oversight

Pulte Mortgage LLC, Englewood, CO, Allowed the Recording of Prohibited Restrictive Covenants

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-04-18.

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

                                                 U.S. DEPARTMENT OF
                                HOUSING AND URBAN DEVELOPMENT
                                         OFFICE OF INSPECTOR GENERAL




                                                    April 18, 2013
                                                                                                   MEMORANDUM NO:
                                                                                                        2013-LA-1802


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

                   Dane M. Narode
                   Associate General Counsel for Program Enforcement, CACC




FROM:              Tanya E. Schulze
                   Regional Inspector General for Audit, Los Angeles Region, 9DGA

SUBJECT:           Pulte Mortgage LLC, Englewood, CO, Allowed the Recording of Prohibited
                   Restrictive Covenants


                                                INTRODUCTION

The U.S. Department of Housing and Urban Development (HUD), Office of Inspector General
(OIG), conducted a limited review of loans underwritten by Pulte Mortgage LLC. 1 We selected
the lender based on the results of an auditability survey, which determined that Pulte Mortgage
allowed prohibited restrictive covenants to be filed against Federal Housing Administration
(FHA)-insured properties. The objective of our review was to determine the extent to which
Pulte Mortgage failed to prevent the recording of prohibited restrictive covenants with potential
liens in connection with FHA-insured loans closed between January 1, 2008, and December 31,
2011.

HUD Handbook 2000.06, REV-4, provides 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 review.




1
    FHA identification number 05369

                                                    Office of Audit (Region 9)
                                  611 West Sixth Street, Suite 1160, Los Angeles, CA 90017
                                           Phone (213) 894-8016, Fax (213) 894-8115
                               Visit the Office of Inspector General Web site at www.hudoig.gov.
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.

                                   METHODOLOGY AND SCOPE

We reviewed 332 2 loans underwritten by Pulte Mortgage with closing dates between January 1,
2008, and December 31, 2011. We conducted the audit work from the HUD OIG Phoenix, AZ,
Office of Audit between June 2012 and January 2013. To accomplish our objective, we

•       Reviewed prior HUD OIG audit reports with findings that included lenders allowing
        prohibited restrictive covenants; 3

•       Reviewed relevant FHA requirements set forth in 24 CFR (Code of Federal Regulations)
        Part 203 and HUD Handbooks 4000.2 and 4155.2;

•       Reviewed a HUD OIG legal opinion pertaining to restrictive covenants;

•       Reviewed a HUD management decision discussing prohibited restrictive covenants;

•       Reviewed prior reviews conducted by the HUD Quality Assurance Division;

•       Discussed the prohibited restrictive covenants with Pulte Mortgage officials; and

•       Obtained and reviewed FHA loan data downloaded from HUD’s Single Family Data
        Warehouse 4 and Neighborhood Watch systems. 5

We analyzed the Single Family Data Warehouse data as of May 31, 2012, and separated the data
into two categories: (1) loans that had gone into claim status and (2) loans that were still active.
We selected a 100 percent review of the claim loans, 260 loans total, and elected to review a
highly stratified attribute statistical sample of the 9,730 active loans. The stratified sample of the
72 loan samples was randomly selected and weighted by means of a computer program in SAS®
using a seed value of 7. To meet the audit objective, we also

•       Requested and received copies of the lender’s FHA lender files for the loans selected for
        review;

•       Attempted to contact some borrowers for loans on which HUD paid a claim and
        interviewed a borrower;

2
  260 claim loans and 72 statistically selected active loans
3
  Audit report numbers 2009-LA-1018, 2010-LA-1009, and 2011-LA-1017
4
  HUD’s Single Family Data Warehouse is a collection of database tables structured to provide HUD users easy and
efficient access to single-family housing case-level data on properties and associated loans, insurance, claims,
defaults, and demographics.
5
  Neighborhood Watch is a Web-based software application that displays loan performance data for lenders and
appraisers by loan types and geographic areas, using FHA-insured single-family loan information.




                                                       2
•       Conducted Internet research, identified and queried applicable county recorder offices,
        and searched Accurint 6 to obtain and review recorded documents related to the sampled
        FHA-insured mortgages; and

•       Compiled and summarized the loan data with corresponding prohibited restrictive
        covenants.

For the audit sample, the percentage and number of loans with unallowable restrictive covenants
were computed based on the weighted sampling results and extended to the population using the
“surveyfreq” procedure provided by SAS®. We used a 15-strata sample design to control for
potential bias that might arise from varying rates of price escalation and varying resale demand
based on population density. Of the selected samples, 11 had disallowed covenants, which
projects to 15.78 percent, or 1,535 loans. To account for the statistical margin of error, we
subtracted the standard error (3.754) times a t-score of 1.67. As a result, we can be 95 percent
confident that at least 925 of the 9,730 loans had similar problems with unallowable restrictive
covenants.

We relied in part on and used HUD computer-processed data to select the claim and active loans
reviewed for prohibited restrictive covenants. Although we did not perform a detailed
assessment of the reliability of data, we performed a minimal level of testing and determined that
the data were sufficiently reliable for our purposes.

We conducted our work in accordance with generally accepted government auditing standards,
except that we did not consider the internal controls or information systems controls of Pulte
Mortgage. We did not follow standards in these areas because our objective was to identify the
extent to which Pulte Mortgage allowed prohibited restrictive covenants and how that affected
the FHA single-family insurance program risk. To meet our objective, it was not necessary to
fully comply with the standards, nor did our approach negatively affect our review results.

                                               BACKGROUND

Pulte Mortgage is a nonsupervised direct endorsement lender 7 headquartered in Englewood, CO.
It received this FHA mortgage insurance program status in 1983. Its affiliated builders, Pulte
Homes and Del Webb, were sellers of the properties discussed in this review memorandum.

FHA, created by Congress in 1934, is the largest mortgage insurer in the world aimed at helping
low- and moderate-income families become homeowners by lowering some of the costs of their
mortgage loans. It is also the only government agency that operates entirely from its self-
generated income from mortgage insurance paid by homeowners and costs the taxpayers

6
  Accurint LE Plus accesses databases built from public records, commercial data sets, and data provided by various
government agencies.
7
  A nonsupervised lender is a HUD-FHA-approved lending institution that has as its principal activity the lending or
investment of funds in real estate mortgages and is not a supervised lender, a loan correspondent, a governmental
institution, a government-sponsored enterprise, or a public or State housing agency and has not applied for approval
for the limited purpose of being an investment lender.




                                                         3
nothing. FHA mortgage insurance encourages lenders to approve mortgages for otherwise
creditworthy borrowers that might not be able to meet conventional underwriting requirements
by protecting the lender against default. However, according to HUD-FHA requirements, the
lender has the responsibility at loan closing to ensure that any conditions of title to the property
are acceptable to FHA and that the mortgaged property will be free and clear of all liens other
than the mortgage. Lenders are responsible for complying with all applicable HUD regulations
and in turn are protected against default by FHA’s Mutual Mortgage Insurance Fund, which is
sustained by borrower premiums.

In the event of homeowner default, the FHA fund pays claims to participating lenders. To this
end, lenders have a responsibility to ensure that the FHA fund is protected by approving only
those loans that meet all eligibility requirements. The FHA fund capital reserve ratio has a
congressional mandate of 2 percent. However, based on the 2012 annual report to Congress on
the FHA fund, 8 its capital reserve ratio had fallen below zero to a negative 1.44 percent. A U.S.
Government Accountability Office report on the FHA fund stated, “If the [capital] reserve
account were to be depleted, FHA would need to draw on permanent and indefinite budget
authority to cover additional increases in estimated credit subsidy costs.” 9 Therefore, the FHA
fund would no longer run on only self-generated income.

We reviewed a legal opinion 10 from OIG’s Office of Legal Counsel regarding the seller’s
restriction on conveyance of FHA properties. Counsel opined that the recorded agreements
between the seller and borrowers would constitute a violation of HUD statutes, regulations, or
handbook requirements. In its opinion, the Office of Legal Counsel specifically stated that 24
CFR 203.41(b), pertaining to consent by a third party, appears to violate HUD’s regulations. In
this case, the seller is considered a third party.

Additionally, we obtained a HUD management decision on the recommendations of a prior OIG
audit 11 not related to Pulte Mortgage. In the decision, HUD agreed that the execution of
prohibited restrictive covenants is a violation of Federal regulations and FHA requirements and
considered the violation a serious deficiency, stating that loans with prohibited restrictive
covenants are ineligible for FHA insurance.

                                          RESULTS OF REVIEW

Pulte Mortgage did not follow HUD requirements regarding free assumability and liens when it
underwrote loans that had executed and recorded agreements between Pulte Homes and the FHA
borrower, containing prohibited restrictive covenants and liens in connection with FHA-insured
properties. This noncompliance occurred because Pulte Mortgage did not exercise due diligence
and was unaware that the restrictive covenants recorded between the sellers and the borrowers
violated HUD-FHA requirements. As a result, we found 1,106 FHA-insured loans (181 claim

8
  Annual Report to Congress, Fiscal Year 2012 Financial Status, FHA Mutual Mortgage Insurance Fund
9
  U.S. Government Accountability Office testimony, GAO-12-578T, Mortgage Financing, FHA and Ginnie Mae
Face Risk-Management Challenges, issued March 29, 2012
10
   The legal opinion was previously obtained during the review of a separate lender (2011-LA-1017) for a similar
restriction contained in the FHA purchase agreement.
11
   Audit report 2011-LA-1017




                                                         4
loans and 925 active loans) with a corresponding prohibited restrictive covenant with a potential
lien recorded with the applicable county recording office, and Pulte Mortgage placed the FHA
fund at unnecessary risk for potential losses.

Claim Loan Review Results

We identified and reviewed all 260 claim loans underwritten by Pulte Mortgage, 12 limited to
loans closed between January 1, 2008, and December 31, 2011. In our review of the applicable
county recorders’ documents, we identified unallowable restrictive covenants corresponding to
181 of the 260 claim loans with properties in Arizona, California, Florida, and Nevada. Of the
181 loans, 82 resulted in actual losses 13 to HUD totaling more than $9.9 million (see appendix C,
table 1), and 99 resulted in claims paid totaling more than $11.8 million, but the properties had
not been sold by HUD (see appendix C, table 2).

Active Loan Sample Results

Additionally, we completed a random attribute statistical sample and selected 72 of 9,730 active
loans within our audit period. In our review of the applicable county recorders’ documents of
the sampled active FHA loans, we identified an unallowable restrictive covenant corresponding
to 11 of the 72 sampled active loans with properties in Arizona, California, Florida, and Nevada.
The 11 loans were active with an unpaid principal balance of more than $2.3 million (see
appendix C, table 3).

Based on a highly stratified sample, designed to minimize error and accommodate varying rates
of price escalation and varying demand based on population density, 15.78 percent of the 72
weighted loan samples contained restrictive covenants, which are not allowed by HUD
rules. Therefore, we can be 95 percent confident that at least 925 of the 9,730 active loans in our
audit period had similar problems with unallowable restrictive covenants (see Scope and
Methodology).

Restriction on Conveyance

For each FHA loan, the lender certifies on the Direct Endorsement Approval for HUD/FHA-
Insured Mortgage (form HUD-92900-A) that the mortgage was eligible for HUD mortgage
insurance under the direct endorsement program (see lender certification excerpts below).




12
  Based on HUD’s Single Family Data Warehouse as of May 31, 2012
13
  The actual loss is the calculated amount of loss resulting from the sale of a HUD property. The loss is calculated
based on the sales price - [acquisition cost + capital income/expense (rent, repair costs, taxes, sales expenses, and
other expenses)].




                                                          5
The FHA insurance requirements, set forth in 24 CFR 203.41(b), state that to be eligible for
insurance, the property must not be subject to legal restrictions on conveyance. Further, 24 CFR
203.41(a)(3) defines legal restrictions on conveyance as “any provision in any legal instrument,
law or regulation applicable to the mortgagor or the mortgaged property, including but not
limited to a lease, deed, sales contract, declaration of covenants, declaration of condominium,
option, right of first refusal, will, or trust agreement, that attempts to cause a conveyance
(including a lease) made by the mortgagor to:

(i)        Be void or voidable by a third party;
(ii)       Be the basis of contractual liability of the mortgagor for breach of an agreement not to
           convey, including rights of first refusal, pre-emptive rights or options related to
           mortgagor efforts to convey;
(iii)      Terminate or subject to termination all or a part of the interest held by the mortgagor in
           the mortgaged property if a conveyance is attempted;
(iv)       Be subject to the consent of a third party;
(v)        Be subject to limits on the amount of sales proceeds retainable by the seller; or
(vi)       Be grounds for acceleration of the insured mortgage or increase in the interest rate.”

Additionally, 24 CFR 203.32 states that a “mortgagor must establish that, after the mortgage
offered for insurance has been recorded, the mortgaged property will be free and clear of all liens
other than such mortgage, and that there will not be outstanding any other unpaid obligations
contracted in connection with the mortgage transaction or the purchase of the mortgaged
property, except obligations that are secured by property or collateral owned by the mortgagor
independently of the mortgaged property.” 14

Finally and of most significance, HUD Handbooks 4000.2, paragraph 5-1(B), and 4155.2,
paragraph 6.A.1.h, both state that it is the lender’s responsibility at loan closing to ensure that
any conditions of title to the property are acceptable to FHA. In essence, it is the duty of the
lender to ensure that FHA loans approved for mortgage insurance are eligible and acceptable
according to FHA rules and regulations. The restrictive covenants identified placed a prohibited
restriction on the conveyance by a third party of the FHA properties, conflicting with the lender’s
certification that the loans met HUD-FHA insurance requirements defined in 24 CFR
203.41(a)(3).

It is also noteworthy that HUD Handbook 4155.1, paragraph 4.B.2.b, states, “FHA security
instruments require a borrower to establish bona fide occupancy in a home as the borrower’s
principal residence within 60 days of signing the security instrument, with continued occupancy
for at least one year.” However, these security instruments would be between the lender and
borrower, not a third party like the seller. Extra emphasis must be placed on the fact that the
conveyance of the property during the occupancy period was limited by the seller, which

14
     The CFR includes exceptions; however, the exceptions do not apply in this case.




                                                           6
violated HUD-FHA requirements 24 CFR 203.41(b) defined at 24 CFR 203.41(a)(3)(ii) and
203.41(a)(3)(iv). The following are excerpts from multiple versions of the recorded restrictive
covenants found between the seller, a third party to the FHA loans, and borrowers.

                                           Version 1




                                           Version 2




                                           Version 3




                                           Version 4




                                                7
                                             Version 5




                                             Version 6




The above examples illustrate the language contained in the restrictive covenants identified;
specifically, that the property cannot be conveyed without limitations imposed by the seller until
the occupancy period is over, which is contrary to the HUD-FHA free assumability requirements
defined in 24 CFR 203.41(a)(3)(ii) and 203.41(a)(3)(iv), respectively. A distinction to be made
is that the restrictive covenants, while ineligible, do not necessarily prevent FHA from obtaining
clear title in the event of foreclosure and conveyance. This distinction does not, however, alter
the material fact that the loans should not have reached the point of foreclosure and conveyance
as they were not eligible for FHA mortgage insurance.

We also identified potential lien language, which stipulated monetary damages to the seller in the
event of a breach in the agreement (see versions 1-3 above). A breach of the contract would
include the borrower’s conveying or transferring the property during the specified occupancy
period, which is contrary to 24 CFR 203.32.

Pulte Mortgage officials stated the prohibited restrictive covenants were allowed because they
believed that the documents with the restrictive covenants, which contain an owner occupancy
requirement, were consistent with FHA requirements. Therefore, they allowed the use of sellers’
restrictive covenants on FHA properties. Based on this information, we concluded that Pulte
Mortgage did not exercise due diligence, demonstrated by its failure to ensure that language in
the recorded property agreements was appropriate and followed HUD rules and regulations.

Materiality

Consistent with prior HUD findings, we determined the existence of unallowable restrictive
covenants to be a significant, material deficiency. In prior reviews, HUD identified unallowable
restrictive covenants as a violation of Federal regulations and FHA requirements, considering the
violations a material serious deficiency, stating that loans with prohibited restrictive covenants
were ineligible for FHA insurance. For the active loans reviewed, HUD determined that
indemnification was appropriate if the lender could not provide adequate support indicating a
termination of any restrictive language. Our recommendations are made in the same regard.

The FHA loans identified in this memorandum were determined to be ineligible for FHA
insurance; therefore, any loss or claim tied to the loans identified represents an unnecessary loss
to HUD’s FHA insurance fund. As with any underwriting review, deficiencies identified, such
as overstated income and understated liabilities, do not have to be the reason an FHA loan went
into default or claim for HUD to seek indemnification. Rather, the deficiencies are used as



                                                 8
evidence that the loan should not have been FHA-insured. In the same regard, the audit
memorandum identifies a significant material deficiency that deemed the identified loans
ineligible for FHA insurance, thereby warranting recommendations for indemnification of the
loans identified.

According to the FHA Emergency Fiscal Solvency Act of 2013, 15 indemnification should be an
appropriate remedy when HUD has suffered a loss tied to a loan that was not originated or
underwritten appropriately. It states that if the HUD Secretary determines that the mortgagee
knew, or should have known, of a serious or material violation of the requirements established
by the Secretary, such that the mortgage loan should not have been approved and endorsed for
insurance, and HUD pays an insurance claim with respect to the mortgage, the Secretary may
require the mortgagee to indemnify HUD for the loss, irrespective of whether the violation
caused the mortgage default. This pending legislation illustrates Congress’ specific intent to
protect the FHA mortgage insurance fund and ensure its solvency by providing HUD with the
appropriate tools and remedies.

Impact and Risk for Losses

We identified 1,106 loans (181 claim loans and 925 active loans) within our audit period that had
unallowable restrictive covenants on the FHA-insured properties. The third-party agreements,
which contained the prohibited restrictive covenants preventing free assumability of the property
and potential liens between the seller and borrowers, violated HUD-FHA requirements defined
in 24 CFR 203.41(a)(3) and 203.32, respectively, thereby materially impacting the insurability of
the questioned loans, making the loans ineligible for FHA insurance. Additionally, the
borrowers in the restrictive covenant agreements were restricted in their ability to rent, lease,
sell, or otherwise convey the FHA properties. By allowing the restrictive conveyance
agreements on FHA properties that at minimum appeared to hinder free assumability, Pulte
Mortgage may have forced borrowers with decreasing financial capability to remain in their
property longer than they would have otherwise.

As a result, Pulte Mortgage’s failure to exercise due diligence placed the FHA fund at
unnecessary risk for potential losses by approving ineligible properties for FHA insurance and
restricting borrowers’ ability to rent, lease, sell, or otherwise convey the FHA properties and
included language for remedies if the contract was breached. Of most significance, insuring
properties that are not eligible for mortgage insurance increases the risk to an FHA fund that is
already facing dangerously low levels of funding. For the 192 loans identified, HUD would not
otherwise see a loss on the uninsurable FHA loans, as they would not have been approved for
FHA insurance and would not be the responsibility of the FHA fund. For the 82 claim loans
identified as ineligible for FHA insurance, HUD suffered a loss it should not have otherwise
suffered.




15
  Pending legislation, House Resolution 1145, sponsored by Congresswoman Maxine Waters and Congressman
Michael E. Capuano on March 13, 2013. It was reintroduced under the 113th Congress after the 112th Congress
referred it to the Committee on Banking, Housing, and Urban Affairs.




                                                      9
Conclusion

Pulte Mortgage did not follow HUD requirements regarding free assumability and liens when it
underwrote loans that had executed and recorded agreements between sellers and the FHA
borrower, containing prohibited restrictive covenants and liens in connection with FHA-insured
properties. We identified 1,106 loans (181 claim loans and 925 active loans) within our audit
period that did not meet the requirements for FHA insurance, thereby rendering them ineligible
for FHA insurance. Pulte Mortgage’s failure to exercise due diligence allowed prohibited
restrictive covenants with the potential for liens on the FHA-insured properties, which rendered
the loans uninsurable. These uninsurable loans placed the FHA fund at unnecessary risk for
potential losses because HUD would not otherwise see a loss on loans not insured by the FHA
fund. Of the 192 (181 claim loans and 11 sampled active loans) loans reviewed where a
prohibited restrictive covenant was found, 82 resulted in an actual loss to HUD of more than $9.9
million. Another 99 of these loans had claims paid totaling more than $11.8 million. The
remaining 11 loans found with prohibited restrictive covenants had a total unpaid mortgage
balance of more than $2.3 million with an estimated loss to HUD of more than $1.3 million (see
appendix C).

                                   RECOMMENDATIONS

We recommend that HUD’s Associate General Counsel for Program Enforcement

1A.    Determine legal sufficiency and if legally sufficient, pursue civil remedies (31 U.S.C.
       (United States Code) Sections 3801-3812, 3729, or both), civil money penalties (24 CFR
       30.35), or other administrative action against Pulte Mortgage, its principals, or both for
       incorrectly certifying to the integrity of the data or that due diligence was exercised
       during the origination of FHA-insured mortgages.

We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing require Pulte
Mortgage, after completing recommendation 1A, to

1B.    Reimburse the FHA fund for the $9,909,292 in actual losses resulting from the amount of
       claims and associated expenses paid on 82 loans that contained prohibited restrictive
       covenants and liens (see appendix C, table 1).

1C.    Support the eligibility of $11,865,597 in claims paid or execute an indemnification
       agreement requiring any unsupported amounts to be repaid for claims paid on 99 loans
       for which HUD has paid claims but has not sold the properties (see appendix C, table 2).

1D.    Analyze all FHA loans originated, including the 11 active loans identified in this
       memorandum, or underwritten beginning January 1, 2008, and nullify all active
       restrictive covenants or execute indemnification agreements that prohibit it from
       submitting claims on those loans identified. The 11 active loans with prohibited




                                               10
        restrictive covenants had a total unpaid mortgage balance of $2,385,747, which carries a
        potential loss of $1,359,876 16 that could be put to better use (see appendix C, table 3).

1E.     Follow 24 CFR 203.32 and 203.41 by excluding restrictive language and prohibited liens
        for all new FHA-insured loan originations and ensure that policies and procedures reflect
        FHA requirements.




16
  The potential loss was estimated based on HUD’s 57 percent loss severity rate, multiplied by the unpaid mortgage
balance. The 57 percent loss rate was the average loss on FHA-insured foreclosed-upon properties based on HUD’s
Single Family Acquired Asset Management System’s “case management profit and loss by acquisition” as of
December 2012.




                                                       11
Appendix A

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


        Recommendation                                  Funds to be put
                       Ineligible 1/     Unsupported 2/
        number                                          to better use 3/
                    1B        $9,909,292
                    1C                      $11,865,597
                    1D                                       $1,359,876
                 Total        $9,909,292    $11,865,597      $1,359,876

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.

3/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an 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. If HUD
     implements our recommendations to indemnify loans not originated in accordance with
     HUD-FHA requirements, it will reduce FHA’s risk of loss to the fund. See appendix C
     for a breakdown, by FHA loan number, of the funds to be put to better use.




                                             12
Appendix B
        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         13
Comment 1




Comment 2


Comment 3


Comment 3


Comment 1
Comment 4
Comment 1

Comment 5



Comment 3



Comment 1




            14
Comment 6

Comment 7


Comment 3




Comment 8




            15
Comment 3


Comment 9

Comment 3


Comment 6


Comment 7



Comment 10




             16
Comment 11




Comment 1




             17
Comment 12

Comment 13
Comment 12



Comment 1



Comment 14




Comment 1




             18
Comment 1




Comment 1


Comment 15

Comment 1

Comment 16

Comment 17
Comment 1




             19
Comment 15




Comment 1



Comment 15



Comment 18




             20
Comment 17




Comment 18


Comment 1




Comment 1


Comment 5




             21
Comment 19

Comment 1




Comment 1




Comment 14




Comment 11
Comment 5




             22
Comment 20




Comment 3




Comment 21




             23
Comment 21

Comment 22
Comment 3




Comment 23
Comment 3


Comment 3
Comment 9
Comment 1
Comment 15
Comment 6




Comment 3




             24
Comment 15

Comment 1

Comment 6
Comment 24
Comment 1
Comment 9
Comment 20




             25
Comment 9


Comment 1

Comment 19



Comment 5



Comment 18




Comment 24

Comment 1

Comment 15




             26
Comment 11
Comment 9

Comment 18



Comment 3
Comment 1

Comment 3
Comment 6
Comment 5

Comment 3



Comment 3



Comment 6

Comment 11




             27
Comment 11




             28
Comment 25


Comment 9
Comment 3




Comment 1

Comment 3


Comment 1




             29
                               OIG Evaluation of Auditee Comments

Comment 1       We disagree with Pulte Mortgage’s assessment of the OIG review. Specifically,
                we disagree with Pulte Mortgage’s interpretation of FHA requirements. These
                assessments include:

                    •   The prohibited restrictive covenants tracked FHA’s own underwriting
                        requirements by discouraging “flippers” from fraudulently
                        misrepresenting their occupancy intentions and did so in a manner entirely
                        consistent with FHA guidelines;

                    •   The prohibited restrictive covenants were consistent with and did not
                        violate FHA regulations; and

                    •   The restrictive covenant language contained in the agreements signed by
                        the seller and borrower “tracks” the language in the “FHA Mortgage
                        Form” 17 that would make it viewed as permissible or compliant with FHA
                        regulations.

                To clarify, the audit memorandum findings do not take exception with the owner
                occupancy language. Pulte Mortgage, throughout its response, attempted to
                equate the prohibited owner occupancy language between the borrower and seller
                with FHA regulations. A violation would not have occurred had the cited
                agreements merely required a one year occupancy requirement. What Pulte
                Mortgage did not address is that the prohibited restrictive covenants identified go
                beyond merely requiring owner occupancy, and actually placed restrictions on the
                mortgage deed that violate FHA regulations. The audit memorandum discussed
                the agreement being between a third party to the mortgage, the seller, and the
                borrower as well as the agreement containing provisions for damages to the seller
                in the event of a breach, which violated 24 Code of Federal Regulation 204.41
                and 203.32 respectively. By Pulte Mortgage’s own admission, the seller “would
                agree not to enforce the Provision…” The fact that the buyer must get the seller’s
                permission is a violation of 24 CFR 203.41(a)(3)(iv), the seller being considered a
                third party.

                Any reference in Pulte Mortgage’s response to tracking or adhering to FHA
                guidelines is incorrect. The regulations under 24 CFR 203.41(a)(3), for free
                assumability of the property, emphasize the prohibition of a restriction where the
                conveyance of a property be subject to the consent of a third party, in this case the
                seller, and that such a document cannot be the basis of contractual liability of the
                borrower for breach of an agreement not to convey. The findings and related
                examples illustrate the agreements in question are between the seller and
                borrower and include provisions for damages to the seller if the borrower conveys

17
  The “Supplement B” contained in Pulte Mortgage’s response contained a poor copy of the “FHA Mortgage Form”
and therefore was omitted from inclusion in appendix B of this audit memorandum. However, relevant excerpts
were included below.




                                                    30
the property during the occupancy period, which clearly violate HUD FHA
requirements. The violations make each identified loan ineligible for FHA
mortgage insurance.

A significant, material distinction exists; the “FHA Mortgage Form” cited by
Pulte Mortgage is the mortgage note between the lender and borrower, whereas
the prohibited restrictive covenant discussed in the audit memorandum is between
the seller, a third party to the mortgage, and the borrower. Additionally, the
“FHA Mortgage Form” cited does not contain language that creates a basis of
additional contractual liability of the borrower for breach of the agreement not to
convey, see excerpt of Section 5 below.
        Start of “FHA Mortgage Form” – Between Borrower and Lender




                       Section 5 of “FHA Mortgage Form”




                                31
            We would like to clarify that the “FHA Mortgage Form” section 9, “Grounds for
            Acceleration of Debt” paragraph (a) are limited by regulations issued by the
            Secretary and paragraph (b) is subject to applicable law and with prior approval of
            the Secretary. In both these instances the “FHA Mortgage Form” discusses
            acceleration of debt at the approval of the Secretary rather than the creation of an
            additional liability to the seller that is found in the restrictive covenants recorded
            with applicable counties.
                                  Section 9(a) of “FHA Mortgage Form”




                                  Section 9(b) of “FHA Mortgage Form”




Comment 2   To clarify, the audit memorandum does not, at any point, state that prohibited
            restrictive covenants were put in place for “pernicious reasons.” Rather, the
            memorandum reports on OIG’s findings, based on specific audit objectives, that
            violations did in fact occur.

Comment 3   We strongly disagree with Pulte Mortgage’s assertion that the OIG memorandum
            serves to threaten tens of millions of dollars in indemnity claims, solely because
            Pulte Mortgage provided mortgages to these homeowners. We also disagree with
            Pulte Mortgage that the OIG’s recommendations to FHA for reimbursement and
            indemnification and a referral to HUD Office of Enforcement are completely
            without merit. The basis for indemnification is in the OIG determination,
            consistent with HUD’s prior findings, that prohibited restrictive covenants are a
            material, statute violation. Losses tied to loans that should not have been FHA-
            insured should appropriately be reimbursed to the FHA mortgage insurance fund
            or indemnified. The OIG recommendations are addressed to HUD for appropriate
            action, fulfilling a public obligation to ensure HUD funds are safeguarded and
            spent appropriately. See also comment 1.



                                             32
            The recorded prohibited restrictive covenants impacted the insurability of the
            reviewed loans. Pulte Mortgage had a duty to ensure loans it approved for FHA
            insurance were in accordance with all FHA rules and regulations. The FHA loans
            identified were determined to be ineligible for FHA insurance; therefore, any loss
            or claim tied to the loan presents an unnecessary loss to HUD’s FHA insurance
            fund. As with any underwriting review, deficiencies identified, such as overstated
            income and understated liabilities, do not have to be the reason an FHA loan went
            into default or claim for HUD to seek indemnification. Rather, the deficiencies
            are used as evidence that the FHA loan should not have been FHA-insured. In the
            same regard, the audit memorandum identifies a significant material deficiency
            that deemed the identified loans ineligible for FHA insurance; thereby warranting
            recommendations for indemnification of the loans identified.

            As outlined in the audit memorandum, we specifically addressed the materiality
            of the findings. The OIG takes all potential and appropriate corrective actions
            into account when developing audit recommendations and those
            recommendations are addressed to HUD, not Pulte Mortgage, for corrective
            action. For clarification, recommendation 1A recommends HUD’s Associate
            General Counsel for Program Enforcement to determine legal sufficiency for civil
            action. It is OIG’s responsibility to refer violations that may rise to the level that
            may warrant civil action to the HUD’s Office of Program Enforcement for its
            consideration. It is that office’s responsibility to evaluate the violations and
            determine what, if any, civil action is warranted. Treble damages are not stated
            anywhere in the recommendation or audit memorandum.

            Pulte Mortgage’s assertion that neither the homebuyers nor the FHA insurance
            fund was harmed is incorrect. The prohibited restrictive covenants all carried the
            potential to harm FHA buyers. The scope of our audit was narrow and specific, to
            identify the presence of unallowable restrictive covenants and to determine if
            those restrictions violated HUD rules and regulations. To that end, we concluded
            that there were prohibited restrictive covenants, which violated Federal statute
            and were not eligible for FHA insurance; therefore, any loss or claim tied to the
            loans identified represents an unnecessary loss to HUD’s FHA insurance fund.

            Based on our conclusions, it was our duty and obligation to HUD and other
            stakeholders, including the American public, to recommend HUD take necessary,
            appropriate action. In HUD’s prior actions, it also deemed the deficiency
            significant enough to warrant indemnification. We believe the recommendations
            contained in the audit memorandum are fair, consistent, and appropriate given the
            materiality of the OIG finding. Therefore, the recommendations remain
            unchanged.

Comment 4   Pulte Mortgage’s statement that the audit memorandum’s interpretation of FHA
            regulations is so inappropriately aggressive that FHA’s own documents would
            violate the OIG’s reading of its terms, is incorrect and without merit. We




                                              33
            identified a specific situation, compared the restrictive language found to FHA
            regulations, and determined the recorded agreements violated HUD FHA
            regulations. HUD’s Office of Single Family Housing has made a similar
            determination in similar situations. See comments 1 and 15 for detailed
            explanations.

Comment 5   Pulte Mortgage is incorrect in assuming that restrictive covenant agreements were
            acceptable because FHA conducted post-endorsement reviews. Such assumptions
            are dangerous and should never be a substitute for reviewing and applying the
            actual FHA regulations. These reviews were not necessarily all inclusive in scope
            and may not have included methodology to search public records for documents
            recorded in conjunction with the FHA-insured loans.

Comment 6   To clarify, the audit memorandum does not state that Pulte Mortgage “acted
            knowingly or with reckless disregard resulting in a false, fraudulent, or fictitious
            claim to FHA” as implied by the Pulte Mortgage’s response. See also comment 2.

Comment 7   Pulte Mortgage stated that no further actions are needed because the provision
            term in the prohibited agreements has expired for these loans and is no longer
            offering loans with the prohibited restrictive covenants. We acknowledge Pulte
            Mortgage’s efforts to address the audit memorandum findings. HUD will review
            the adequacy of Pulte Mortgage’s corrective actions and analysis during the audit
            resolution process to determine if it was sufficient to satisfy the audit
            recommendations. The findings cited restrictive covenants with an occupancy
            period of twelve months; however, there is a possibility that longer occupancy
            periods related to other loans exist.

            Although the loans in question have an expired agreement, the presence of the
            restrictive covenant should have prevented them from reaching the point of
            receiving FHA mortgage insurance. Recommendations 1B, 1C, 1D, and 1E of the
            audit memorandum first seek reimbursement for the ineligible loans with an
            actual known loss, support or indemnification for those with claims but no known
            loss, to nullify active loans with such restrictions or indemnify said loans, and
            finally to follow 24 CFR 203.32 and 203.41 by excluding restrictive language and
            prohibited liens for all new FHA-insured loan originations and ensure that
            policies and procedures reflect FHA requirements. See also comment 3.

Comment 8   To clarify we reviewed public records for 332 loans (260 claim loans and 72
            statistically sampled active loans) and found that, of these, 192 (181 claim loans
            and 11 statistically sampled active loans) had unallowable restrictive covenants.
            The 11 statistically sampled active loans were projected to the universe of active
            loans (see Methodology and Scope section of the audit memorandum), resulting
            in an estimated 925 active loans with similar issues. Therefore, we reported that
            there were 1,106 loans (181 claim loans and 925 active loans) with unallowable
            restrictive covenants.




                                             34
Comment 9     We disagree with Pulte Mortgage that it is unreasonable to expect that it would
              treat these as a violation of FHA requirements because of the unclear nature of the
              regulations in question and FHA’s own documents. FHA regulations at 24 CFR
              203.41 and 203.32 specifically prohibit restrictive covenants as identified in the
              audit memorandum. Additionally, HUD has previously determined that
              prohibited restrictive covenants were serious, material deficiencies that deemed
              FHA loans ineligible for mortgage insurance. Whether intentional or not, Pulte
              Mortgage, as the underwriter, is responsible for ensuring the loan and its title
              instruments meet all HUD rules and regulations. As stated in the audit
              memorandum, HUD Handbooks 4000.2, paragraph 5-1(B), and 4155.2, paragraph
              6.A.1.h, both state that it is the lender’s responsibility at loan closing to ensure
              that any conditions of title to the property are acceptable to FHA. In essence, it is
              the duty of the lender to ensure that FHA loans approved for mortgage insurance
              are eligible and acceptable according to FHA rules and regulations. We also
              disagree that the requirements were unclear and that the FHA documents were
              consistent with the agreements between the seller and borrower, see comment 1.

Comment 10 Pulte Mortgage’s conclusion that, because there is no evidence that the
           builder/seller actually exercised its right under the agreement, therefore, no
           remediation is necessary is not material to the issues identified in the audit
           memorandum because violating 24 CFR 203.41 and 302.32 rendered the loans
           ineligible for FHA insurance. To that end, the recommendations specifically
           address the deficiencies identified, utilizing appropriate remedial options
           available to HUD and OIG. See also comment 3.

Comment 11 OIG acknowledges Pulte Mortgage’s explanation of intent and history. However,
           this does not lift the burden from Pulte Mortgage to ensure all FHA loans
           approved for FHA mortgage insurance adhere to all FHA regulations. See also
           comment 1.

Comment 12 During the audit, the OIG auditors determined the restrictive covenants were in
           violation of HUD FHA regulations. The internal legal opinion cited by Pulte
           Mortgage was used only as additional support that restrictive covenants are
           unallowable and violate FHA rules and regulations. The legal opinion was
           obtained and reviewed after we conducted our own analysis and came to our own
           conclusion that HUD requirements were violated by the execution and recording
           of the restrictive covenants.

Comment 13 We agree with Pulte Mortgage; the audit memorandum has been revised to reflect
           the citation as 24 CFR 203.41(b).

Comment 14 We disagree with Pulte Mortgage’s statement that the cause included in the audit
           memorandum was quite a different assertion than that initially offered by the OIG
           in its draft finding outline. The cause included in the finding outline provided to
           Pulte Mortgage stated, “This occurred because Pulte Mortgage officials believed
           that the documents with the restrictive covenants, which contain an owner




                                               35
              occupancy requirement, were consistent with FHA requirements and would in-
              turn help protect FHA from fraud.” However, we simplified the cause in the audit
              memorandum to state, in part that Pulte Mortgage “was unaware that the
              restrictive covenants recorded between the sellers and the borrowers violated
              FHA requirements.”

              Additionally, Pulte Mortgage commented in its response that our statement that
              Pulte Mortgage was “unaware” that the restrictive covenants were a violation was
              a mischaracterization. A Pulte Mortgage official clarified that in its opinion it
              was reasonable to believe that the provisions were permissible under 24 CFR
              203.41 and it offered the loans for insurance in good faith. As a result, we have
              revised the audit memorandum “Restriction on Conveyance” section to
              incorporate more of the original language from the finding outline and the
              clarification provided by a Pulte Mortgage official.

              Pulte Mortgage was notified that the finding outline was a working document and
              the draft form was presented as a courtesy to enhance open communication and
              keep Pulte Mortgage informed of the OIG’s progress and tentative conclusions in
              advance of the draft audit memorandum. The “Supplement A” contained in Pulte
              Mortgage’s response contained a copy of a working document that was not
              intended for an external audience and therefore has been omitted from inclusion
              in appendix B of this audit memorandum.

Comment 15 Pulte Mortgage’s logic is flawed and does not appear to understand or make the
           distinction that the prohibited agreements in question are between the borrower
           and seller, a third party, and not between the borrower and lender. It is incorrect
           and inappropriate for Pulte Mortgage to compare two clearly different
           agreements. See also comment 1.

Comment 16 Pulte Mortgage did not appropriately apply the FHA regulations. The exceptions
           at 24 CFR 203.512, as discussed in its response, do not apply.

Comment 17 Pulte Mortgage presented hypothetical scenarios that are not relevant to the facts
           of OIG’s findings. The audit memorandum presented specific instances that
           violated FHA regulations, as determined separately by HUD and OIG. See also
           comments 1 and 15.

              We disagree with the Pulte Mortgage’s statement that the restrictive covenants did
              not create an actual or potential lien. Examples of the prohibited restrictive
              language included in the agreements in question were included in the body of the
              audit memorandum. Merriam-Webster dictionary describes a lien as follows:

                      “In law, a charge or encumbrance on property for the satisfaction of a debt
                      or other duty. Common law developed two kinds of possessory lien: the
                      specific (a lien on the specific property involved in a transaction) and the




                                               36
                      general (a lien for the satisfaction of a balance due, not confined to a
                      specific property involved in a transaction)…”

              Therefore, one could reasonably conclude from the prohibited restrictive covenant
              language of the buyer owing damages to the seller in the event of a breach or the
              seller’s right to repurchase as a lien, which violated 24 CFR 203.32. We do not
              disagree with the Pulte Mortgage’s assertion that typically a lien gives the right to
              the creditor to foreclose and take possession of the property in question if the debt
              is not satisfied; however, by definition that it is not required. Therefore, the
              discussion of potential liens will remain in the audit memorandum.

Comment 19 The intention behind 24 CFR 203.41(b) is not in question. The audit scope
           focused solely on Pulte Mortgage and its practices and was not an internal review
           of HUD and its regulations and policy decisions. The prohibited restrictive
           covenants identified violated FHA regulations, thereby rendering them ineligible
           for FHA insurance. To that end, the intention behind the regulations do not
           change that what occurred did not meet the stated requirements for insurance. See
           also comments 1 and 3.

Comment 20 We acknowledge Pulte Mortgage’s efforts to take corrective actions and adhere to
           FHA rules and regulations. Any actions taken should be directed to HUD during
           the audit resolution process, including providing supporting documentation. See
           also comment 7.

Comment 21 We agree with Pulte Mortgage and acknowledge that the FHA Reform Act of
           2010 was never finalized. However, this legislation has been updated and was
           reintroduced to the U.S. House of Representatives and is now known as the “FHA
           Emergency Fiscal Solvency Act of 2013.” This legislation clearly indicates the
           U.S. Congress’ specific intent to protect and ensure the fiscal solvency of the
           FHA mortgage insurance fund. The audit memorandum has been updated
           accordingly and reflects the new, updated pending legislation. As a result, there
           was no need to include Pulte Mortgage’s “Supplement C” in appendix B of the
           audit memorandum, which contained the progress of the FHA Reform Act of
           2010.

Comment 22 We disagree with Pulte Mortgage’s statement that the OIG’s position is that any
           technical breach may serve as a basis for indemnification. The OIG reviews each
           situation independently and makes determinations on specific facts and merits. In
           this specific circumstance, the conditions for free assumability of the loan, as well
           as no additional liens outside the mortgage (with some exceptions noted in the
           CFR), were required to be met for the loan to be eligible for FHA mortgage
           insurance. We disagree that indemnification should only be utilized for
           traditional underwriting deficiencies (overstated income, understated liabilities,
           etc.). This interpretation opens a wide door for violations other than your typical
           underwriting deficiencies and sets a bad precedent to violating lenders. Therefore,
           in OIG’s assessment, indemnification is an appropriate remedy in these instances




                                                37
              because it provides the remedy of alleviating any loss or potential loss on the
              loans from impacting the FHA mortgage insurance fund, as would be the case if
              the loans were not insured. Ultimately, the recommendations are directed to HUD
              for it to assessment and enter in to a management agreement during the audit
              resolution process with OIG on the appropriate course of action. See also
              comment 3.

Comment 23 We acknowledge Pulte Mortgage’s admission that had it known the loans in
           question were in violation of FHA regulations it would have taken corrective
           actions. Unfortunately, the violations have already occurred, and need to be
           remedied. See also comment 9.

Comment 24 We strongly disagree with Pulte Mortgage’s interpretation that the audit
           memorandum stated, “Pulte Mortgage falsely certified that loans with recorded
           Provisions that it offered for insurance were in compliance with FHA
           regulations.” Rather the audit memorandum states, “For each FHA loan, the
           lender certifies on the Direct Endorsement Approval for HUD/FHA-Insured
           Mortgage (form HUD-92900-A) that the mortgage was eligible for HUD
           mortgage insurance under the direct endorsement program.”

Comment 25 We strongly disagree with Pulte Mortgage’s assertion that the audit memorandum
           demonstrates a failure to understand the purpose behind implementation of the
           prohibited agreements and the reasonability of the position that the prohibited
           agreements did not violate FHA regulations. Also, Pulte Mortgage’s response
           incorrectly attempts to explain HUD’s policy on implementing regulations and
           incorrectly interprets FHA regulations. Additionally, Pulte Mortgage
           inappropriately attempted to compare different agreements between the borrower
           and lender and the borrower and seller. As previously stated, the purpose behind
           the implementation of the restrictive covenants between the seller and borrower
           are irrelevant in light of the fact that ultimately the agreements violated 24 CFR
           203.41 and 203.32, which rendered the loans ineligible for FHA insurance. See
           also comments 1, 9, and 15.




                                             38
Appendix C
                      SUMMARY OF FHA LOANS REVIEWED

                                        Table 1 - Actual loss to HUD
                                         Claim loan review results

                                  FHA loan               Recommendation 1B –
                                   number                 actual loss to HUD 18
                                022-1927689          $                      71,373
                                023-2603944                                146,239
                                023-2611680                                143,523
                                023-2619967                                105,390
                                023-2619996                                288,390
                                023-2655731                                 80,896
                                023-2669181                                116,573
                                023-2673344                                105,125
                                023-2685324                                105,459
                                023-2707816                                129,494
                                023-2713580                                 69,467
                                023-2716167                                 92,088
                                023-2731482                                130,236
                                023-2754772                                110,901
                                023-2764894                                114,485
                                023-2772117                                118,331
                                023-2776246                                136,992
                                023-2779167                                 84,883
                                023-2784325                                109,780
                                023-2786411                                 76,201
                                023-2788697                                159,438
                                023-2793680                                 56,021
                                023-2795810                                 89,038
                                023-2799953                                174,561
                                023-2804376                                 75,844
                                023-2818776                                133,341
                                023-2819969                                 97,437


18
     The actual loss to HUD was obtained from HUD’s Single Family Data Warehouse in January 2013.




                                                         39
 FHA loan     Recommendation 1B –
  number       actual loss to HUD 18
023-2820025                     92,392
023-2821037                     92,863
023-2823878                     46,585
023-2823986                     97,706
023-2830153                    123,671
023-2830182                    104,026
023-2838213                     91,107
023-2848285                    123,901
023-2851827                    134,619
023-2855523                     95,199
023-2858904                     81,223
023-2879361                    128,920
023-2880461                     90,803
023-2884854                     85,855
023-2886080                    102,730
023-2908445                     80,562
023-2933479                     91,916
023-2943430                     67,492
023-2985345                    116,858
023-2996978                     89,110
023-3014540                    124,576
023-3018717                     97,629
023-3039168                    115,536
023-3047628                    104,105
023-3180064                     82,738
023-3311141                     65,043
023-3617752                     50,135
023-3814604                    103,782
042-8042434                    248,649
042-8084411                    238,870
042-8516684                    120,177
043-7466544                    119,070
043-7525324                    200,059
043-7573835                    131,817
043-7621188                    158,705
043-8056250                    135,382




              40
 FHA loan         Recommendation 1B –
  number           actual loss to HUD 18
044-4321995                         79,870
048-4640203                        201,968
048-4842458                        152,501
197-3761673                        154,478
197-4087743                        154,321
332-4483429                        137,515
332-4575855                        128,866
332-4616837                        172,417
332-4656194                        141,132
332-4656250                        132,069
332-4658869                        135,518
332-4661113                        150,950
332-4661868                        139,676
332-4664292                        126,408
332-4666337                        175,968
332-4676488                        176,192
332-4707171                        223,858
332-4751441                        114,385
332-4814978                         55,883
   Total      $                 9,909,292




                  41
                                    Table 2 - Claims paid, loss unknown
                                         Claim loan review results

                            FHA loan         Recommendation 1C – claims paid
                             number             but no actual loss known 19
                           022-1916640       $                          81,755
                           022-1931001                                  75,076
                           022-2211768                                 111,328
                           023-2622908                                  74,215
                           023-2640369                                 121,060
                           023-2644672                                 133,163
                           023-2644689                                 120,447
                           023-2645757                                 104,755
                           023-2648333                                 101,088
                           023-2648385                                 110,176
                           023-2648697                                 230,330
                           023-2655879                                  90,050
                           023-2661687                                 139,912
                           023-2665978                                 123,096
                           023-2669826                                  76,752
                           023-2689858                                 116,664
                           023-2696193                                 108,419
                           023-2714983                                 114,959
                           023-2715908                                  50,784
                           023-2722711                                 113,753
                           023-2734131                                 160,272
                           023-2741062                                 105,275
                           023-2760699                                 101,583
                           023-2774600                                 103,158
                           023-2782528                                 231,783
                           023-2791883                                  98,691
                           023-2791940                                  95,971
                           023-2814853                                 163,847
                           023-2815474                                 141,753
                           023-2823905                                  62,077
                           023-2827580                                 160,797
                           023-2838140                                 132,185

19
     The claims paid values were obtained from HUD’s Neighborhood Watch system in January 2013.




                                                       42
 FHA loan     Recommendation 1C – claims paid
  number         but no actual loss known 19
023-2838852                              53,391
023-2840150                              80,894
023-2845339                             144,238
023-2855779                             112,981
023-2863559                              87,940
023-2867176                             159,626
023-2883690                             114,664
023-2901742                             135,712
023-2908320                              78,745
023-2911870                              94,981
023-2921849                             104,673
023-2928252                              53,339
023-2929156                              70,648
023-2930472                              87,070
023-2948654                             144,373
023-2952108                             127,160
023-2954217                             106,100
023-2966402                              83,424
023-2986022                             136,581
023-3005512                             108,400
023-3016456                              76,045
023-3030123                             106,730
023-3053515                              91,570
023-3057631                              81,538
023-3073981                              64,161
023-3498004                              95,981
023-3503349                              70,451
023-3530032                              98,071
023-3617492                             117,504
023-3617979                              93,973
023-3774368                              74,322
042-8050561                             180,298
042-8079927                             170,132
042-8087657                             233,413
042-8091572                             129,761
042-8559877                              93,586




                     43
 FHA loan     Recommendation 1C – claims paid
  number         but no actual loss known 19
043-7447279                              60,250
043-7500295                             250,193
043-7523845                             123,747
043-7573076                             119,162
043-7577084                             118,366
043-7757408                              91,139
043-7805468                             294,226
043-7989028                              25,408
043-8084823                              74,065
044-4334708                             139,718
044-4346770                              91,864
044-4357665                              91,231
045-6707713                              48,385
048-4743554                             156,706
091-4315182                             100,042
091-4382164                             239,308
197-3785482                             168,871
197-3877861                             121,956
332-4529992                             174,964
332-4531582                             111,524
332-4550184                             269,478
332-4565671                             131,040
332-4586869                             144,024
332-4612208                             106,993
332-4641624                             121,667
332-4644955                             339,753
332-4666655                             167,819
332-4666684                             142,314
332-4708125                              93,329
332-4942724                              43,821
332-5008601                              86,584
   Total      $                     11,865,597




                     44
                                    Table 3 - Potential loss to HUD
                                      Active loan sample results

                                                                 Recommendation 1D –
                 FHA loan            Unpaid mortgage
                                                                 potential loss on active
                  number                balance 20
                                                                         loans16
               023-2612062          $              245,959     $                    140,197
               023-2848335                         239,153                          136,317
               023-2971807                         221,198                          126,083
               023-3439835                         168,663                           96,138
               023-4056921                         122,303                           69,713
               023-4113303                         170,901                           97,414
               042-8555607                         335,490                          191,229
               043-8367965                         186,923                          106,546
               095-0847106                         229,269                          130,683
               197-3785674                         275,024                          156,764
               332-4950346                         190,864                          108,792
                   Total            $            2,385,747     $                    1,359,876




20
  The unpaid mortgage balance for each loan was obtained from HUD’s Single Family Data Warehouse in January
2013.




                                                    45