oversight

All American Home Mortgage Corp., Brooklyn, NY, Did Not Always Comply With HUD-FHA Loan Underwriting Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-09-06.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                                               Issue Date
                                                                                     September 6, 2011

                                                                               Audit Report Number
                                                                                    2011-NY-1014




TO:              Deborah Holston, Acting Deputy Assistant Secretary for Single Family
                                                           Housing, HU



FROM:            Edgar Moore, Regional Inspector General for Audit, New York/New Jersey,
                                                           Region, 2AGA

SUBJECT:         All American Home Mortgage Corp., Brooklyn, NY, Did Not Always
                 Comply With HUD-FHA Loan Underwriting Requirements

                                            HIGHLIGHTS

    What We Audited and Why

                 We audited All American Home Mortgage Corp., a nonsupervised1 lender located
                 in Brooklyn, NY, in support of the Office of Inspector General’s (OIG) goal of
                 improving the integrity of single-family insurance programs. We selected this
                 lender because of its 8.8 percent default and claim ratio for insured single-family
                 loans with beginning amortization dates between September 1, 2008, and August
                 31, 2010. This rate was more than double the New York State average of 3.57
                 percent for the same period. The audit objectives were to determine whether All
                 American (1) approved Federal Housing Administration (FHA)-insured loans in
                 accordance with the requirements of the U.S. Department of Housing and Urban
                 Development (HUD)-FHA, and (2) implemented a quality control plan in
                 accordance with HUD-FHA requirements.




1
  A nonsupervised lender is a HUD-FHA-approved lending institution, the principal activity of which involves
lending or investing funds in real estate mortgages.
What We Found
           All American officials did not always approve FHA-insured loans in accordance
           with HUD-FHA requirements. Specifically, material underwriting deficiencies
           were noted regarding 6 of the 20 loans reviewed, such as inadequate verification
           of gift funds, the statutory minimum investment, source of funds, improper
           calculation of income and inconsistent information not reconciled. As a result,
           loans were approved for potentially ineligible borrowers, which caused HUD-
           FHA to incur an unnecessary insurance risk. In addition, All American officials
           charged the borrowers $680 in unallowable fees, such as wire and courier fees.

           All American officials did not ensure that their quality control plan was
           implemented in accordance with HUD-FHA requirements. Consequently, the
           effectiveness of the plan was impaired, resulting in a lack of assurance that loan
           origination problems were identified and appropriate corrective action was taken
           to prevent similar occurrences.

What We Recommend
           We recommend that HUD’s Acting Deputy Assistant Secretary for Single Family
           Housing require All American officials to (1) indemnify HUD against future
           losses of more than $1.07 million related to the five loans that were underwritten
           in violation of HUD-FHA requirements, (2) reimburse HUD for the $181,515 in
           claims and associated fees paid on one loan with significant underwriting
           deficiencies, (3) ensure that borrowers have been reimbursed $680 for
           unallowable wire and courier fees, (4) establish procedures to ensure that all
           HUD-FHA underwriting requirements are properly implemented and
           documented, and (5) implement quality control procedures to ensure that
           management responses and planned corrective action are adequately documented
           and quality control reviews are always conducted in accordance with HUD-FHA
           requirements.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.

Auditee’s Response
           We discussed the results of the audit with auditee officials during the audit,
           provided them with a copy of the draft report, and requested their comments on
           July 21, 2011. We held an exit conference with auditee officials on July 27, 2011,
           and they provided their written comments on August 3, 2011, at which time they
           generally disagreed with finding 1 and agreed with finding 2. The complete text
           of auditee officials’ response, along with our evaluation of that response, can be
           found in appendix B of this report.



                                            2
                                     TABLE OF CONTENTS

Background and Objectives                                                               4

Results of Audit
        Finding 1: All American Officials Did Not Always Comply With HUD-FHA            6
                   Underwriting Requirements

        Finding 2: All American Officials Did Not Implement a Quality Control Plan in   12
                   Accordance With HUD-FHA Requirements

Scope and Methodology                                                                   17

Internal Controls                                                                       18

Appendixes
   A.   Schedule of Questioned Costs and Funds To Be Put to Better Use                  20
   B.   Auditee Comments and OIG’s Evaluation                                           21
   C.   Summary of Loans With Material Underwriting Deficiencies                        36
   D.   Schedule of Actual and Potential Losses to the FHA Insurance Fund               37
   E.   Case Summary Narratives                                                         38




                                              3
                       BACKGROUND AND OBJECTIVES

All American Home Mortgage Corp., was incorporated in the State of New York in December
1989 under the name AllBank Mortgage Corp. In June 1992, it adopted the name AllMoney
Mortgage Bankers, Inc., which was changed in April 2002 to its current name. All American has
three active branch offices located in Lake Worth, FL, Uniondale, NY, and its main office is
located in Brooklyn, NY.

All American became an authorized Federal Housing Administration (FHA) direct endorsement
lender on August 25, 1993. It is a nonsupervised lender, the principal activity of which involves
lending or investing funds in real estate mortgages. A nonsupervised lender may originate, sell,
purchase, hold, or service FHA-insured mortgages, depending on its wishes and qualifications.

All American originated 500 loans with amortization dates between September 1, 2008, and
August 31, 2010. As of August 31, 2010, 44 of the 500 loans originated by All American were
in default, and its loan default rate was 8.8 percent. This rate was more than double the New
York State average of 3.57 percent for the same period.

All American originated 32 of 44 defaulted loans using FHA’s Technology Open To All Lenders
(TOTAL) Mortgage Scorecard and the remaining 12 defaulted loans were originated manually.
The TOTAL Mortgage Scorecard is not an Automatic Underwriting System2 (AUS). It is a
mathematical equation for use within an AUS. To underwrite an FHA loan electronically a
mortgagee must process the request through an AUS that communicates with TOTAL. FHA’s
TOTAL Mortgage Scorecard evaluates the overall creditworthiness of the applicants based on a
number of credit variables. When TOTAL combines with the functionalities of the AUS, it
indicates a recommended level of underwriting and documentation in determining a loan’s
eligibility for insurance by FHA. The combined analysis by TOTAL and the AUS will either
conclude that the borrowers’ credit and capacity for repayment of the mortgage is acceptable or
refer the loan application to an individual Direct Endorsement (DE) underwriter for further
consideration and review.

For mortgage loans scored as “accept” or “approve,” FHA has granted a number of credit policy
waivers and documentation relief from the instructions in HUD Handbook 4155.1 as described in
FHA TOTAL Mortgage Scorecard User Guide, dated September 2003. However, lenders must
still comply with outstanding eligibility requirements and ensure the integrity of the data used to
render a decision. For loans receiving a “refer” risk classification and are remanded to a DE
underwriter, FHA’s credit policies as described in HUD Handbook 4155.1 apply. The lender
using the TOTAL Mortgage Scorecard must conduct a manual underwriting review according to
FHA’s guidelines for all loan applications that generate a “refer” rating. The underwriter must


2
 An Automated Underwriting System is a computerized system for doing automated underwriting. The most
widely used are Fannie Mae’s “Desktop Underwriter” and Freddie Mac’s “Loan Prospector”.



                                                     4
determine if the borrower is creditworthy in accordance with FHA standard credit policies and
guidelines.

The objectives of the audit were to determine whether All American officials (1) approved
insured loans in accordance with HUD-FHA requirements, and (2) implemented a quality control
plan that complied with HUD-FHA requirements.




                                               5
                                         RESULTS OF AUDIT


Finding 1: All American Officials Did Not Always Comply With HUD-
           FHA Underwriting Requirements
All American officials did not always approve FHA-insured loans in accordance with HUD-FHA
requirements. Specifically, material underwriting deficiencies were noted regarding 6 of the 20
loans reviewed, such as inadequate verification of gift funds, inadequate verification of statutory
minimum investment, inadequate verification of source of funds, improper calculation of income
and improper verification of employment, unsupported cash reserves on Desktop Underwriter
underwriting findings, and inconsistent information not reconciled. These deficiencies occurred
because All American officials did not have adequate controls to document, verify, and reconcile
the borrowers’ information; therefore, officials did not ensure that all loans were processed in
compliance with HUD-FHA requirements. As a result, the FHA insurance fund incurred a loss
of $181,515 on one loan and continues to be at risk for more than $1.07 million3 on five loans.
All American officials also charged the borrowers $680 in unallowable fees, such as wire and
courier fees. However, officials are taking corrective action to reimburse the borrowers for the
unallowable fees charged.




    Material Underwriting
    Deficiencies Noted

                   All American officials originated six loans that exhibited material underwriting
                   deficiencies. While the underwriting process is somewhat subjective, these
                   deficiencies occurred because officials neither always followed HUD-FHA
                   requirements nor exercised due diligence in verifying and documenting the
                   borrowers’ income and assets. The table below summarizes the deficiencies
                   identified in the six loans. These deficiencies are not independent of each other as
                   all loans exhibited at least one material deficiency.




3
    This amount is estimated at $1,070,963 (59 percent of the $1,815,191 unpaid principal balance of the five loans).
    The 59 percent loss rate is based on HUD’s Single Family Acquired Asset Management System’s (SAMS) Case
    Management Profit and Loss by Acquisition computation for Fiscal Year 2010 based on actual sales.



                                                           6
                                                                  Number of
                                    Deficiency
                                                                    loans

                  Gift funds and statutory minimum investment          1

                  Source of funds                                      2
                  Income or employment resulting in incorrect
                  ratios                                               3

                  Cash reserves                                        3

                  Inconsistent information                             1



            Appendix C of this report provides a summary of loans with material
            underwriting deficiencies identified in each of the seven cases, and appendix E
            provides detailed descriptions of these deficiencies, as well as the applicable
            HUD-FHA requirements.

Inadequate Verification of Gift
Funds and Statutory Minimum
Investment

            All American officials neither adequately verified nor documented the source of
            gift funds used for one borrower’s earnest money deposits. Consequently, the
            statutory minimum investment was not obtained since the borrower’s investment
            in the property was not verified. For example, in FHA case number 374-5045917,
            All American officials did not adequately verify the source of a $9,160 gift used
            as part of the borrowers’ $13,655 earnest money deposit. The Desktop
            Underwriter underwriting findings showed that the borrowers’ minimum statutory
            investment requirement was $13,615 ($389,000 x 3.5 percent), and the lender file
            contained a gift letter with no date from the coborrower’s stepbrother for a $9,160
            gift to the coborrower to be applied toward the property purchase. The lender file
            contained a check, dated January 16, 2009, from the donor to the borrower’s
            closing attorney for $9,160. However, the lender file did not contain
            documentation verifying that the source of the gift funds was indeed the donor’s
            own funds because the transaction journal dated December 15, 2008, to January
            16, 2009, from the donor’s bank showed that the donor had a negative balance at
            the beginning of the month. It showed the following: a negative balance of
            ($523) on December 15, 2008, a deposit of $10,000 on December 16, 2008,
            several withdrawals totaling $10,010 during the period December 19 to December
            22, 2008, and a deposit of $9,300 and withdrawal of $9,170 on January 16, 2009.
            Consequently, All American officials did not provide assurance that the gift funds
            came from the donor’s personal account and ultimately did not come from an
            unacceptable source. Without documentation verifying that the gift funds were
            from an acceptable source, the borrower did not make the minimum cash
            investment in the property, and the lender did not verify and document the
            borrower’s gift and investment in the property.


                                                 7
Inadequate Verification of the
Source of Funds

             All American officials did not adequately verify the source of the funds for two
             borrowers. For example, in case number 374-4874336, All American officials
             did not provide adequate support to show that the borrower had sufficient funds
             to complete the transaction. The Desktop Underwriter underwriting findings
             stated that the depository assets totaling $15,258 were available to underwrite
             this case. However, $11,492 of the $15,258 was not supported because the bank
             statements exceeded the 120-day documentation requirement. In addition, the
             earnest money of $10,000 was not properly documented because the lender did
             not verify the source of funds. Further, the verified assets of $3,766 ($15,258 -
             $11,492) were not sufficient funds to close the loan because the HUD-1
             settlement statement showed that the borrower needed $11,735 ($10,000 earnest
             money + $1,735 required cash from borrower) in funds to close. Therefore, the
             lender did not verify that the borrower had sufficient funds to complete the
             transaction.


Inadequate Verification of
Income or Employment that
Resulted in the Incorrect
Calculation of Qualifying
Ratios

            All American officials inadequately verified the income or employment for three
            borrowers resulting in the incorrect calculation of qualifying ratios. For instance,
            in case number 374-4840303, the Desktop Underwriter underwriting findings
            showed that total income of $15,568 was listed as available on the loan
            application to underwrite this case. However, $2,157 ($15,568 - $13,411 verified
            income) of the $15,568 was overstated because All American officials did not
            average the base pay for the two borrowers for 30.33 months (January 1, 2006, to
            July 10, 2008, the dates on the verification of employment). All American
            officials concurred that the borrowers’ income was overstated. Therefore, the
            mortgage payment-to-income ratio (front) was increased from 24.05 to 27.91
            percent ($3,744/$13,411) and the total fixed payment-to-income ratio (back) was
            increased from 40.29 to 46.76 percent ($6,272/$13,411). The verified income
            was 13.85 percent [(15,568 report income - 13,411 verified income)/15,568] less
            than that reported by the borrowers. Since the difference in verified income was
            13.85 percent, or more than the 5 percent difference allowed by HUD, there was a
            need to rescore the mortgage loan.




                                             8
Inadequate Verification of Cash
Reserves

            All American officials inadequately verified cash reserves on Desktop
            Underwriter underwriting findings for three borrowers. For instance, in case
            number 374-4874336, the underwriting findings showed cash reserves of 3
            months; however, this amount was not supported by the borrowers’ assets. All
            American officials stated that the correct available funds were $3,766, which was
            well below the 3 months of cash reserves after the closing amount as noted on the
            underwriting findings. The HUD-1 settlement statement showed that the
            borrower needed $1,735 to close. The underwriting findings showed that the
            borrower had cash reserves of $11,094; however, this amount was incorrect
            because the borrower only had cash reserves of $2,031 ($3,766 - $1,735) after
            closing. Therefore, after closing, the borrower had cash reserves of less than a
            month, or 68 percent of the total mortgage payment ($2,031/$2,991). The cash
            reserve verified amount was $2,031, which was 82 percent [($11,094 -
            $2,031)/$11,094] less than the Underwriting Findings, or more than 10 percent
            less than that reported by the borrowers on the loan application; therefore, the
            lender should have rescored the mortgage loan as required.


Inconsistent Information Not
Reconciled

            All American officials processed one FHA-insured loan without reconciling
            discrepancies found in the loan file documentation. For example, with respect to
            FHA case number 374-5019085, the direct endorsement approval for a HUD-
            FHA-insured mortgage showed an interest rate of 5 percent; the uniform
            residential loan application and mortgage note had an interest rate of 5 percent
            and principal and interest of $3,004. However, FHA’s loan underwriting and
            transmittal summary had an interest rate of 6.5 percent and principal and interest
            of $3,538, and the Desktop Underwriter underwriting findings had an interest rate
            of 6.5 percent and principal and interest of $3,556. As a result, the lender
            incorrectly calculated the borrowers’ back and front ratios because All American
            overstated the mortgage payment and interest by $552 ($3,556 - $3,004) and the
            front and back ratios were decreased from 40.85 to 35.53 percent [($4,240 -
            $552)/$10,379] and 45.15 to 39.83 percent [($4,686 - $552)/$10,379],
            respectively. All American officials stated that the file was qualified initially at a
            6.5 percent interest rate and closed at a decreased interest rate of 5 percent. All
            American officials further stated that resubmission used to be required only for an
            increase on the interest rate and the mortgage note rate of 5 percent and that the
            principal and interest of $3,004 was the correct one. We agreed that the loan was
            not required to be rescored because of the decrease on the interest rate; however,
            Mortgagee Letter 92-5 prohibits the lender from processing loans without
            reconciling discrepancies in the file documentation.



                                              9
    Unallowable Fees

                 All American officials charged borrowers unallowable fees such as wire or
                 courier fees on 9 of the 20 loans. However, as a result of our audit work, the
                 lender disbursed a check to the borrowers for the unallowable fees charged. Four
                 of the nine loans contained material underwriting deficiencies and are included in
                 appendix C. The remaining five loans had deficiencies that were not deemed
                 significant enough to impact the insurability of the loan

                 The table below details the loans in which unallowable fees were charged to the
                 borrowers.4



                                                               Unallowable fees
                                           Case number       charged to borrowers

                                           374-5043583                 45

                                           374-4874336                 90

                                           374-5045917                 90

                                           374-5119533                 90

                                           374-4974705                 45

                                           374-4778212                 90

                                           374-4805280                 45

                                           374-5105511                 90

                                           374-5179044                 95
                                               Total                  680



    Conclusion

                 Six of the twenty loans reviewed exhibited material underwriting deficiencies that
                 posed a material risk to the FHA insurance fund, such as inadequate verification
                 of gift funds, statutory minimum investment, inadequate verification of the source
                 of funds, improper calculation of income or inadequate verification of
                 employment resulting in the incorrect calculation of qualifying ratios, inadequate
                 verification of cash reserves, and inconsistent information not reconciled. In
                 addition, the lender charged borrowers $680 in unallowable fees, such as wire and

4
 Four loans highlighted in green are included in appendix C. The five loans highlighted in blue contained
deficiencies deemed not significant enough to impact the insurability of the loan.



                                                        10
          courier fees. Thus, indemnification is warranted against future losses on five
          loans with material underwriting deficiencies; the loss to HUD is estimated to be
          at more than $1.07 million. Further, the HUD-FHA insurance fund incurred a
          loss of $181,515 for claims and associated fees paid on one loan. These
          deficiencies occurred because All American officials did not have adequate
          controls to document, verify, and reconcile the borrowers’ information; therefore,
          officials did not ensure that all loans were processed in compliance with HUD-
          FHA requirements.

Recommendations

          We recommend that HUD’s Acting Deputy Assistant Secretary for Single Family
          Housing require All American officials to

          1A.     Indemnify HUD against any future losses on the five loans with material
                  underwriting deficiencies. The projected loss is $1,070,963 based on
                  HUD’s default loss rate of 59 percent of the unpaid principal balance of
                  $1,815,191.

          1B.     Reimburse HUD for the loss of $181,515 that resulted from the amount of
                  claims and associated fees paid on one loan with significant underwriting
                  deficiencies, case number 374-4840303.

          1C.     Ensure that borrowers have been reimbursed $680 for unallowable wire
                  and courier fees.

          1D.     Establish underwriting procedures that will provide assurance that
                  borrowers’ information are documented, verified, and reconciled to ensure
                  that HUD-FHA requirements are always complied with by being properly
                  implemented and documented.




                                          11
Finding 2: All American Officials Did Not Implement a Quality Control
           Plan in Accordance With HUD-FHA Requirements
All American officials did not ensure that a quality control plan was implemented in accordance
with HUD-FHA requirements. The plan implemented did not include basic and specific HUD-
FHA requirements. Specifically, officials did not ensure that (1) management responses and
planned corrective actions were adequately documented, (2) quality control reviews were
conducted in a timely manner, (3) all early payment defaulted loans defaulting within 6 months
were routinely reviewed, and (4) quality control reviews complied with HUD-FHA
requirements. These deficiencies occurred due to weaknesses in All American officials’
implementation of their quality control plan. Consequently, the effectiveness of All American’s
quality control plan was impaired, resulting in a lack of assurance that loan origination problems
were identified and appropriate corrective action was taken to prevent similar occurrences.



  Quality Control Plans Not in
  Accordance With HUD-FHA
  Requirements


               During the period September 1, 2008, through October 31, 2010, All American
               officials implemented three quality control plans, dated August 2006, July 2009,
               and October 2010. However, the three quality control plans were not in
               accordance with HUD-FHA requirements. The three quality control plans were
               developed by a contractor, and All American officials added controls to them to
               be carried out by the contractor.

               The two quality control plans, dated August 2006 and July 2009, were
               implemented during the audit period but did not contain all HUD-FHA
               requirements. All American officials had incorporated most of the requirements
               into their updated quality control plan, dated October 2010; however, there were
               three basic requirements that were not included.

               The updated plan did not include the clauses that are required by HUD Handbook
               4060.1 REV 2, Paragraphs 7-3(I), 7-6(B), and7-6(C). Specifically,

                      Quality control reports that identified deficiencies were to include a final
                      report that identified the corrective actions taken, the timetable for
                      completion of actions, and any planned follow-up activities.

                      If more than 15 loans were closed per month, the quality control reviews
                      were to be conducted at least monthly, addressing one month’s activities.
                      If 15 or fewer loans were closed per month, the quality control reviews
                      were to be conducted at least quarterly.



                                                12
              If 3,500 or fewer FHA loans were originated or underwritten per year, 10
              percent of the FHA loans were to be reviewed. If more than 3,500 FHA loans
              were originated or underwritten per year, 10 percent of the FHA loans or a
              statistical random sampling that provided a 95 percent confidence level with 2
              percent precision was to be reviewed.

Management Responses and
Planned Corrective Action
Inadequately Documented

           All American officials did not adequately document management responses and
           planned corrective actions for deficiencies identified during quality control
           reviews. During the audit period, 58 loans were reviewed under the quality
           control plans dated August 2006 and July 2009; however, quality control reports
           did not adequately document management responses and planned corrective
           actions. All American officials did not provide evidence that the deficiencies
           were addressed for 35 of the 58 quality control reports. HUD Handbook 4060.1,
           REV-2, paragraph 7-3I, states that management must take prompt action to deal
           appropriately with any material findings. The final report or an addendum must
           identify actions being taken, the timetable for their completion, and any planned
           follow-up activities. In addition, All American’s quality control policies and
           procedures, dated August 2006, states that senior management should respond to
           all deficiencies noted from quality control reports. Further, All American’s
           quality control policies and procedures, dated July 2009, states that a third-party
           provider is used for quality control reviews and the third-party provider follows
           FHA guidelines. However, 43 of 58 quality control reports did not always
           identify the actions being taken, a timetable for completion of the actions taken,
           and planned follow-up activities. These weaknesses occurred because All
           American officials did not establish procedures to ensure that their quality control
           plan was properly implemented.


Quality Control Reviews Not
Conducted in a Timely Manner

           All American officials did not conduct quality control reviews in a timely manner.
           Of the 58 loans reviewed under the quality control plan, 32 were not reviewed
           within 90 days of the closing of the loan as required by HUD. HUD Handbook
           4060.1, REV-2, paragraph 7-6A, states that loans must be reviewed within 90
           days from the end of the month in which the loan closed. In addition, monthly
           quality control reviews were not conducted when All American officials closed
           more than 15 loans during 15 months within a 2-year audit period. HUD
           Handbook 4060.1, REV-2, paragraph 7-6B, states that lenders closing more than
           15 loans monthly must conduct quality control reviews at least monthly and the
           reviews must address 1 month’s activities. This requirement is intended to ensure



                                            13
            that problems left undetected before closing are identified as early after closing as
            possible. The deficiency described above occurred because All American
            officials did not provide the contractor with a closed loan report in a timely
            manner.

Loans Defaulting Within the
First 6 Months Not Routinely
Reviewed

            All American officials did not routinely select loans defaulting within the first 6
            months for review as required by HUD. HUD Handbook 4060.1, REV-2,
            paragraph 7-6D, states that in addition to the loans selected for routine quality
            control reviews, lenders must review all loans going into default within the first
            six payments. As defined here, early payment defaults are loans that become 60
            days past due. All American officials provided an early payment defaulted list of
            34 loans; however, quality control reviews were not conducted for 10 of the 34
            early payment defaulted loans. In addition, 19 of 34 early payment defaulted
            loans were not reviewed until 61 to 567 days after the loans defaulted within the
            first six payments. According to the quality control contractor, the early payment
            defaulted loans were not reviewed because All American officials did not provide
            the contractor with the list of all the early payment defaulted loans. Quality
            control reviews of early payment defaulted loans can provide valuable
            information about the origin of default that may indicate inadequate underwriting.
            All American officials acknowledged this weakness and stated that they would
            provide the contractor all of the early payment defaulted loans.

         retainedReviews
Quality Control   in the future.
                           Not in
Compliance With HUD
Requirements


            All American officials did not conduct quality control reviews in accordance with
            HUD requirements. Six of the fifty-eight loans were examined to determine
            whether quality control reviews were conducted in accordance with HUD
            requirements. The examination revealed that three of the six loan files did not
            contain evidence that the borrower’s sources of funds were reverified as required.
            HUD Handbook 4060.1, REV-2, paragraph 7-6E(2), states that documents
            contained in the loan files, such as documents relating to the borrower’s income,
            gifts, or sources of funds, should be checked for sufficiency and subjected to
            written reverification. All American officials acknowledged the inadequacy of
            the reviews and planned to take corrective action by engaging another quality
            control company to conduct their second quarter (April to June 2011) quality
            control reviews.




                                             14
Conclusion

             All American officials did not ensure that their quality control plan was
             implemented in accordance with HUD-FHA requirements. As a result, (1) all
             basic and specific HUD-FHA requirements were not included in the plan, (2)
             management responses and planned corrective actions were inadequately
             documented, (3) quality control reviews were not conducted in a timely manner,
             (4) loans defaulting within the first 6 months were not routinely reviewed, and (5)
             quality control reviews did not comply with HUD-FHA requirements. These
             deficiencies occurred due to weaknesses in All American officials’
             implementation of their quality control plan. Consequently, the effectiveness of
             the quality control plan was impaired; thus, All American officials could not
             provide assurance that their quality control process was capable of evaluating,
             monitoring, and improving the quality of loans originated.


Recommendation

             We recommend that HUD’s Acting Deputy Assistant Secretary for Single Family
             Housing require All American officials to

             2A.    Update their current quality control plan, dated October 2010, to include
                    all of the requirements. Specifically, the plan should include language
                    detailing that

                            Quality control reports identifying deficiencies should include a
                            final report that identifies the corrective actions taken, the
                            timetable for completion of actions, and planned follow-up
                            activities.

                            If more than 15 loans are closed per month, quality control reviews
                            should be conducted at least monthly, addressing 1 month’s
                            activities. If 15 or fewer loans are closed per month, quality
                            control reviews should be conducted at least quarterly.

                            If 3,500 or fewer FHA loans are originated - or underwritten per
                            year, 10 percent of the FHA loans must be reviewed. If more than
                            3,500 FHA loans are originated or underwritten per year, 10
                            percent of the FHA loans or a statistical random sampling that
                            provides a 95 percent confidence level with 2 percent precision
                            must be reviewed.

             2B.     Implement procedures to ensure that (1) management responses and
                     planned corrective actions are adequately documented, (2) quality control
                     reviews are conducted in a timely manner, (3) all loans defaulting within


                                             15
       the first 6 months are reviewed, and (4) quality control reviews comply
       with HUD requirements.

We further recommend that the Director of HUD’s Homeownership Center’s
Quality Assurance Division

2C.    Follow up with All American officials to ensure that the required quality
       control procedures have been implemented.




                               16
                         SCOPE AND METHODOLOGY

To accomplish the audit objectives, we reviewed documentation from HUD’s Philadelphia, PA,
Homeownership Center’s loan endorsement files, as well as case files provided by All American
officials. We also reviewed All American’s quality control procedures to assess whether they
were adequate and properly implemented in accordance with HUD requirements.

We reviewed applicable laws, regulations, HUD handbooks, and mortgagee letters. We
interviewed All American’s loan originator, loan processor, underwriter, quality control
manager, and postclosing coordinator as well as an official of the quality control contractor to
obtain an understanding of the policies and procedures related to the lender’s management
controls. We analyzed HUD’s postendorsement technical reviews, Approval Recertification
Review Tracking System findings, and independent audit reports.

We reviewed a nonstatistical sample of 20 of the 44 FHA defaulted loans that were originated
and underwritten by All American officials during the period September 1, 2008, through August
31, 2010. The population consisted of 44 loans with total mortgage amounts of more than $18.6
million. A nonstatistical sample of 20 FHA loans with a total mortgage amount of more than
$8.6 million was selected for review as follows: (1) we selected 14 loans for which 6 payments
or fewer were made before the first 90-day default was reported, (2) 4 loans were selected for
which 7 payments were made before the first 90-day default was reported and that were
manually underwritten, and (3) 2 loans were selected for which 8 payments were made before
the first 90-day default. The 20 loans included 14 purchased TOTAL Mortgage Scorecard loans,
1 refinanced TOTAL Scorecard loan, and 5 refinanced manual loans.

While we did not review and assess the controls over computer-processed data for HUD’s
Neighborhood Watch System, we did use data obtained from the system for informational
purposes. We performed a minimal level of testing to assure the integrity of the computer-
processed data relevant to our audit objectives and found the data to be sufficiently reliability.
The minimal level of testing consisted of tracing the loan amount, closing date, among other
items to the source documentation.

We performed our audit fieldwork from February through June 2011 at All American’s main
office located at 1001 60th Street, Brooklyn, NY. We conducted the audit in accordance with
generally accepted government auditing standards. Those standards require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that the evidence obtained
provides a reasonable basis for our findings and conclusions based on our audit objectives.




                                                17
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

       Effectiveness and efficiency of operations,
       Reliability of financial reporting, and
       Compliance with applicable laws and regulations.

Internal controls comprise the plans, methods, and procedures used to meet the organization’s
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations as well as the systems for
measuring, reporting, and monitoring program performance.


 Relevant Internal Controls
               We determined that the following internal controls were relevant to our audit
               objectives:

                      Controls over the loan origination process - Policies and procedures that
                      management has in place to reasonably ensure that the loan origination
                      process complies with HUD program requirements.

                      Controls over the quality control plan - Policies and procedures that
                      management has in place to reasonably ensure the implementation of HUD
                      quality control requirements.

               We assessed the relevant controls identified above.

               A deficiency in internal control exists when the design or operation of a control does
               not allow management or employees, in the normal course of performing their
               assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
               impairments to the effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.




                                                 18
Significant Deficiencies


            Based on our review, we believe that the following items are significant deficiencies:

                   All American officials did not ensure that loans were underwritten in
                   accordance with HUD-FHA requirements (see finding 1).

                   All American officials did not adequately implement a quality control plan
                   that ensured compliance with HUD-FHA requirements (see finding 2).




                                             19
                                      APPENDIXES

Appendix A

              SCHEDULE OF QUESTIONED COSTS
             AND FUNDS TO BE PUT TO BETTER USE

                 Recommendation            Ineligible 1/   Funds to be put
                        number                             to better use 2/
                                1A                              $1,070,963
                                1B            $181,515
                                1C                $680
                              Total           $182,195          $1,070,963


1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local
     policies or regulations.

2/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified. In this instance, if HUD implements our recommendation
     to indemnify the five loans exhibiting material underwriting deficiencies, it will reduce
     FHA’s risk of loss to the insurance fund. The amount above is based on HUD’s default
     loss rate of 59 percent of the total unpaid principal balance of $1,815,191, as April 30,
     2011 (see appendix D).




                                            20
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         21
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         22
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 3




Comment 4




                         23
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 4




Comment 5




                         24
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 5




                         25
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 6




                         26
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 7




                         27
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 8




                         28
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 8




                         29
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 9




Comment 10




Comment 11




                         30
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 12




                         31
Appendix B

                  OIG Evaluation of Auditee Comments
Comment 1   All American officials assert that their default rate of 8.8 percent would have been
            below HUD’s established threshold if FHA-to-FHA Non Credit Qualifying
            Streamline Refinances were not taken into consideration. Further, officials
            disagree with the review results pertaining to 6 of the 7 loans found to contain
            material underwriting deficiencies and do not contest 1 out of 7 cited loans.
            Nevertheless, although we recognize the officials’ opinion, the fact remains that
            their 8.8 percent default rate was nearly triple the New York State average of 3.57
            percent during the same period, and the results of our review are supported by
            documentation provided during and subsequent to the audit.

Comment 2   All American officials allude to discomfort and preconceived opinions on OIG’s
            part towards the use of FHA’s TOTAL Mortgage Scorecard. Officials contend
            that the regulatory standards that were in effect during the period for the activities
            examined were misinterpreted, and that sufficient supplementary documentation
            was provided to prevent the findings. Further, officials express that the
            uncertainty as to the accuracy of the national default rate demands OIG’s
            attention, citing for example, the February 17, 2010 Mortgage Review Board
            Administrative Action Docket No. 10-1630-MR. Contrary to the officials’
            perception; OIG does not have a preconceived opinion towards the use of FHA’s
            TOTAL Mortgage Scorecard. We commend the use of the TOTAL Scorecard
            technology, which enhances FHA’s ability and capacity to oversee its expanded
            market share in order to achieve HUD’s strategic goal of strengthening the
            nation’s housing market to bolster the economy and protect consumers. In
            contrast with the officials’ beliefs, the regulatory standards that were in effect at
            the time of the activities, along with documentation provided during and
            subsequent to the audit field work were taken into consideration. The officials’
            citing of the Mortgage Review Board Docket that pertains to the administrative
            action taken by HUD against another lender does not in any way support the
            contention that the national default rate is inaccurate. Nevertheless, in this case
            the audit results concluded that All American officials did not always comply
            with HUD-FHA requirements in the approval of FHA-insured loans.
            Accordingly, we have not removed the finding from the final report.

Comment 3   All American officials state that immediate corrective action was initiated and
            implemented swiftly in the areas needing so, and that their underwriting had
            absolutely nothing to do with borrowers defaulting on their mortgages. The
            actions taken by the officials are responsive to the audit; however, since the audit
            disclosed material underwriting deficiencies that could have lead to some
            borrowers going into default, this fact further supports our stance on not removing
            finding 1 from the final report.




                                              32
Appendix B

                  OIG Evaluation of Auditee Comments
Comment 4   For case number 374-5019085, OIG agrees that the asset in question of $1,508
            (unverified retirement savings withdrawal) was approximately five percent of the
            total asset ($1,508/$29,468). However, the verified assets of $27,960 ($29,468 -
            $1,508) [not the $28,930 in the lenders comments] were not sufficient and did not
            equal the 2 months of cash reserves after the closing ($12,368), as reported on the
            underwriting findings. The total depository assets of $29,468 included the
            unverified retirement savings plus a gift of $25,000 that the HUD-1 settlement
            statement showed was required at closing. Thus the borrower had cash reserves
            of only $2,960 ($29,468-$1,508-$25,000) after closing. Therefore, since the cash
            reserve verified amount was $2,960, which was 76 percent less [($12,368 -
            $2,960) / $12,368], or more than 10 percent less than that reported by the
            borrowers on the loan application; All American officials should have rescored
            the mortgage loan as required. Further, All American officials contend that the
            final submission to TOTAL/AUS was not reviewed during the audit, and
            promised to provide the final transmission for review soon. Unfortunately,
            officials never provided the final TOTAL/AUS submission subsequent to the
            audit and the concluding exit conference. Thus, the issue of source of funds is
            unchanged.

Comment 5   For case number 374-5179044, OIG removed the issue of inadequate verification
            of the source of gift funds and the statutory minimum investment from the final
            report based on the review of supporting documentation provided during the exit
            conference. Specifically, All American officials provided a transaction summary
            from the donor’s checking account that shows that the donor had funds of $13,406
            on March 20, 2009, which were enough to cover the gift of $9,000 as noted on the
            gift letter dated April 3, 2009. OIG also removed the issue of inconsistent
            information not reconciled by the lender from the final report due to
            documentation supporting the immateriality of the $12 fire insurance discrepancy
            ($100 less $88). However, the issue of improper verification and calculation of
            income that resulted in incorrect calculated ratios is unchanged because according
            to the borrower’s pay stubs for pay period ending February 1, February 15, and
            March 15, 2009, the base biweekly pay was $2,550; therefore, the monthly pay
            should have been $5,525 ($2,550 x 26 / 12) instead of $5,647. In addition, the
            borrower’s increasing income trend and stability does not support that the lender
            appropriately verified the borrowers’ bonus income for two years, as required by
            HUD. Therefore, the issue of improper verification and calculation of income
            that resulted in incorrect calculated ratios is unchanged because the lender lacked
            evidence of two years of bonus income.

Comment 6   For case number 374-4974705, OIG removed the issue of inconsistent
            information not reconciled by the lender from the final report since the
            underwriter resubmitted the loan using TOTAL Mortgage Scorecard with the


                                            33
Appendix B

                  OIG Evaluation of Auditee Comments
            correct tax and special assessment. In addition, we removed the issue of
            inadequate verification of income resulting in incorrectly calculated ratios.
            Although the borrower’s April 2008 lottery winnings of $1 million will probably
            make her ineligible to receive SSI; the lender did obtain a letter from the Social
            Security Administration, dated almost seven months after the lottery winnings,
            stating that the borrower was receiving SSI payments. As such, it is not the
            lenders responsibility to notify the Social Security Administration that a borrower
            receiving SSI has won the lottery. Accordingly, the only issue that remains is the
            unallowable fee charges that may have been repaid.

Comment 7   For case number 374-4840303, the terms and conditions for the retirement
            accounts provided during the exit conference were reviewed and found to only
            support the withdrawals for one of the borrower’s retirement accounts. The other
            retirement account of $9,779 remains unsupported. However, during the exit
            conference, All American officials also provided a copy of a cancelled check of
            $9,807 from the borrower to the closing agent, therefore, the issue of inadequate
            verification of the source of funds was removed from the final report. However,
            All American officials did not support the income calculation that was used to
            approve the loan. Therefore, the issue of inadequate verification of the
            borrowers’ income resulting in incorrectly calculated ratios and inadequate
            verification of cash reserves on the Desktop Underwriter Underwriting Findings
            are unchanged.

Comment 8   For case number 374-5045917, All American officials stated that the gift was
            documented further than required by Total Scorecard. They stated that the gift
            was listed on the application and there is a gift letter for which the donor attested
            that the gift was not made available from any person with an interest in the sale
            and that no repayment is expected. They provided copies of the gift check and
            the transfer of funds into the seller’s attorney escrow account, etc., however,
            officials could not provide documentation to support that the gift funds came from
            an acceptable source and were indeed the donor’s own funds. Mortgagee Letter
            00-28 provides that the lender must be able to determine that the gift funds were
            not ultimately provided from an unacceptable source and were indeed the donor’s
            own funds. However, among other things, on January 16, 2009 there were two
            unexplained deposits totaling $9,300 into the donors account followed by the
            check to the escrow attorney for the $9,160 gift. Further, contrary to All
            American officials comment that the gift funds were already in the homebuyer’s
            account prior to the application, the gift funds were not in the homebuyers
            account as evident by the transfer of funds between the donor and the escrow
            attorney, and the borrowers banking transactions. Lastly, based on further review
            we agree that the borrower had sufficient funds available to close so we have
            removed the issue of inadequate verification of the source of funds from the case


                                             34
Appendix B

                    OIG Evaluation of Auditee Comments
              narrative; but we will not remove the issue of inadequate verification of the
              source of gift funds and statutory minimum investment.

Comment 9     For case number 374-5043583, All American officials did not verify two years of
              employment, as required by the Desktop Underwriter Underwriting Findings, or
              the source of income for 2007. Therefore, All American officials should not have
              used the coborrower’s income for determining the mortgage loan eligibility. In
              addition, since officials only confirmed during the audit that the coborrower had
              11.6 months of employment history from March 3, 2008, to February 14, 2009,
              and not the required two years or 24 months; the issue of inadequate verification
              of employment or income resulting in incorrectly calculated ratios is unchanged.

Comment 10 For case number: 374-4874336, All American officials do not contest the audit
           results and agree to indemnify.

Comment 11 All American officials are in agreement with finding 2. Their implemented
           corrective actions are responsive to the recommendations.

Comment 12 All American officials agree with the issue of unallowable fees and have
           implemented corrective action to reimburse the borrowers for the unallowable fees
           charged.




                                               35
                                                                                                                                                                                 Appendix C




                                                                                                         Case number




     Total
             374-5179044
                           374-5045917
                                         374-4874336
                                                       374-5043583
                                                                     374-5019085
                                                                                   374-4840303
                                                                                                 Inadequate verification of gift




     1
                           X
                                                                                                 funds and statutory minimum
                                                                                                          investment

                                                                                                 Inadequate verification of the




     2
                                         X
                                                                     X
                                                                                                       source of funds




36
                                                                                                 Improper calculation of income
                                                                                                  or verification of employment




     3
             X
                                                       X
                                                                                   X
                                                                                                     resulted in the incorrect
                                                                                                       calculation of ratios


                                                                                                 Inadequate verification of cash




     3
                                                                                                                                                      DEFICIENCIES




                                         X
                                                                     X
                                                                                   X




                                                                                                           reserves

                                                                                                  Inconsistent information not
     1
                                                                     X




                                                                                                           reconciled
                                                                                                                                   SUMMARY OF LOANS WITH MATERIAL UNDERWRITING
Appendix D

SCHEDULE OF ACTUAL AND POTENTIAL LOSSES TO THE
             FHA INSURANCE FUND


                        Number                                              Potential
                                                 Unpaid
                           of                                            loss to HUD
                                  Original      principal     Actual
 Case      Closing     payments                                           (59 percent
                                   loan          balance      loss to                       Total of
number      date         before                                            of unpaid
                                  amount       As of April     HUD                         actual and
                          first                                            principal
                                                30, 2011                                  potential loss
                        default                                             balance)
                                                                                            to HUD
  374-
4840303   08/26/2008      2       $414,779     -              $181,515                -     $181,515
  374-
5019085   01/14/2009      2       $559,675         $539,747      -        $318,451          $318,451
  374-
5043583   03/27/2009      2       $333,841         $323,776      -        $191,028          $191,028
  374-
4874336   08/21/2008      2       $323,916         $314,929      -        $185,808          $185,808
  374-
5045917   02/10/2009      3       $381,954         $369,427      -        $217,962          $217,962
  374-
5179044   05/21/2009      7       $274,928         $267,312      -        $157,714          $157,714
                        Total     $2,289,093   $1,815,191     $181,515   $1,070,963        $1,252,478




                                                   37
Appendix E
                       CASE SUMMARY NARRATIVES

Case number:                                         374-4840303
Loan type:                                           No cash-out refinance
Mortgage amount:                                     $414,779
Closing date:                                        8/26/2008
Payments before first 90-day default reported        Two
Default status as of April 30, 2011                  Preforeclosure Sale Completed

Summary:
We found material underwriting deficiencies relating to inadequate verification of the income
resulting in improper calculation of ratios and unsupported cash reserves.

Inadequate Verification of the Borrowers’ Income Resulting in Incorrectly Calculated
Ratios
The Desktop Underwriter underwriting findings showed that total income of $15,568 was listed
as available on the loan application to underwrite this case. However, $2,157 ($15,568 -
$13,411) of the $15,568 was overstated because All American officials did not average the base
pay for the two borrowers for 30.33 months (January 1, 2006, to July 10, 2008, the dates on
verification of employment). All American officials concurred that the borrowers’ income was
overstated. Therefore, the mortgage payment-to-income ratio (front) was increased from 24.05
to 27.91 percent ($3,744/$13,411), and the total fixed payment-to-income ratio (back) was
increased from 40.29 to 46.76 percent ($6,272/$13,411). Thus, the verified income was 13.85
percent [(15,568 reported income - 13,411 verified income)/15,568] less than that reported by the
borrowers. Since the difference in verified income was 13.85 percent, or more than the 5 percent
difference allowed by HUD, there was a need to rescore the mortgage loan.

HUD-FHA Requirements:
Mortgagee Letter 2005-15 states that there is no need to resubmit loans to TOTAL for rescoring
provided the verified income is not more than 5 percent less than that reported by the borrowers
on the loan application.

HUD Handbook 4155.1, REV-5, “Mortgage Credit Analysis for Mortgage Insurance”, prescribes
that lenders are expected to exercise both sound judgment and due diligence in the underwriting
of loans to be insured by FHA.

Inadequate Verification of Cash Reserves on the Desktop Underwriter Underwriting
Findings
The Desktop Underwriter underwriting findings showed that the borrower had 3 months of cash
reserves; however, this amount was not supported by the borrower’s assets. The underwriting
findings noted deposited assets totaling $11,639, and the HUD-1 settlement statement showed
that the borrower needed $10,207 in funds to close. The underwriting findings showed that the
borrower had cash reserves of $11,597; however, this amount was incorrect because the


                                                38
borrower had cash reserves of only $1,432 ($11,639 - $10,207) after closing. Therefore, after the
closing, the borrower had cash reserves of less than a month, or 38 percent of the total mortgage
payment ($1,432 cash after closing /$3,744 total mortgage payment). The cash reserve verified
amount was $1,432, which was 87 percent less [($11,597 - $1,432)/$11,597], or more than 10
percent less, than that reported by the borrowers on the loan application; therefore, the lender
should have rescored the mortgage loan as required.

HUD-FHA Requirement:
Mortgagee Letter 2005-15 states that there is no need to resubmit loans to TOTAL for rescoring
provided the cash reserves verified are not more than 10 percent less than those reported by the
borrowers on the loan application.




                                               39
Case number:                                         374-5019085
Loan type:                                           Purchase
Mortgage amount:                                     $559,675
Closing date:                                        1/14/2009
Payments before first 90-day default reported        Two
Default status as of April 30, 2011                  Delinquent


Summary:
We found material underwriting deficiencies relating to inadequate verification of the source of
funds and cash reserves, and inconsistent information not reconciled by the lender.

Inadequate Verification of the Source of Funds and Cash Reserves on Desktop
Underwriter Underwriting Findings
The Desktop Underwriter underwriting findings showed that assets of $29,468 were available to
underwrite this case. However, $1,508 of the $29,468 was not supported because there was no
evidence in the lender file to show that the borrower was qualified to withdraw and/or borrow
from the retirement funds. As a result, the verified assets of $27,960 ($29,468 - $1,508) were not
sufficient and did not equal the 2 months of cash reserves after the closing as noted on the
underwriting findings. The total assets of $29,468 included a gift of $25,000 that the HUD-1
settlement statement showed was required at closing. The underwriting findings showed that the
borrower had cash reserves of $12,368. However, this amount was incorrect because the
borrower had cash reserves of only $2,960 ($27,960 - $25,000) after closing. Therefore, after
closing, the borrower had cash reserves of less than a month, or 70 percent of the total mortgage
payment ($2,960/$4,240). The cash reserve verified amount was $2,960, which was 76 percent
less [($12,368 - $2,960)/$12,368], or more than 10 percent less, than that reported by the
borrowers on the loan application; therefore, the lender should have rescored the mortgage loan
as required.

HUD-FHA Requirements:
HUD Handbook 4155.1, REV-5, dated October 2003, section 2-10, states that all funds for the
borrower’s investment in the property must be verified and documented.

Approval condition number 43 in the Desktop Underwriter underwriting findings stated that
documentation must be provided to show that the borrower was eligible to withdraw funds from
the retirement accounts, along with evidence that the account allowed for withdrawal for
conditions other than those related to the borrower’s employment or death and that the borrower
qualified for withdrawal and/or borrowing.

Mortgagee Letter 2005-15 states that there is no need to resubmit loans to TOTAL for rescoring
provided the cash reserves verified are not more than 10 percent less than those reported by the
borrowers on the loan application.




                                                40
Inconsistent Information Not Reconciled by Lender
The direct endorsement approval for a HUD-FHA-insured mortgage showed an interest rate of 5
percent; the uniform residential loan application and mortgage note showed an interest rate of 5
percent and principal and interest of $3,004. However, the FHA loan underwriting and
transmittal summary showed an interest rate of 6.5 percent and principal and interest of $3,538,
and the Desktop Underwriter underwriting findings showed an interest rate of 6.5 percent and
principal and interest of $3,556. As a result, the lender incorrectly calculated the borrowers’
back and front ratios because All American officials overstated the mortgage payment and
interest by $552 ($3,556 - $3,004) and the front and back ratios were decreased from 40.85 to
35.53 percent [($4,240 - $552)/$10,379] and 45.15 to 39.83 percent [($4,686 - $552)/$10,379],
respectively. All American officials stated that the file was qualified initially at a 6.5 percent
interest rate and closed at a decreased interest rate of 5 percent. All American officials further
stated that resubmission used to be required only for an increase in the interest rate and the
mortgage note rate of 5 percent and principal and interest of $3,004 was the correct one. We
agreed that the loan was not required to be rescored because of the decrease in the interest rate;
however, Mortgagee Letter 92-5 prohibits the lender from processing loans without reconciling
discrepancies in the file documentation.

HUD-FHA Requirement:
Mortgagee Letter 92-5 prohibits the lender from processing loans without reconciling
discrepancies in the file documentation.




                                                41
Case number:                                         374-5043583
Loan type:                                           Purchase
Mortgage amount:                                     $333,841
Closing date:                                        3/27/2009
Payments before first 90-day default reported        Two
Default status as of April 30, 2011                  First Legal Action to Commence
                                                     Foreclosure

Summary:
We found material underwriting deficiencies relating to inadequate verification of employment
or income resulting in improper calculation of ratios, and unallowable fees charged to the
borrower.

Inadequate Verification of Employment or Income Resulting in Incorrectly Calculated
Ratios
All American officials did not verify 2 years (24 months) of employment history for the
coborrower as required. The lender file contained a 2008 Internal Revenue Service Form W-2
(Wage and Tax Statement) and three pay stubs for periods ending January 3, 2009, January 17,
2009, and February 14, 2009, from the coborrower’s employer. During the audit, the lender
confirmed that the coborrower had 11.6 months of employment history from March 3, 2008, to
February 14, 2009. Therefore, the coborrower’s income should not have been used because the
coborrower did not have 2 full years of employment history as required. Without the
coborrower’s income, the front and back ratios would increase from 39.97 to 62.03 percent
($3,111/$5,015) and 46.85 to 72.70 percent ($3,646/$5,015). Also, the verified income was
$5,015, and the reported income was $7,782, which was 35.56 percent [($7,782 -
$5,015)/$7,782] less than that reported by the borrower. Since the difference in verified income
was 35.56 percent, or more than the 5 percent difference allowed by HUD, there was a need to
rescore the mortgage loan.

HUD-FHA Requirements:
HUD Handbook 4155.1, REV-5, section 2-6, states that we do not impose a minimum length of
time a borrower must have held a position of employment to be eligible. However, the lender
must verify the borrower’s employment for the most recent 2 full years.

Mortgagee Letter 2005-15 states that there is no need to resubmit loans to TOTAL for rescoring
provided the verified income is not more than 5 percent less than that reported by the borrowers
on the loan application.

Unallowable Fees Charged to Borrower
All American officials charged the borrowers $45 in unallowable wire fees. However, as a result
of our audit work, the lender issued a refund check to the borrowers for the unallowable closing
fees charged.

HUD-FHA Requirement:
HUD Handbook 4000.2, REV-3, chapter 5, paragraph 5-2O, states that courier fees and wire fees
may be charged only on refinances and only for delivery of the mortgage payoff statement to the



                                                42
lien holder and for closing documents to the settlement agent. It further provides that the
borrower must agree in writing to pay for courier and wire fees before loan closing.




                                                43
Case number:                                         374-4874336
Loan type:                                           Purchase
Mortgage amount:                                     $323,916
Closing date:                                        8/21/2008
Payments before first 90-day default reported        Two
Default status as of April 30, 2011                  First Legal Action to Commence
                                                     Foreclosure

Summary:
We found material underwriting deficiencies relating to inadequate verification of the source of
funds and cash reserves, and unallowable fees charged to the borrower.

Inadequate Verification of the Source of Funds
All American officials did not provide adequate support to show that the borrower had sufficient
funds to complete the transaction. The Desktop Underwriter underwriting findings showed the
depository assets totaling $15,258 that were available to underwrite this case. However, $11,492
of the $15,258 was not supported because the bank statements exceeded the 120-day
documentation requirement. In addition, the earnest money of $10,000 was not properly
documented because there was no source of funds. Further, the verified assets of $3,766
($15,258 - $11,492) were not sufficient funds to close the loan because the HUD-1 settlement
statement showed that the borrower needed $11,735 ($10,000 earnest money + $1,735 required
cash from borrower) in funds to close. Therefore, the lender did not verify that the borrower had
sufficient funds to complete the transaction.

HUD-FHA Requirements:
HUD Handbook 4155.1, REV-5, section 3-1, states that all documents may be up to 120 days old
at the time the loan closes (180 days for new construction) unless this or other applicable HUD
instructions specify a different timeframe.

HUD Handbook 4155.1, REV-5, paragraphs 2-10A and B, provide: “A. Earnest Money
Deposit. If the amount of the earnest money deposit exceeds 2 percent of the sales price or
appears excessive based on the borrower’s history of accumulating savings, the lender must
verify with documentation the deposit amount and the source of funds. Satisfactory
documentation includes a copy of the borrower’s cancelled check. A certification from the
deposit-holder acknowledging receipt of funds and separate evidence of the source of funds is
also acceptable. Evidence of source of funds includes a verification of deposit or bank statement
showing that at the time the deposit was made the average balance was sufficient to cover the
amount of the earnest money deposit. B. Savings and Checking Accounts. A verification of
deposit (VOD), along with the most recent bank statement, may be used to verify savings and
checking accounts. If there is a large increase in an account, or the account was opened recently,
the lender must obtain a credible explanation of the source of those funds.”

Inadequate Verification of Cash Reserves on Desktop Underwriter Underwriting Findings
The Desktop Underwriter underwriting findings showed that cash reserves of 3 months were not
supported by the borrowers’ assets. All American officials stated that the correct available funds
were $3,766, which was well below the 3 months of cash reserves after the closing amount as



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noted on the underwriting findings. The HUD-1 settlement statement showed that the borrower
needed $1,735 to close. The underwriting findings showed that the borrower had cash reserves
of $11,094; however, this amount was incorrect because the borrower had cash reserves of only
$2,031 ($3,766 - $1,735) after closing. Therefore, after closing, the borrower had cash reserves
of less than a month, or 68 percent of the total mortgage payment ($2,031/$2,991). The cash
reserve verified amount was $2,031, which was 82 percent [($11,094 - $2,031)/$11,094] less, or
more than 10 percent less, than that reported by the borrowers on the loan application; therefore,
the lender should have rescored the mortgage loan as required.

HUD-FHA Requirement:
Mortgagee Letter 2005-15 states that there is no need to resubmit loans to TOTAL for rescoring
provided the cash reserves verified are not more than 10 percent less than those reported by the
borrowers on the loan application.

Unallowable Fees Charged to Borrower
All American officials charged the borrowers $90 in unallowable wire and courier fees.
However, as a result of our audit work, the lender took corrective action to reimburse the
borrowers for the unallowable closing fees charged.

HUD-FHA Requirement
HUD Handbook 4000.2, REV-3, chapter 5, paragraph 5-2O, states that courier fees and wire fees
may be charged only on refinances and only for delivery of the mortgage payoff statement to the
lien holder and for closing documents to the settlement agent. It further provides that the
borrower must agree in writing to pay for courier and wire fees before loan closing.




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Case number:                                         374-5045917
Loan type:                                           Purchase
Mortgage amount:                                     $381,954
Closing date:                                        2/10/2009
Payments before First 90-day default reported        Three
Default status as of April 30, 2011                  Ineligible for Loss Mitigation


Summary:
We found material underwriting deficiencies relating to inadequate verification of the source of
gift funds and the statutory minimum investment, and unallowable fees charged to the borrower.

Inadequate Verification of the Source of Gift Funds
Inadequate Verification of the Statutory Minimum Investment
All American officials did not adequately verify the source of a $9,160 gift; therefore, the
borrower’s investment in the property was not verified. The Desktop Underwriter underwriting
findings showed that the borrowers’ minimum statutory investment requirement was $13,615
($389,000 x 3.5 percent), and the case binder contained a gift letter with no date from the
coborrower’s stepbrother for a $9,160 gift to the coborrower to be applied toward the property
purchase. The loan closed on February 10, 2009, and the lender file contained a check, dated
January 16, 2009, from the donor to the borrower’s closing attorney for $9,160. However, the
lender file did not contain documentation verifying that the source of the gift funds was indeed
the donor’s own funds because the transaction journal, dated December 15, 2008, to January 16,
2009, from the donor’s bank showed that the donor had a negative balance at the beginning of
the month. It showed the following: a negative balance of ($523) on December 15, 2008, a
deposit of $10,000 on December 16, 2008, several withdrawals totaling $10,010 from December
19 to December 22, 2008, and a deposit of $9,300 and withdrawal of $9,170 on January 16,
2009. The lender did not verify that the gift did not ultimately come from an unacceptable
source. Without documentation verifying that the gift funds were from an acceptable source, the
borrower did not make the minimum cash investment in the property, and the lender did not
verify and document the borrower’s gift and investment in the property. All American officials
did not concur on this deficiency because they used the FHA TOTAL Mortgage Scorecard User
Guide requirement. However, the FHA TOTAL Mortgage Scorecard User Guide, dated
September 2003, provides that if sufficient funds required for closing are not already verified in
the borrower’s accounts, the transfer of the gift funds to the home buyer must be documented in
accordance with the instructions described in Mortgagee Letter 00-28, which provides that the
lender must be able to determine that the gift funds were not ultimately provided from an
unacceptable source and were indeed the donor’s own funds.

HUD-FHA Requirements:
HUD Handbook 4155.1, REV-5, dated October 2003, section 2-10, provides that all funds for
the borrower’s investment in the property must be verified and documented and the lender must
be able to determine that the gift funds ultimately were not provided from an unacceptable
source and were indeed the donor’s own funds.




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Mortgagee Letter 2008-23, issued September 5, 2008, provides that the borrower must make a
3.5 percent minimum cash investment in the property and borrower-paid closing costs may not
be used to meet the cash investment requirements.

The TOTAL Mortgage Scorecard User Guide, dated September 2003, provides that the borrower
must list the name, address, telephone number, relationship to the home buyer, and dollar amount
of the gift on the loan application or in a gift letter for each cash gift received. If sufficient funds
required for closing are not already verified in the borrower’s accounts, the transfer of the gift
funds to the home buyer must be documented in accordance with instructions described in
Mortgagee Letter 00-28.

Mortgagee Letter 00-28 provides that the lender must be able to determine that the gift funds
were not ultimately provided from an unacceptable source and were indeed the donor’s own
funds.

Approval condition number 31 in the Desktop Underwriter underwriting findings provides that
the lender must document and retain a copy of the transfer of the gift and confirm that those
funds came from an acceptable source.

Unallowable Fees Charged on HUD-1 Settlement Statement
All American officials charged the borrowers $90 in unallowable wire and courier fees.
However, as a result of our audit work, the lender disbursed a check to the borrowers for the
unallowable closing fees charged.

HUD-FHA Requirement:
HUD Handbook 4000.2, REV-3, chapter 5, paragraph 5-2O, provides that courier and wire fees
may be charged only on refinances and only for delivery of the mortgage payoff statement to the
lien holder and for closing documents to the settlement agent. It further provides that the
borrower must agree in writing to pay for courier and wire fees before loan closing.




                                                  47
Case number:                                         374-5179044
Loan type:                                           Purchase
Mortgage amount:                                     $274,928
Closing date:                                        5/21/2009
Payments before first 90-day default reported        Seven
Default status as of April 30, 2011                  Ineligible for Loss Mitigation


Summary:
We found material underwriting deficiencies relating to inadequate verification of income
resulting in, improper calculation of ratios and unallowable fees charged to the borrower.

Improper Verification and Calculation of Income that Resulted in Incorrect Calculated
Ratios
All American officials failed to properly verify income because they did not document that
bonus income was going to continue for 2 years or explain why bonus income of less than 2
years was used. The lender file contained a pay stub for the pay period ending March 15, 2009,
with two awards for a total of $9,232. The lender file also contained an Employment & Income
Verification Service report stating that bonuses for 2009 and 2008 were $9,232 and $13,261,
respectively, and it did not report a bonus for 2007. However, using the Form W-2 for 2008, we
calculated the bonus as $11,674. The Form W-2 for 2008 showed gross wages of $77,180, and
according to the Employment & Income Verification Service report, the borrower’s base pay was
$65,506 ($77,180 - $65,506), supporting a bonus of $11,674. In addition, in calculating
allowable bonus income, the lender only documented 16.03 months worth of bonuses (January 1,
2008, to May 1, 2009, based on the date of the Employment & Income Verification Service
report). Since the borrower did not have 2 full years’ worth of bonuses and the Employment and
Income Verification Service report did not state that bonuses were likely to continue, the bonus
income should not have been factored into the debt-to-income ratio.

Also, the lender calculated the borrower’s base income as $5,647, which was incorrect.
According to the borrower’s pay stubs for pay period ending February 1, February 15, and
March 15, 2009, the base biweekly pay was $2,550; therefore, the monthly pay should have been
$5,525 ($2,550 x 26 / 12) instead of $5,647. Without the bonus and with the correct base
income, the mortgage payment-to-income ratio (front) and the total fixed payment-to-income
ratio (back) would have increased from 39.52 to 50.42 percent ($2,786/ $5,525) and from 48.51
to 61.90 percent [($2,786 + $634)/ $5,525], respectively.

All American officials stated that the underwriter allowed a bonus for a period of less than 2
years because the employer generously rewarded its employees and the borrower continued to be
an employee who had an increasing income. We do not agree with this reasoning as it was not
documented at the time the loan was approved. In addition, the base pay was calculated
incorrectly. The verified and reported incomes were $5,525 and $7,050, respectively, which was
21.63 percent [($7,050 - $5,525)/ $7,050] less than those reported by the borrowers. Since the
difference in verified income was 21.63 percent, or more than the 5 percent difference allowed
by HUD for verified income, there was a need to rescore the mortgage loan.




                                                48
HUD-FHA Requirements:
HUD Handbook 4155.1, paragraph 4D (2)(b), states that both overtime and bonus income may
be used to qualify a borrower if such income was received for the past 2 years and is likely to
continue. The lender must develop an average of bonus or overtime income for the past 2 years,
and the employment verification must not state that such income is unlikely to continue. Periods
of less than 2 years may be acceptable provided the lender justifies and documents in writing the
reason for using the income for qualifying purposes.

Mortgagee Letter 2005-15 states that there is no need to resubmit loans to TOTAL for rescoring
provided the verified income is not more than 5 percent less than that reported by the borrowers
on the loan application.

Unallowable Fees Charged
All American officials charged the borrowers $95 in unallowable wire and courier fees.
However, as a result of our audit work, the lender disbursed a check to reimburse the borrowers
for the unallowable closing fees charged.

HUD-FHA Requirement:
HUD Handbook 4000.2, REV-3, chapter 5, paragraph 5-2O, states that courier fees and wire fees
may be charged only on refinances and only for delivery of the mortgage payoff statement to the
lien holder and for closing documents to the settlement agent. It further provides that the
borrower must agree in writing to pay for courier and wire fees before loan closing.




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