oversight

Utah Housing Corporation Did Not Always Properly Determine Borrower Eligibility for FHA's Preforeclosure Sale Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-05-15.

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

OFFICE OF AUDIT
REGION 8
DENVER, CO




                  Utah Housing Corporation
                    West Valley City, UT

               Federal Housing Administration’s
                 Preforeclosure Sale Program




2013-DE-1001                                      MAY 15, 2013
                                             U.S. DEPARTMENT OF
                           HOUSING AND URBAN DEVELOPMENT
                                      OFFICE OF INSPECTOR GENERAL




                                                                      Issue Date: May 15, 2013

                                                                      Audit Report Number: 2013-DE-1001


TO:            Charles S. Coulter, Deputy Assistant Secretary for Single Family Housing, HU

               //signed//
FROM:          Ronald J. Hosking, Regional Inspector General for Audit, Denver Region, 8AGA

SUBJECT:       Utah Housing Corporation Did Not Always Properly Determine Borrower
               Eligibility for FHA’s Preforeclosure Sale Program


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of Utah Housing Corporation’s approval of
borrowers for FHA’s Preforeclosure Sale Program.

    HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.

    The Inspector General Act, Title 5 United States Code, section 8L, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.

   If you have any questions or comments about this report, please do not hesitate to call me at
913-551-5872.




                                                Office of Audit Region 8
                                     1670 Broadway, 24th Floor, Denver, CO 80202
                                      Phone (303) 672-5452, Fax (303) 672-5006
                          Visit the Office of Inspector General Web site at www.hudoig.gov.
                                                           
                                             May 15, 2013
                                             Utah Housing Corporation Did Not Always Properly
                                             Determine Borrower Eligibility for FHA’s Preforeclosure
                                             Sale Program



Highlights
Audit Report 2013-DE-1001


 What We Audited and Why                      What We Found

We reviewed 39 Federal Housing               The Corporation did not always properly determine
Administration (FHA) claims submitted        that borrowers were eligible to participate in the
by Utah Housing Corporation, West            Program. Of the 39 preforeclosure sales reviewed, it
Valley City, UT. Our objective was to        inappropriately approved three borrowers who had
determine whether the Corporation            more than one FHA-insured loan and two borrowers
properly determined that borrowers           who did not meet the definition of facing imminent
were eligible to participate in FHA’s        default at the time of approval. Additionally, the
Preforeclosure Sale Program. We              Corporation did not independently verify expenses
selected the Corporation because it had      used in the financial analysis of these five borrowers
more preforeclosure sales than regular       plus an additional 32 borrowers. This condition
foreclosures, placing it at the top of our   occurred because the Corporation incorrectly believed
risk assessment.                             that it was within Program guidelines when it approved
                                             borrowers and did not have all necessary controls in
                                             place. As a result, the FHA insurance fund paid out
 What We Recommend
                                             $213,370 for ineligible claims and the associated
                                             $5,000 in lender incentive fees, and $1.5 million for
We recommend that the Deputy                 unsupported claims, with $32,000 for inappropriate
Assistant Secretary for Single Family        lender incentive fees.
Housing require the Corporation to
reimburse the U.S. Department of
Housing and Urban Development
(HUD) for the five ineligible claims
paid plus lender incentive fees totaling
$218,370. Also, we recommend that
HUD review for Program eligibility the
32 claims totaling $1.5 million that
were paid without proper support and
require the Corporation to reimburse
HUD for those without support plus
$32,000 in lender incentive fees
received. Additionally, we recommend
that HUD require the Corporation to
develop and implement policies and
procedures to ensure proper
determination of borrower eligibility
before approval for the Program.
                            TABLE OF CONTENTS

Background and Objective                                                   3

Results of Audit
      Utah Housing Corporation Did Not Always Properly Approve Borrowers   4
      for the Preforeclosure Sale Program

Scope and Methodology                                                      7

Internal Controls                                                          9

Appendixes
A.    Schedule of Questioned Costs                                         10
B.    Auditee Comments and OIG’s Evaluation                                11
C.    Schedule of Preforeclosure Sale Deficiencies                         15
D.    Case Narratives                                                      16




                                             2
                      BACKGROUND AND OBJECTIVE

The Federal Housing Administration (FHA) provides mortgage insurance on loans made by
FHA-approved lenders. FHA mortgage insurance provides lenders with protection against losses
as the result of homeowners defaulting on their mortgage loans. The lenders bear less risk
because FHA will pay a claim to the lender in the event of a homeowner’s default. Loans must
meet certain requirements established by FHA to qualify for insurance.

Since being introduced as a national program in 1994, FHA’s Preforeclosure Sale Program has
helped thousands of borrowers avoid foreclosure and transition to more affordable housing. The
Program allows borrowers who cannot make their mortgage payments, resulting from an adverse
and unavoidable financial situation, to sell their home at fair market value. The sale proceeds
satisfy the mortgage debt even if the proceeds are less than the amount owed. This option is
appropriate for borrowers whose financial situation requires that they sell their home, but they
are unable to do so without FHA relief because the gross recovery on the sale of their property is
less than the amount owed on the mortgage.

FHA lenders must maintain supporting documentation to demonstrate a comprehensive review
of the borrower’s financial records and that the borrower did not have sufficient income to pay
the mortgage. A lender may submit an FHA insurance claim and be compensated for the
difference between the sale proceeds and the amount owed on the mortgage. In addition, FHA
will pay lenders an incentive fee of $1,000 for each completed transaction.

Utah Housing Corporation was created in 1975 by Utah legislation to provide mortgage loans at
reasonable interest rates for low- and moderate-income persons. The Corporation received
approval on March 20, 1978, from FHA to be a government lender. According to the U.S.
Department of Housing and Urban Development’s (HUD) Single Family Data Warehouse
database, the Corporation filed 313 preforeclosure sale claims between June 30, 2010, and
September 30, 2012. Each claim compensated the Corporation for the difference between the
sale proceeds and the amount owed on the mortgage, plus incentives earned by the Corporation,
the borrower, or both. The Single Family Data Warehouse includes a collection of database
tables allowing users to access Single Family Housing data on properties and associated loans,
insurance, claims, defaults, and demographics.

Our audit objective was to determine whether Utah Housing Corporation properly determined
that borrowers were eligible to participate in FHA’s Preforeclosure Sale Program.




                                                3
                               RESULTS OF AUDIT


Finding 1: Utah Housing Corporation Did Not Always Properly
Approve Borrowers for the Preforeclosure Sale Program
The Utah Housing Corporation did not always properly determine that borrowers were eligible to
participate in FHA’s Preforeclosure Sale Program. This condition occurred because the
Corporation incorrectly believed that it was within Program guidelines when it approved
borrowers and did not have all necessary controls in place. As a result, the FHA insurance fund
paid out $213,370 for ineligible claims, $1.5 million for unsupported claims, and $37,000 for
inappropriate lender incentive fees.



 The Corporation Did Not
 Properly Determine Eligibility

            Of the 39 Program loan files reviewed, the Corporation did not properly determine
            that 37 borrowers were eligible to participate in the Program. It approved three
            borrowers who had more than one FHA-insured loan and two borrowers who did
            not meet the definition of facing imminent default. Further, it did not independently
            verify expenses used in the financial analysis of these five borrowers plus an
            additional 32 borrowers.

            The Corporation incorrectly approved three borrowers who had more than one
            FHA-insured loan. Section B of Mortgagee Letter 2008-43 restricts the Program
            option to borrowers having only one FHA-insured loan. In two of the three cases,
            the borrower obtained a second FHA-insured loan before applying for the Program.
            In each case, the Corporation used both FHA-insured mortgage payments in the
            borrowers’ financial analysis, but it did not verify whether FHA had insured the
            second mortgage. The third borrower obtained a second FHA-insured mortgage 2
            weeks after being approved for the Program, making the borrower no longer
            eligible to participate. This borrower’s file included a copy of the second loan’s
            deed of trust; however, the Corporation did not verify whether FHA had insured the
            second loan.

            The Corporation did not ensure that two borrowers faced imminent default at the
            time it approved the applications. Mortgagee Letter 2008-43, section A, allows
            lenders to exercise their discretion to accept applications from borrowers who are
            current but facing imminent default. Further, Mortgagee Letter 2010-04, Loss
            Mitigation for Imminent Default, defines an “FHA borrower facing imminent
            default” as an FHA borrower who is current or less than 30 days past due on the
            mortgage obligation and is experiencing a significant reduction in income or other
            hardship that will prevent him or her from making the next mortgage payment
                                               4
                                                
         during the month it is due. The lender must document the basis for its decision that
         a payment default is imminent.

         In one case, the borrower relocated for a graduate program starting in January of
         2011, during which the borrower would not have an income. The borrower’s
         application stated, “I have every intention of staying current on my payment and
         will have an income to do so until December [2010].” The Corporation approved
         the borrower for the Program in September of 2010. The borrower made the
         October and November mortgage payments and then missed the December payment
         to ensure qualifying for the Program. The second borrower received a letter in
         August of 2010, stating that the borrower’s employment would be terminated in
         December of 2010. The Corporation approved the borrower in September, and the
         short sale closed in October of 2010, 2 months before the hardship occurred.

         The Corporation did not independently verify all expenses used in the borrowers’
         financial analysis for 37 of the 39 files reviewed. Section D of Mortgagee Letter
         2008-43 requires lenders to independently verify the borrowers’ financial
         information regardless of how it is obtained. During its financial analysis, the
         Corporation used expense amounts claimed by the borrower without verifying
         them. All cases included amounts for utilities, insurance, medical bills,
         transportation, donations, or other family expenses that were not verified. Without
         verifying these expenses, the Corporation could not demonstrate that the borrowers’
         expenses exceeded their income, with the exception of two unemployed borrowers.

The Corporation
Misunderstood the
Requirements and Had
Insufficient Controls

         The Corporation incorrectly believed that it was within the Program guidelines
         when it approved borrowers for the Program. It believed that it met the intent of the
         Program by helping borrowers avoid foreclosure. However, it is required to follow
         the regulations in place when approving borrowers for the Program. In addition, the
         Corporation did not have controls in place to (1) ensure that a borrower had only
         one FHA loan, (2) determine whether the borrower truly faced imminent default,
         and (3) independently verify borrower expenses. The Corporation had a control to
         check the Credit Alert Verification Reporting System when reviewing the
         borrowers’ application. However, it did not realize that the System does not
         generate all of the FHA-insured loans a borrower has. Additionally, if the
         borrower’s application included expenses that the reviewer thought were customary
         for the family size, the Corporation did not require support for the expense.




                                            5
                                             
FHA Paid Improper Claims

          The FHA insurance fund paid out $213,370 for 5 ineligible claims, $1.5 million
          for 32 unsupported claims, and $37,000 for inappropriate lender incentive fees.
          Lenders receive a $1,000 per claim incentive for complying with all requirements
          of the Program’s mortgagee letter. Since the Corporation did not meet all
          requirements for 37 of the claims reviewed, it was not entitled to receive the
          incentive fees. The schedule of Program deficiencies in appendix C shows the
          results of each Program file review.

Recommendations

         We recommend that the Deputy Assistant Secretary for Single Family Housing

         1A. Require the Corporation to reimburse HUD for the five claims paid totaling
             $213,370 and the associated $5,000 in lender incentive fees received.

         1B. Review for Program eligibility the 32 claims paid without proper support
             totaling $1,507,699 and require the Corporation to reimburse HUD for those
             without support plus the associated $32,000 in lender incentive fees received.

         1C. Require the Corporation to develop and implement policies and procedures to
             ensure proper determination of borrower eligibility before approval for the
             Program.




                                           6
                                             
                          SCOPE AND METHODOLOGY

We performed our onsite audit work at the Corporation’s office at 2479 South Lake Park
Boulevard, West Valley City, UT, between October 2012 and February 2013. The audit covered
the period June 30, 2010, through September 30, 2012.

To accomplish our objective, we

      Interviewed Corporation staff, HUD staff, and program participants;
      Reviewed Federal regulations, HUD handbooks, and mortgagee letters;
      Reviewed the Corporation’s policies and procedures;
      Reviewed the Corporation’s preforeclosure sale case files; and
      Reviewed the Corporation’s loan servicing records.

During the audit period, the Corporation closed 313 preforeclosure sales, resulting in claims
totaling more than $16 million. Of the total preforeclosure sales, there were 39 sales that closed
after the borrower had missed three or fewer payments. We reviewed all 39 of these loan files
with claims totaling almost $1.8 million.

We reviewed the Corporation’s preforeclosure sale case files to evaluate whether the Corporation
verified that the borrower

      Suffered an adverse and unavoidable financial hardship,
      Implemented a repayment plan if surplus income or assets existed,
      Accurately stated income and expenses,
      Faced imminent default if applicable,
      Was the owner-occupant of the subject property,
      Did not have another FHA-insured mortgage, and
      Was more than 30 days delinquent when the short sale closed.

We also reviewed the case files to determine whether the Corporation verified that (1) the
mortgage payoff amount exceeded the “as-is” fair market value of the home, (2) the home was
listed for sale at no less than the appraised “as-is” fair market value, and (3) the sale generated
the minimum net sale proceeds required by the Program.

We used reports obtained from HUD’s Single Family Data Warehouse database as background
information for our review. Specifically, we used the reports to identify preforeclosure sales that
closed during the audit period, the number of payments missed, and the associated claim
amounts. However, we did not rely on these data for our conclusions. All conclusions were
based on additional review performed during the audit.

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

                                                  7
                                                    
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                               8
                                                 
                              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, policies, 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
               objective:

                     Controls over reviewing borrower qualifications to participate in the
                      Preforeclosure Sale Program.

               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 effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.

 Significant Deficiency

               Based on our review, we believe that the following item is a significant deficiency:

                     Utah Housing Corporation did not have adequate policies and procedures in
                      place to ensure that it properly determined borrower eligibility to participate
                      in the Preforeclosure Sale Program.




                                                 9
                                                   
                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

             Recommendation
                                   Ineligible 1/            Unsupported 2/
                 number
                    1A                $218,370
                    1B                                          $1,539,699


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/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.




                                             10
                                               
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         11
                           
Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         12
                           
                        OIG Evaluation of Auditee Comments

Ref to OIG Evaluation                Auditee Comments




Comment 3




Comment 4




                                       13
                                         
                         OIG Evaluation of Auditee Comments

Comment 1   CAIVRS is a Federal government database of delinquent Federal debtors. It can
            be used to check if a borrower has delinquent debt, however this system does not
            generate all debt that a borrower possesses. The Corporation might use other
            evidence provided by the borrower, such as the loss mitigation application, credit
            report, and deed of trust, and request the settlement statement from any other
            loans a borrower indicated.

Comment 2   We agree to adding additional questions to the loss mitigation application to
            inquire about other loan types a borrower has. However, we did not review the
            updated application.

Comment 3   We disagree that the borrowers were facing imminent default for FHA case
            numbers 521-6388262 and 521-6557107 at the time of application approval.
            HUD defines a “borrower facing imminent default” as an FHA borrower who is
            experiencing a hardship that will prevent him or her from making the next
            required payment on the mortgage during the month in which it is due. These
            borrowers did not experience a hardship for over 2 months after Program
            approval. Therefore, the hardship did not prevent the borrower from making their
            next month’s mortgage payment as they had yet to experience the hardship.

Comment 4   Mortgagee Letter 2008-43, section D, requires lenders to independently verify the
            borrowers’ financial information regardless of how it is obtained. The
            Corporation staff’s discretion does not take the place of verification by an
            independent third party.




                                            14
                                               
Appendix C
 SCHEDULE OF PREFORECLOSURE SALE DEFICIENCIES
 Sample   FHA case        Claim        Payments         More than one   Not in imminent       Unverified
 number    number        amount         missed           FHA loan         default at          expenses
                                                                           approval
     1    521-6419744       $54,584         1                                                        x
     2    521-6545196        $9,198         1                                                        x
     3    521-6335819       $42,959         1                                                        x
     4    521-6388262       $42,241         1                                    x                   x
     5    521-6478380       $51,896         1                                                        x
     6    521-6749703       $31,905         1                                                        x
     7    521-6871164       $34,975         1                                                        x
     8    521-7933905       $14,849         1                                                        x
     9    521-6482225       $51,560         1                                                        x
    10    521-6493240       $72,366         1                                                        x
    11    521-6314247       $30,553         2                                                        x
    12    521-6330840       $18,961         2                                                        x
    13    521-6333026       $43,584         2                                                        x
    14    521-6360366      $103,049         3                                                        x
    15    521-6361927       $59,534         2                                                        x
    16    521-6374076       $56,241         3                                                        x
    17    521-6398282       $40,582         2                                                        x
    18    521-6401448       $67,974         3                                                        x
    19    521-6408735       $46,025         3                                                        x
    20    521-6423699       $63,227         3                                                        x
    21    521-6433037       $33,535         2                                                        x
    22    521-6472082       $46,689         2                                                        x
    23    521-6480390       $71,057         3                                                        x
    24    521-6506627       $72,121         2                                                        x
    25    521-6557107       $27,104         2                                    x                   x
    26    521-6587217       $66,304         3                                                        x
    27    521-6717434       $37,073         2                                                        x
    28    521-6720491       $59,436         2                                                        x
    29    521-6730946       $37,533         2                                                        x
    30    521-6760787       $69,653         2                 x                                      x
    31    521-6800951       $30,521         2                                                        x
    32    521-6807829       $49,558         2                                                        x
    33    521-6812371       $44,022         3                                                        x
    34    521-6819681       $36,419         3                                                        x
    35    521-7298396       $28,227         2                                                        x
    36    521-7375951       $47,639         3                 x                                      x
    37    521-7563637       $30,609         3                                                        x
    38    521-7569719       $41,094         3                                                        x
    39    521-7593680       $26,733         3                 x                                      x
  Total                  $1,791,590                           3                  2                  39
                          ($70,521)   Claims for two eligible loans (dark blue highlight) - sample #9 and #12
                         ($144,025)   Claims having more than one FHA loan - sample #30, #36, and #39
                          ($69,345)   Claims not in imminent default at approval date - sample #4 and #25
                        $1,507,699    Total for 32 unsupported loans


                                                  15
                                                     
Appendix D

                                 CASE NARRATIVES

The Corporation approved the following ineligible borrowers for the Preforeclosure Sale
Program. The first two borrowers below were not facing imminent default, and the last three
borrowers had more than one FHA-insured loan, both of which are not allowable under the
Program. In addition, the Corporation did not obtain supporting documentation to independently
verify each of the borrowers’ reported expenses; therefore, it did not satisfy the requirement of a
comprehensive analysis of the borrower’s finances.

Sample number 4
FHA case number: 521-6388262
Claim amount: $42,241
Settlement date of preforeclosure sale: January 7, 2011

The borrower’s application, dated August 23, 2010, said that the borrower would be moving to
attend a graduate program. The application stated, “I will not be working at all starting January
2011… I have every intention of staying current on my payment and will have an income to do
so until December.” The Corporation approved the borrower for the Program on September 22,
2010, although the requirement says that to participate, a borrower needs to be facing imminent
default. HUD defines a “borrower facing imminent default” as an FHA borrower who is
experiencing a hardship that will prevent him or her from making the next required payment on
the mortgage during the month in which it is due. This borrower did not meet this definition at
the time of approval as the borrower was able to make the October and November mortgage
payments after approval and the hardship event did not take place for more than 3 months after
the borrower was approved for the Program.

Sample number 25
FHA case number: 521-6557107
Claim amount: $27,104
Settlement date of preforeclosure sale: October 7, 2010

The file included a letter, dated August 5, 2010, from the borrower’s employer stating that the
borrower would be laid off on December 1, 2010. The Corporation approved the borrower for
the Program on September 17, 2010, although the requirement says that to participate in the
Program, a borrower needs to be facing imminent default. HUD defines a “borrower facing
imminent default” as an FHA borrower who is experiencing a hardship that will prevent him or
her from making the next required payment on the mortgage during the month in which it is due.
Therefore, the borrower did not meet this definition when the Corporation approved the borrower
because the hardship event, being laid off, did not take place until 2½ months after the borrower
was approved for the Program. Further, the short sale took place almost 2 months before the
hardship event occurred.



                                                16
                                                  
Sample number 30
FHA case number: 521-6760787
Claim amount: $69,653
Settlement date of preforeclosure sale: February 4, 2011

The borrower received notice of a job transfer to another office location within the company that
the borrower worked for. The Corporation approved the borrower for the Program on October
25, 2010, and then the borrower obtained another home loan. The deed of trust in the file for the
borrower’s new home had an FHA case number of 521-7924302 listed on it. The requirements
allow borrowers to have only one FHA-insured loan to participate in the Program. This
borrower did not qualify since the borrower acquired a second FHA-insured loan before the short
sale occurred.

Sample number 36
FHA case number: 521-7375951
Claim amount: $47,639
Settlement date of preforeclosure sale: June 1, 2012

The borrower relocated for a higher paying job since his spouse lost her job and was not able to
find employment promptly. The credit report in the file for this borrower listed two FHA-
insured loans, one opened on September 1, 2009, and the other opened on November 1, 2011.
The Corporation approved the borrower for the Program on April 10, 2012, although the credit
report listed both loans as FHA insured. Because the borrower had two FHA-insured loans, he
did not qualify for the Program as the requirements allow participants to have only one FHA-
insured loan.

Sample Number 39
FHA case number: 521-7593680
Claim amount: $26,733
Settlement date of preforeclosure sale: November 18, 2011

The borrower stated in his application, “I relocated from Logan to Tucson, AZ to accept a new
position with the University of Arizona. I have purchased a home in Arizona where I plan to
permanently live and as such I am unable to afford paying two mortgages.” The borrower closed
on the Tucson home on August 2, 2011, and applied for the Program on the Logan home on
August 26, 2011. The Corporation approved the borrower for the Program on November 9,
2011, without ensuring that the borrower’s mortgage on the Tucson home was not an FHA-
insured loan, which it was. Therefore, this borrower did not qualify for the Program as the
requirements allow participants to have only one FHA-insured loan and the borrower had two.




                                               17