oversight

Cornerstone Home Lending, Houston, TX, Did Not Adequately Underwrite 16 Loans, Violated the Real Estate Settlement Procedures Act, and Did Not Implement an Adequate Quality Control Plan During Our Review Period

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-09-26.

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

OFFICE OF AUDIT
REGION 6
FORT WORTH, TX




                  Cornerstone Home Lending
                        Houston, TX

        Single-Family Housing Mortgage Insurance
                         Program




2014-FW-1006                                 September 26, 2014
                                                        Issue Date: September 26, 2014

                                                        Audit Report Number: 2014-FW-1006




TO:            Kathleen Zadareky,
               Deputy Assistant Secretary for Single Family Housing, HU

               Craig Clemmensen, Director, Departmental Enforcement Center, CACB

               //signed//
FROM:          Gerald R. Kirkland
               Regional Inspector General for Audit, Fort Worth Region, 6AGA


SUBJECT:       Cornerstone Home Lending, Houston, TX, Did Not Adequately Underwrite 16
               Loans, Violated the Real Estate Settlement Procedures Act, and Did Not
               Implement an Adequate Quality Control Plan During Our Review Period


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of Cornerstone Home Lending.

    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 8M, 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
817-978-9309.
                                            September 26, 2014

                                            Cornerstone Home Lending, Houston TX, Did Not
                                            Adequately Underwrite 16 Loans, Violated the Real
                                            Estate Settlement Procedures Act, and Did Not
                                            Implement an Adequate Quality Control Plan During
                                            Our Review Period
Highlights
Audit Report 2014-FW-1006


 What We Audited and Why                     What We Found

We audited Cornerstone Home                 During the review period, Cornerstone (1) did not
Lending, formerly known as                  comply with HUD and FHA requirements when
Cornerstone Mortgage Company. We            underwriting 16 of 34 loans, (2) violated RESPA when
selected Cornerstone based upon a high      it paid marketing fees in exchange for the referral of
default rate at Cornerstone’s Branch 87     FHA mortgage business, and (3) failed to properly
in 2007 through 2009. Our audit             implement a quality control plan. As a result, HUD
objectives were to determine whether        paid claims for 13 of the loans, incurring losses of
Cornerstone (1) complied with HUD           more than $981,000 upon sale of the properties.
and Federal Housing Administration          Further, Cornerstone placed the FHA insurance fund at
(FHA) regulations when originating and      an increased risk of loss of almost $154,000 if the three
underwriting FHA-insured mortgages          remaining loans are foreclosed upon and the properties
and (2) implemented a quality control       are sold. In addition, Cornerstone could not ensure
plan that met requirements.                 that its customers were able to shop for other lenders
                                            with better mortgage rates or that referral fees did not
                                            unnecessarily increase the costs of mortgage services.
 What We Recommend
                                            Lastly, Cornerstone was unable to ensure the accuracy,
                                            validity, and completeness of its loan origination
We recommend that the U.S.                  operations, resulting in an increased risk to the FHA
Department of Housing and Urban             insurance fund. The findings in this report reflect
Development (HUD) require                   Cornerstone’s performance during 2007 through 2009,
Cornerstone to (1) reimburse HUD for        and may not reflect current performance.
13 loans for which HUD has sold the
properties and incurred losses totaling
$981,574 and (2) indemnify HUD for 3
actively insured loans which would cause
additional losses of $153,856 if they are
foreclosed upon and resold. We also
recommend that HUD pursue
administrative actions against the
owners and management of Cornerstone
for the violations cited in the report.
                            TABLE OF CONTENTS

Background and Objectives                                                           3

Results of Audit
      Finding 1: Cornerstone Did Not Comply With HUD and FHA Requirements in
                 Underwriting 16 FHA Loans                                         5

      Finding 2: Cornerstone Violated RESPA When It Paid Marketing Fees in
                 Exchange for the Referral of FHA Mortgage Business                12

      Finding 3: Cornerstone Failed To Properly Implement a Quality Control Plan   16

Scope and Methodology                                                              20

Internal Controls                                                                  22

Appendixes
A.    Schedule of Questioned Costs and Funds To Be Put to Better Use               24
B.    Auditee Comments and OIG’s Evaluation                                        25
C.    Narrative Case Summaries – Underwriting Deficiencies                         71
D.    Schedule of Losses Upon Property Sales                                       83
E.    Summary of Underwriting Deficiencies                                         84
F.    Schedule of Referral Loans - RESPA Violations                                85
G.    Sample Loans That Were Not Reviewed by OIG                                   86




                                            2
                        BACKGROUND AND OBJECTIVES
Cornerstone Home Lending’s chairman and chief executive officer founded Cornerstone in 1988.
It received Federal Housing Administration (FHA) approval on March 31, 1988, as a
nonsupervised direct endorsement lender. Headquartered at 1177 West Loop South, Suite 200,
Houston, TX, Cornerstone was a full-service mortgage banker and FHA-approved lender with 99
branch offices in 18 States 1 at the time of the audit. Cornerstone had 900 employees, and its loan
officers could make loans in 44 States and the District of Columbia. According to Cornerstone,
it closed 33 of its branch offices, and had 70 branch offices registered with HUD/FHA as of
March 31, 2014.

Cornerstone acts as principal (processes, underwrites, or submits insurance endorsements) for
nine authorized agents. In addition, it is the authorized agent for one principal. During fiscal
year 2007, Cornerstone originated 1,104 FHA loans totaling $129 million. In fiscal years 2008
and 2009, it originated 3,398 FHA loans totaling $481 million and 6,255 FHA loans totaling
$936 million, respectively. In 2009, it had more than $2.5 billion in home purchase and
refinance loans.

Cornerstone Branch 87, located at 14515 Briarhills Parkway, Suite 202, Houston, TX, 2 was
approved by FHA on April 28, 2004. Branch 87 originated 831 FHA loans totaling $86.5
million from October 1, 2007, through September 30, 2009. During this same period, 92 of the
loans (11.07 percent) were at least 90 days delinquent. The national average default rate was
4.94 percent, and the rate for the State of Texas was 4.88 percent. According to HUD’s
Neighborhood Watch Early Warning System,3 Branch 87’s default rates continued to be higher than
the National and State rates for 2010 and 2011. Cornerstone terminated Branch 87 in March 2012.

FHA’s mortgage insurance programs help low- and moderate-income families become homeowners
by lowering some of the costs of their mortgage loans. FHA mortgage insurance also encourages
lenders to approve mortgages for otherwise creditworthy borrowers and projects that might not be
able to meet conventional underwriting requirements by protecting the lender against default. The
direct endorsement program simplifies the process for obtaining FHA mortgage insurance by
allowing lenders to underwrite and close the mortgage loan without prior U.S. Department of
Housing and Urban Development (HUD) review or approval. Lenders are responsible for
complying with all applicable HUD regulations and are required to evaluate the borrower’s ability
and willingness to repay the mortgage debt. Lenders are protected against default by FHA’s Mutual
Mortgage Insurance Fund, which is sustained by borrower premiums.

As an FHA-approved lender, Cornerstone is required to follow 12 U.S.C. (United States Code)
Chapter 27, Sections 2601-2617, and 24 CFR (Code of Federal Regulations) Part 3500, more

1
    Alabama, Arizona, California, Colorado, Florida, Georgia, Kansas, Minnesota, Mississippi, Missouri, Nevada,
    New Mexico, Oklahoma, Tennessee, Texas, Utah, Virginia, and Washington.
2
    Before its termination in March 2012, Branch 87 had relocated to 389 Cedar Street South, Matagorda, TX.
3
    Neighborhood Watch refers to a Web-based software application that displays loan performance data for
    lenders and appraisers using FHA-insured single-family loan information. The system is designed to highlight
    exceptions so that potential problems are readily identifiable.


                                                       3
commonly known as the Real Estate Settlement Procedures Act (RESPA). RESPA applies to
transactions involving a federally related mortgage loan. RESPA is a consumer protection
statute initially passed in 1974. Its purposes are to help consumers become better shoppers for
real estate settlement services and to eliminate kickbacks and referral fees that unnecessarily
increase the costs of certain settlement services. 4

Our audit objectives were to determine whether Cornerstone (1) complied with HUD and FHA
regulations when originating and underwriting FHA-insured mortgages and (2) implemented a
quality control plan that met requirements.




4
    HUD’s Office of RESPA and Interstate Land Sales was responsible for enforcing RESPA during the audit period.
    The Dodd-Frank Act transferred responsibility for enforcing RESPA to the Bureau of Consumer Financial
    Protection in 2010.



                                                        4
                                        RESULTS OF AUDIT

Finding 1: Cornerstone Did Not Comply With HUD and FHA
Requirements in Underwriting 16 FHA Loans
During 2007 through 2009, Cornerstone did not comply with HUD and FHA requirements when
underwriting 16 of 34 (47 percent) FHA-insured loans reviewed (see case narratives in appendix
C). 5 Specifically, underwriters (1) violated restrictions on resales occurring 90 days or less after
acquisition, (2) failed to review appraisal reports to ensure that properties’ values were
reasonable, and (3) did not adequately verify borrower assets or income. This noncompliance
occurred because the underwriters failed to exercise due diligence in underwriting the loans. As
a result, HUD paid claims for 13 of the 16 loans and incurred losses of more than $981,000 upon
sale of the properties (see appendix D). Further, Cornerstone placed the FHA insurance fund at
an increased risk for three ineligible loans with unpaid principal balances of more than $295,000
and estimated losses of almost $154,000 if the loans are foreclosed upon and the properties are
sold (see appendix E).

    Cornerstone Violated
    Restrictions on Resales
    Occurring Within 90 Days of
    Seller Acquisition

                  HUD prohibited originating FHA mortgages for homes resold within 90 days after
                  seller acquisition, commonly referred to as “flipping” properties.6 However,
                  Cornerstone’s underwriters ignored HUD regulations when they approved eight
                  FHA loans for properties that had been flipped.7 The underwriters approved the
                  eight loans, although the homes sold between 18 and 75 days, with an average of 53
                  days, following the seller’s acquisition (see table 1). As a result, FHA insured eight
                  loans totaling $754,402 that were not eligible for insurance and paid $624,949 in
                  claims on seven of them, including a partial claim for $4,771.




5
     All of the loans were originated by Branch 87.
6
     HUD Handbook 4155.2, paragraph 4-7(e), Restrictions on Re-Sales Occurring 90 Days or Less After
     Acquisition. FHA defines the seller’s date of acquisition as the date of settlement on the seller’s purchase of
     that property, while the resale date is the date of execution of the sales contract by a buyer intending to finance
     the property with an FHA-insured loan.
7
     HUD implemented the 90-day flipping rule to prevent FHA home purchasers from becoming victims of
     predatory flipping activity. Federal Register, May 1, 2003 (Volume 68, Number 84). HUD’s Assistant
     Secretary for Housing-Federal Housing Commissioner waived the anti-flipping rule, effective February 1, 2010,
     which was after our audit period. Thus, the waiver was not applicable to the loans in our sample.



                                                           5
Table 1: Properties ineligible for FHA insurance due to property flipping
                                            Contract                                   Price
      Case                                  execution                 Effective      increase
    number    Mortgage      Prior sale       date per   Difference    date per     since seller    Percent
     (493-)   amount       date per file       file       (days)      contract     acquisition     increase
    8959876     $ 84,550    11/18/2008     01/20/2009            63   2/20/2009         $32,410           60
    8547028       80,612    12/20/2007     02/04/2008            46   3/27/2008           56,250         225
    8693472      119,058    03/18/2008     05/25/2008            68   7/25/2008           59,999         100
    8753582       79,373    05/21/2008     07/22/2008            62   8/22/2008           45,000         129
    9141680       86,317    01/16/2008     02/12/2008            27   4/17/2008           50,000         138
    8724586       88,301    05/09/2008     07/10/2008            62     No date           51,000         134
    8721328      107,153    04/16/2008     06/30/2008            75   7/25/2008           43,254          67
    8544391      109,038    01/04/2008     01/22/2008            18     No date           45,600          71
    Total      $754,402                    Average               53               Average                116
                                           days                                   increase

                Cornerstone’s underwriters avoided the 90-day flipping rule by relying on the
                “effective date” in the purchase contract instead of determining the resell date by
                evaluating the loan documents. The “effective date” on the purchase contracts is
                supposed to be the date on which the contract becomes effective (all of the parties
                show their intent to be bound by the contract). In reality, the “effective date” on
                the flipped property contracts was an artificial date that would mislead HUD and
                FHA into believing that more than 90 days had passed between the seller’s date of
                acquisition and the resell. Cornerstone’s underwriters used the “effective date” to
                make the loans appear to be eligible and not violate the antiflipping rule. In some
                files, the “effective date” was meaningless. For example, in one unrelated loan
                file, the “effective date” was after the closing date, while in two flipped loan files
                above, the “effective date” was blank.

                Evidence in the eight loan files showed that all of the contract terms had been
                agreed upon and the parties intended to be bound by the contract within less than
                90 days after the sellers obtained the properties. Evidence included dates and
                signatures on contract addenda, loan applications, loan processing, earnest money
                deposits, appraisals, title insurance, and verifications of employment and deposit
                completed before the “effective date” of the contract and within 90 days following
                the seller’s acquisition.

    Cornerstone Failed To Review
    Appraisal Reports


                Cornerstone’s underwriters violated HUD requirements and Cornerstone’s quality
                control plan when they underwrote nine loans totaling $866,705 without
                reviewing the appraisal reports (see table 2). HUD required the underwriters to
                review the appraisal reports, 8 and Cornerstone’s quality control plan required

8
     HUD Handbook 4155.2, paragraph 4-1(e)



                                                        6
                  them to verify the existence of the property appraisals. 9 However, appraisal
                  reports in nine loan files were dated after the loans closed. Therefore, the
                  underwriters could not have reviewed the appraisal reports as required. Without
                  acceptable appraisals, Cornerstone could not ensure that the loans met loan-to-
                  value requirements.

                  In their direct endorsements, 10 the underwriters certified to HUD that they had
                  personally reviewed appraisal reports, credit reports, and all associated
                  documentation in underwriting FHA-insured mortgages. However, the
                  certifications were erroneous because the reports were dated an average of 16
                  days after loan closing and two reports were issued more than 30 days after
                  closing.

                  Table 2: Loans originated without an appraisal report
                                       Mortgage                         Appraisal                Difference
                    Case number         amount       Closing date report date                      (days)
                    493-8447975          $ 81,357     10/30/2007       11/14/2007                    15
                    493-8567176           109,137     07/08/2008       08/11/2008                    34
                    493-8692510            71,931     07/28/2008       08/06/2008                     9
                    493-8693472           119,058     07/31/2008       08/07/2008                     7
                    491-9483914            80,416     05/01/2009       05/25/2009                    24
                    493-8753582            79,373     08/25/2008       08/28/2008                     3
                    493-8925706            94,261     03/06/2009       03/12/2009                     6
                    493-8480034           142,871     12/21/2007       02/04/2008                    45
                    493-8724586            88,301     08/16/2008       08/20/2008                     4
                        Total           $ 866,705                       Average                      16

     Cornerstone Did Not
     Adequately Review Appraisal
     Reports

                  Cornerstone’s underwriters did not adequately review six appraisal reports to
                  ensure that appraised values were reasonable. Its appraisers did not comply with
                  HUD’s appraisal requirements, 11 and its underwriters did not verify the accuracy
                  and compliance of the property appraisals as required in its quality control plan. 12




9
      Cornerstone Mortgage Company Quality Control Program for Single Family Originations, page 2
10
      Direct Endorsement Approval for a HUD/FHA-Insured Mortgage (form HUD-92900-A).
11
      HUD Handbook 4150.2, Appendix D, Valuation Protocol, provides specific instructions that the appraiser must
      follow to establish the value of the property for mortgage insurance purposes.
12
      Cornerstone Mortgage Company Quality Control Program for Single Family Originations, page 2



                                                         7
            As a result, HUD over insured six properties with original mortgage amounts
            totaling $589,984 (see table 3).

                   Table 3: Loans originated without adequate appraisal review
                                       Inadequate        Overstated         Mortgage
                    Case number         appraisal          values            amount
                     493-8547028           Yes              Yes                 $ 80,612
                     493-8692510           Yes              Yes                   71,931
                     493-8693472           Yes              Yes                  119,058
                     493-8532052           Yes              Yes                   96,239
                     493-8558066           Yes              Yes                   79,273
                     493-8480034           Yes              Yes                  142,871
                                                                 Total         $589,984

            Cornerstone’s appraisal reports contained a number of omissions, errors, and
            contradictory statements, which its underwriters failed to detect. Specifically, the
            appraisers

               •     Inflated gross living areas, which caused the value of the subject
                     properties to be increased, and
               •     Used comparable properties that were not truly comparable to the subject
                     properties because they
                     o Used only higher value properties for comparison,
                     o Failed to make adjustments for dissimilarities (such as seller
                         concessions, size, garage, age, etc.), and
                     o Failed to properly disclose the physical condition of the subject
                         properties and make appropriate adjustments.

            As a result of the erroneous appraisals, subject properties were valued above the
            neighborhood’s predominant value. In one example, the predominant value was
            $50,000, but Cornerstone’s appraiser valued the subject property at $80,000. In a
            second example, the appraiser valued the subject property at $148,000 when an
            unused comparable with equal location and condition sold for $75,000.

Verifications of Assets and
Income Were Inadequate

            Cornerstone’s underwriters approved four FHA-insured mortgages totaling
            $417,915 without adequately verifying or calculating borrowers’ income and
            source of funds (see table 4).




                                              8
                   Table 4: Inadequate verification or calculation of assets and income
                                                              Inadequate            Inadequate
                                          Mortgage            support for          verification of
                     Case number           amount               income                 assets
                      493-8447975                  $ 81,357               Yes
                      493-8567176                   109,137               Yes
                      493-8959876                     84,550                                      Yes
                      493-8480034                    142871               Yes
                    Total                         $417,915

                  Unsupported Income:
                  Cornerstone’s underwriters used an unsupported income amount for one loan and
                  miscalculated income for two other loans. HUD prohibits lenders from using
                  income in evaluating the borrower’s loan if they cannot verify the income or if the
                  income will not continue. 13 Using unverifiable or unstable income would
                  generate inaccurate debt-to-income ratios. 14 In one loan, the borrower was no
                  longer employed. The income calculations for two other loans were based on 40
                  hours per week when the borrowers’ pay stubs showed that they worked less than
                  40 hours per week. If based on year-to-date income, the borrowers’ mortgage
                  payment-to-income ratio (front) 15 and the total fixed payment-to-income ratio
                  (back) 16 would be 32.4 and 43.7 percent and 52.1 and 43.7 percent, respectively,
                  exceeding HUD’s limits of 31 and 43 percent.

                  Unsupported Assets:
                  Cornerstone’s underwriters did not sufficiently verify borrower assets in FHA
                  case number 493-8959876. 17 The borrower had a bank account with a large
                  unexplained increase of $4,000. HUD requires the lender to obtain an explanation
                  and evidence of source of funds for any large increases in bank accounts or
                  recently opened accounts. 18



13
     HUD Handbook 4155.1, paragraph 4-D(1)(a)
14
     HUD uses ratios to determine whether the borrower can reasonably be expected to meet the expenses involved
     in home ownership and otherwise provide for the family. There are two debt-to-income ratios. The mortgage
     payment expense-to-effective income, or front, ratio compares the borrower’s total mortgage expenses for the
     home to the borrower’s income. The total fixed payment-to-effective income, or back, ratio compares the
     borrower’s debt, including the mortgage, to the borrower’s income.
15
     The front ratio is the total mortgage payment, including principal, interest, escrow deposits for taxes and
     insurance, mortgage insurance premium, homeowners’ association dues, ground rent, special assessments, and
     payments for secondary financing, compared to the borrower’s effective income. On April 13, 2005, HUD set
     the current front ratio limit at 31 percent in Mortgagee Letter 2005-16.
16
     The back ratio is the total fixed payment (or total monthly debt payments) to income compared to the
     borrower’s effective income. On April 13, 2005, HUD set the current back ratio limit at 43 percent in
     Mortgagee Letter 2005-16.
17
     This loan was for a flipped property.
18
     HUD Handbook 4155.1, paragraph 5-B(2)(b)



                                                        9
     Conclusion

                  Cornerstone did not comply with HUD and FHA regulations when underwriting
                  16 FHA-insured loans. Specifically, the underwriters violated restrictions on
                  resales occurring 90 days or less after acquisition, failed to review or to
                  adequately review appraisal reports to ensure that the properties’ appraised values
                  were reasonable, and did not adequately verify borrower assets and income. As a
                  result, HUD paid claims for 13 of the 16 loans and incurred losses of more than
                  $981,000 upon sale of the properties (see appendix D). Further, Cornerstone
                  placed the FHA insurance fund at an increased risk for three ineligible loans with
                  unpaid principal balances of more than $295,000, with estimated losses of almost
                  $154,000 if the loans are foreclosed upon and the properties are sold (see
                  appendix E).

     Recommendations

                  We recommend that the Deputy Assistant Secretary for Single Family Housing
                  require Cornerstone Mortgage to

                  1A. Reimburse HUD for 13 loans for which HUD has sold the properties and
                      incurred losses totaling $981,574 (see appendix D).

                  1B. Indemnify HUD for three actively insured ineligible loans with unpaid
                      principal balances of $295,877. The projected loss of $153,856 is based on
                      the FHA insurance fund average loss rate of 52 percent 19 of the unpaid
                      principal balances (see appendix E).

                  1C. Ensure that it has adequately trained its managers and underwriters
                      regarding HUD underwriting requirements, including reviewing appraisals
                      and verifying assets and income.

                  1D. Review the FHA-insured mortgages originated by Branch 87 listed in
                      appendix G, determine which mortgages were originated based on inflated
                      appraisals, and reimburse or indemnify HUD for actual or potential losses
                      on those loans.

                  1E. Review the FHA-insured mortgages originated by Branch 87 listed in
                      appendix G, determine which mortgages were originated without an
                      appraisal report on the closing date, and reimburse or indemnify HUD for
                      actual or potential losses on those loans.

19
      The Single Family Acquired Asset Management System’s case management profit and loss by acquisition as of
      December 2013




                                                       10
1F. Establish procedures designed to ensure that it complies with all HUD and
    FHA underwriting requirements.

We also recommend that the Deputy Assistant Secretary for Single Family
Housing

1G. Refer Cornerstone to HUD’s Mortgagee Review Board for review and
    appropriate actions for violating HUD and FHA underwriting requirements.

We further recommend that the Director, Departmental Enforcement Center,

1H. Take appropriate administrative action, including possible debarment,
    against the appraiser responsible for the actions identified in this report.

1I.   Take appropriate administrative action, including possible debarment,
      against the owners and management of Cornerstone for the violations cited
      in this report.




                                 11
Finding 2: Cornerstone Violated RESPA When It Paid Marketing Fees
in Exchange for the Referral of FHA Mortgage Business
In violation of RESPA requirements, Cornerstone paid realtors improper marketing fees in
exchange for exclusive promotion of Cornerstone’s mortgage products and programs as set forth
in marketing agreements with the realtors. These violations occurred because Cornerstone
ignored RESPA requirements. The $382,500 in marketing fees, paid from December 31, 2007,
to December 1, 2009, were in connection with Cornerstone’s origination and processing of 31
defaulted FHA-insured mortgages totaling more than $3 million (see appendix F). 20 As a result,
Cornerstone could not ensure that its customers were able to shop for other lenders with better
mortgage rates or that the referral fees did not unnecessarily increase the costs of mortgage services.


     Cornerstone Executed an
     Improper Marketing
     Agreement

                   Section 8(a) of RESPA prohibits paying marketing fees to realtors in exchange for
                   exclusive rights. Specifically, RESPA regulations state, “No person shall give
                   and no person shall accept any fee, kickback or other thing of value pursuant to
                   any agreement or understanding, oral or otherwise, that business incident to or
                   part of a settlement service involving a federally related mortgage loan (FHA-
                   insured) shall be referred to any person.” 21

                   Cornerstone violated RESPA requirements in August 2007 and May 2008 when it
                   executed $382,500 in marketing agreements with realtors. The agreements
                   required the realtors to exclusively market Cornerstone’s loan products and
                   programs in exchange for monthly payments of $11,000 and $2,083,
                   respectively. 22 As part of the agreements, the realtors were required to
                   exclusively distribute and display various Cornerstone promotional and marketing
                   materials at their sales offices, including business cards, flyers, and brochures
                   describing various Cornerstone loan products and services.

                   One realtor was also required to provide Cornerstone employees with the
                   exclusive privilege of working in the realtor’s sales office. Cornerstone loan
                   officers and loan processors were on site at the realtor’s office. When borrowers
                   came into the realtor’s office, they were directed to Cornerstone employees, who
                   provided such services as credit approval, mortgage financing, consulting, and
                   expertise, effectively restricting borrowers’ ability to shop for other lenders.

20
      Of the 831 loans underwritten by Branch 87, 145 (nearly 18 percent) were referred, while 31 of 74 (nearly 42
      percent) defaulted loans with 6 or fewer payments were referrals.
21
      24 CFR 3500.14(b)
22
      During our review period, Cornerstone paid $37,500 in marketing fees to a national real estate franchise
      operator for FHA mortgage referrals.



                                                         12
                    The agreement restricted the realtor from entering into similar agreements with
                    other lenders. The agreement stated, “During the terms of the agreement [realtor]
                    agreed not to offer promotional opportunities similar to the one in the contract or
                    rent office space to any other residential mortgage lender other than
                    Cornerstone.” 23 In exchange, Cornerstone would pay the realtor $11,000 24 per
                    month. However, Cornerstone’s general ledger showed that it paid the realtor
                    $345,000 from December 2007 to December 2009. Cornerstone made an initial
                    payment of $46,000 in December 2007 and a second $46,000 payment in January
                    2008 and paid $11,000 per month from February 2008 through December 2009.

                    Other Payments to the Realtor:
                    Cornerstone made additional payments totaling $44,058 from September 2007
                    through December 2009 to another entity owned by the realtor. There were no
                    contractual agreements between Cornerstone and this entity, but the general
                    ledger described them as rental, advertisement, telephone, and utility payments.
                    Cornerstone’s executive vice president stated that these payments should have
                    been labeled as marketing expenses but did not provide a marketing agreement
                    with this entity.

     Cornerstone Violated Conflict-
     of-Interest Statutes


                    In addition to violating RESPA, the marketing agreement violated
                    conflict-of-interest statutes 25 because one of Cornerstone’s branch managers was
                    a principal in a realty company. Local and Internet advertisements, in which the
                    principal claimed to “run” and own a Cornerstone branch, indicated that the
                    principal owned both the realty company and a branch of Cornerstone.

                    At the time of our review, on his Web site, the principal stated, he “… is also
                    active in interim lending to other Real Estate Investors through his Houston Hard




23
       While Cornerstone employees were on site at the realtor’s office, Cornerstone denied paying rent during that
       time.
24
       The agreement called for Cornerstone to pay EGDG, LLC, $11,000 per month for marketing and advertising
       services and if applicable, desk rental as outlined. (The agreement did not outline anything regarding desk
       rental. The amount of the fee attributed to rent was $0, and the square footage space was left blank.)
25
       24 CFR 202.5(l), “Conflict of interest: A mortgagee may not pay anything of value, directly or indirectly, in
       connection with any insured mortgage transaction or transactions to any person or entity if such person or entity
       has received any other consideration from the mortgagor, seller, builder, or any other person for services related
       to such transactions or related to the purchase or sale of the mortgaged property, except that consideration
       approved by the [HUD] Secretary may be paid for services actually performed. The mortgagee shall not pay a
       referral fee to any person or organization.”



                                                            13
                   Money 26 Lending Company, Jet Investor Lending, LLC, as well as offering home
                   mortgage loans through his mortgage company, Cornerstone Mortgage Partners.”

                   In a March 2009 online trade magazine, an article referred to the principal as
                   running Cornerstone. It stated, he “… does over 100 complete rehab transactions
                   a year (buy, fix and sell). Plus, he runs a large hard money company, Jet Lending,
                   and a traditional mortgage banking business through Cornerstone Mortgage.”

                   Further, Cornerstone quality control reports used the principal’s name to describe
                   a branch. 27 According to Cornerstone’s executive vice president, the reference
                   was used to describe the cost center and nothing else. The executive vice
                   president stated that the principal had never been employed by Cornerstone.

                   Finally, Cornerstone originated loans from two locations during the audit period.
                   The two locations were 14515 Briarhills and 15729 I-45 North Freeway.
                   According to Neighborhood Watch, Branch 87’s address is 14515 Briarhills. The
                   office at 15729 I-45 North Freeway housed Branch 87 staff, but it also housed
                   businesses owned by the principal and a separate business owned by a Branch 87
                   loan officer.

                   Cornerstone originated 141 mortgages from its office collocated with the realtor.
                   FHA insured the mortgages for more than $13.7 million.

                   Cornerstone submitted erroneous certifications to HUD that effectively hid the
                   RESPA violations and the conflict of interest. In its direct endorsements 28 for
                   loans involving the realtor, Cornerstone certified that it and its owners, officers,
                   employees, and directors did not have financial interests in or relationships, by
                   affiliation or ownership, with sellers involved in the loan transactions. Further,
                   Cornerstone certified to HUD that it did not pay any fee or consideration of any
                   type, directly or indirectly, to any party in connection with the loan transactions.

                   According to one of Cornerstone’s managers as of March 6, 2014, Cornerstone
                   continued to use marketing agreements.

     Conclusion

                   Cornerstone violated RESPA’s restriction on referral fees by making improper
                   payments to a realtor that referred FHA mortgage business to it and violated
                   conflict-of-interest statutes by contracting with a branch manager, who was also a
                   franchise owner as well as a realtor, lender, and investment company executive.

26
      According to Wikipedia, one definition of “Hard Money” is an asset-based loan financing secured by the value
      of a parcel of real estate.
27
      Branch P&L, Gant, LLC, West Houston (115)
28
      Form HUD-92900-A



                                                         14
          Cornerstone submitted erroneous certifications to HUD, which effectively hid the
          relationships from HUD.

Recommendations

          We recommend that the Deputy Assistant Secretary for Single Family Housing

          2A. Require Cornerstone to adequately train its managers and staff regarding
              RESPA requirements.

          2B. Review Cornerstone’s current marketing agreements and its payments to
              realtors under those agreements to determine whether they are improper
              referrals for FHA mortgage business.

          We recommend that the Director, Departmental Enforcement Center,

          2C. Take appropriate administrative action, including possible debarment, against
              the realtor for the RESPA violations.




                                         15
Finding 3: Cornerstone Failed To Properly Implement a Quality Control
Plan
From 2007 through 2009, Cornerstone did not always comply with HUD’s quality control
requirements. Specifically, it did not (1) conduct timely quality control reviews, (2) review all
early payment default and rejected loans or review them in a timely manner, (3) conduct timely
onsite reviews or include all review items required by HUD, or (4) follow required reverification
processes for loans it reviewed. Further, Cornerstone could not support that it took corrective
actions in a timely manner. These conditions occurred because Cornerstone’s quality control
plan conflicted with HUD regulations and its review process was inadequate. As a result, it was
unable to ensure the accuracy, validity, and completeness of its loan origination operations,
resulting in an increased risk to the FHA insurance fund.


     Cornerstone Did Not Conduct
     Timely Quality Control
     Reviews

                   While Cornerstone performed quality control reviews on 10 percent of loans
                   closed monthly, it did not complete those reviews in a timely manner—within 90
                   days of loan closing—as required by HUD regulations. 29 For example,
                   Cornerstone did not complete quality control reviews for loans closed between
                   December 2008 and April 2009 until 4 to 7 months after the loans closed. This
                   condition occurred because Cornerstone’s quality control plan conflicted with
                   HUD regulations. Cornerstone’s quality control plan required that quality control
                   reviews be conducted within 90 days of loan closing. HUD regulations require
                   that quality control reviews be completed within 90 days of loan closing.

     Cornerstone Did Not Conduct
     Early Payment Default and
     Rejected Loan Reviews as
     Required

                   Cornerstone did not review or did not review in a timely manner 36 loans that
                   defaulted within the first 6 payments 30 (early payment default loans) as required
                   by HUD regulations 31 and its quality control plan. 32 It did not review 11 loans
                   and did not review the other 25 loans in a timely manner. For example, in several
29
      HUD Handbook 4060.1, REV-2, paragraph 7-3(D), requires quality control reviews to be completed within 90
      days of closing.
30
      The loans closed between April 2008 and December 2009.
31
      HUD Handbook 4060.1, REV-2, paragraph 7-6(D), requires lenders to review all early payment default loans,
      including loans that become 60 days or more delinquent, within the first six payments.
32
      Cornerstone’s quality control plan, page 8, required reviews to be performed on all loans going into default
      within the first six payments.



                                                         16
                   cases, the borrower made no payments, and Cornerstone did not conduct quality
                   control reviews until as many as 8 months later.

                   Further, Cornerstone did not perform required quality control reviews on any of
                   the 51 loans that Branch 87 rejected between July 1, 2007, and September 30,
                   2009. 33

     Cornerstone Did Not Conduct
     Annual Onsite Reviews of
     Branch 87

                   Due to high default rates, new key employees (loan officers and a branch
                   manager), and past problems, Cornerstone was required to conduct annual
                   reviews of Branch 87. 34 From 2007 through 2009, Neighborhood Watch showed
                   that Branch 87 ranked first among Cornerstone branches in the Houston area with
                   a high percentage of defaulted loans in the first year. During that period, Branch
                   87 originated 831 loans and had 79 defaults and 13 claims. Branch 87’s
                   percentage of claims and defaults was 11.07 percent compared with 4.94 percent
                   for the country. Despite the high default rates, new key employees, and past
                   problems, Cornerstone did not conduct annual reviews of Branch 87. For
                   example, Cornerstone conducted an onsite review during March 2008 but did not
                   conduct another review until 21 months later in December 2009.

                   Further, Cornerstone’s reviews did not address all of the items required by HUD.
                   Cornerstone’s reviews did not confirm whether Branch 87 revised procedures to
                   reflect changes in HUD requirements and inform personnel of the changes.
                   Further, the reviews did not ensure that Branch 87 personnel were all Cornerstone
                   employees or contract employees performing functions that FHA allowed to be
                   outsourced.

     Cornerstone Did Not Follow
     Reverification Requirements

                   Cornerstone did not follow required reverification processes for loans that it
                   reviewed under its quality control program. HUD requires quality control
                   programs to include procedures for reviewing and confirming specific
                   information on all loans selected for review. 35 HUD further requires that certain
                   documents contained in the loan file be checked for sufficiency and subjected to
                   written reverification. Specifically, HUD requires lenders to reverify the
33
      HUD Handbook 4060.1, REV-2, paragraph 7-8(A)(1), requires that of the total loans rejected, a minimum of 10
      percent or a statistical random sampling that provides a 95 percent confidence level with 2 percent precision
      must be reviewed.
34
      HUD Handbook 4060.1, paragraph 7-3(G)
35
      HUD Handbook 4060.1, REV-2, paragraph 7-6(E)(2)



                                                         17
                 borrower’s employment, other income, deposits, gift letters, alternate credit
                 sources, acceptable sources of funds, and mortgage or rent payments. If the
                 written reverification is not returned to the lender, the lender is required to make a
                 documented attempt to conduct a telephone reverification, even if the original
                 information provided during the loan origination process was obtained
                 electronically or involved alternative documents. Cornerstone’s case files did not
                 contain documentation showing that it reverified unreturned verifications of
                 employment for 105 Branch 87 loans.

                 HUD also requires lenders to obtain new credit reports for loans when performing
                 quality control reviews, except for streamline refinance loans or loans processed
                 using an FHA-approved automated underwriting system. 36 However,
                 Cornerstone ordered new credit reports for only 18 of the FHA loans it reviewed
                 during the audit period.

                 In one example (FHA case number 493-8447975), Cornerstone originated a loan
                 for a borrower without verifying current employment. The employment
                 verification in the file showed that the borrower was not employed when the loan
                 closed. It showed previous employment, not current employment. When
                 Cornerstone conducted a quality control review in December 2007, it again did
                 not verify employment.

     Cornerstone Could Not Support
     That It Took Timely Corrective
     Actions

                 Cornerstone could not provide support to show that it complied with HUD
                 regulations requiring it to

                   •   Report review findings to senior management within 1 month of completion
                       of the initial report;
                   •   Take prompt action to deal appropriately with any material findings; and
                   •   Identify actions being taken, the timetable for completion, and any planned
                       follow-up activities in the report. 37

                 The monthly quality control reports appeared to show that management responded
                 to each of the required corrective action requests, but the reports were not dated
                 except to say that they were for a specific month, and there were no follow-up
                 dates given in any of the reports. As a result, it was not clear when or whether
                 Cornerstone’s management followed through with specific actions.



36
      HUD Handbook 4060.1, REV-2, paragraph 7-6(E)(1)
37
      HUD Handbook 4060.1, REV-2, paragraph 7-3(I)



                                                    18
Conclusion

             Cornerstone did not always comply with HUD’s quality control requirements
             during the review period. Specifically, it did not (1) conduct timely quality
             control reviews, (2) review all early payment defaulted and rejected loans or
             review them in a timely manner, (3) conduct timely onsite reviews or include all
             review items required by HUD, or (4) follow required reverification processes for
             loans it reviewed. Further, Cornerstone could not support that it took corrective
             actions in a timely manner. As a result, it was unable to ensure the accuracy,
             validity, and completeness of its loan origination operations, resulting in an
             increased risk to the FHA insurance fund.

Recommendations

             We recommend that the Deputy Assistant Secretary for Single Family
             Housing

             3A. Verify that Cornerstone has implemented a HUD-approved quality control
                 plan that fully complies with HUD and FHA requirements.




                                             19
                              SCOPE AND METHODOLOGY

To accomplish our review objectives, we

     •   Reviewed applicable regulations, requirements, mortgagee letters, and HUD Quality
         Assurance Division reports;
     •   Reviewed reports and information in HUD’s Neighborhood Watch system and Single
         Family Data Warehouse; 38
     •   Reviewed Cornerstone’s files, ledgers, policies, procedures, and independent audit reports
         for the years ending December 31, 2007, and 2008;
     •   Reviewed 13 escrow files from 4 different title companies;
     •   Conducted interviews with Cornerstone staff and borrowers; and
     •   Performed appraisal reviews for 7 properties.

We obtained a data download of Branch 87 loans originated from October 1, 2007, through
September 30, 2009, from Neighborhood Watch. The download showed that Branch 87 originated
831 FHA-insured loans valued at more than $86.5 million. Three hundred of the loans were at least
30 days delinquent, and 74 of the loans with original loan amounts totaling $7.4 million defaulted
within the first 6 payments. We used the data to select a sample of loans for review, and did not
rely on the data as a basis for our conclusions. Therefore, we did not assess the reliability of the
data.

We selected a sample of 34 loans from the 74 defaulted loans. We did not review all 74 defaulted
loans because we did not plan to project the results on the population of loans. The 34 sample loans
reviewed were currently in default, were not refinanced, and had six or fewer payments before the
first reported default. The original loan amounts for the 34 loans totaled nearly $3.5 million. The
results of our detailed testing apply to only the 34 loans selected and cannot be projected. The
remaining 40 defaulted loans that we did not test are listed in appendix G with the loan status as of
January 2014.

We performed detailed testing and reviewed the underwriting procedures for the 34 loans. We
reviewed documentation from the HUD Homeownership Center39 loan endorsement files and loan
files provided by Branch 87. Our testing and review included (1) analysis of borrowers’ income,
assets, and liabilities; (2) review of borrowers’ savings ability and credit history; (3) verification of
selected data on the underwriting worksheet and settlement statements; and (4) confirmation of
employment and gifts. In addition, we conducted site visits to 10 of the 34 properties to ensure they
existed.

38
     Single Family Data Warehouse is a large and extensive collection of database tables organized and dedicated to
     support the analysis, verification, and publication of single-family housing data. It consists of database tables
     structured to provide HUD users easy and efficient access to Office of Single Family Housing case-level data
     on properties and associated loans, insurance, claims, defaults, and demographics.
39
     Homeownership Centers are offices where HUD has set up mortgage insurance operations to serve and monitor
     mortgagees, lenders, and home buyers. They are located in Philadelphia, PA, Atlanta, GA, Denver, CO, and
     Santa Ana, CA.



                                                          20
We obtained Cornerstone’s quality control plan and all 105 of the quality control review reports and
supporting documentation for loan reviews that it and its quality control contractor conducted
during the 12-month period September 2008 through August 2009. 40 We reviewed the quality
control plan, reports, and supporting documentation to determine the sufficiency and timeliness of
the quality control reviews on closed loans. In addition, we reviewed the previously selected 74
loans that had defaulted within 6 months for evidence of early payment default reviews. Finally, we
selected a random sample of 10 of 51 rejected loans from the period July 1, 2007, to September 30,
2009, to determine the adequacy of quality control reviews conducted for the rejected loans. We
selected a random sample instead of reviewing all 51 rejected loans because we were
determining the adequacy of the reviews instead of the number of errors in the population.

We selected a sample of 7 properties from the 74 defaulted loans. We selected properties with
current sales prices and appraisal values exceeding the prior sales prices, list prices, and tax values.
The results of this testing apply only to the 7 properties selected and cannot be projected to the
remaining 67 properties. A HUD Office of Inspector General (OIG) appraiser performed appraisal
reviews of the seven properties. OIG conducted physical inspections, researched neighborhoods,
and verified comparable sales for the seven properties.

For the 13 ineligible loans that were foreclosed and the properties sold, we obtained profit and loss
data from HUD’s Single Family Acquired Asset Management System. We also calculated the
estimated loss for the three ineligible loans that were in default using FHA’s loss rate of 52 percent
as of December 2013.

We performed our fieldwork between December 2009 and May 2010 on loans that Branch 87
originated between October 1, 2007, and September 30, 2009. We expanded our scope as necessary
to include a RESPA violation and Cornerstone’s quality control procedures. We performed our
audit work at Cornerstone’s headquarters and Branch 87 offices and at our office in Houston, TX.

We conducted the review in accordance with generally accepted government auditing standards,
except as noted below. Those standards require that we plan and perform the review to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based
on our audit objective(s). We believe that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our review objectives.

We did not comply with the auditing standard for early communication of control deficiencies
resulting in noncompliance with provisions of laws, regulations, contracts or grant agreements, or
abuse because we suspended our audit from August 2010 until July 2013 at the request of the U.S.
Department of Justice. We then updated our review work to incorporate changes in Cornerstone’s
operations for background purposes and to update the status of our sample loans.



40
     From October 1, 2007, to March 15, 2009, Cornerstone conducted quality control reviews internally. From
     March 15 to September 30, 2009, Cornerstone conducted some reviews internally but also used a contractor to
     perform external quality control reviews.



                                                       21
                              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
               objectives:

               •   Policies and procedures intended to ensure that FHA-insured loans are properly
                   originated, underwritten, and closed.
               •   Safeguarding FHA-insured mortgages from high-risk exposure.
               •   Policies and procedures intended to ensure that the quality control program is an
                   effective tool in reducing underwriting errors and noncompliance.

               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 Deficiencies

               Based on our review, we believe that the following items were significant
               deficiencies in 2007 through 2009:

               •   Cornerstone did not have effective controls in place to ensure that FHA-insured
                   loans were originated, underwritten, and closed in accordance with HUD
                   requirements, exposing HUD to unnecessary insurance risks (finding 1).


                                                 22
•   Cornerstone ignored RESPA regulations by paying a realtor marketing fees in
    exchange for referrals for FHA mortgage business (finding 2).
•   Cornerstone did not implement an effective quality control plan (finding 3).




                                23
                                           APPENDIXES

Appendix A

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


                       Recommendation           Ineligible 1/      Funds to be put to
                           number                                    better use 2/

                               1A                     $981,574
                               1B                                            $153,856



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

2/       Recommendations that funds be put to better use are estimates of amounts that could be
         used more efficiently if an 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.

         Implementation of our recommendation to require Cornerstone to indemnify HUD for the
         three loans that were not originated in accordance with FHA requirements will reduce
         FHA’s risk of loss to the FHA insurance fund. The amount above reflects that upon the
         sale of the mortgaged property, FHA’s average loss experience is about 52 percent of the
         unpaid principal balance as of December 12, 2013. 41




41
     According to the Single Family Acquired Asset Management System’s case management profit and loss by
     acquisition as December 2013



                                                     24
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1
Comment 2




                         25
Comment 2




Comment 1




Comment 3




Comment 2


Comment 2




            26
Comment 4




            27
Comment 2

Comment 5




Comment 1




Comment 1


Comment 6




            28
Comment 3




Comment 2




Comment 7




Comment 2




Comment 2




            29
Comment 7


Comment 3



Comment 2

Comment 2

Comment 7




Comment 2




            30
Comment 7




Comment 1




            31
Comment 1




Comment 8




Comment 8




            32
Comment 8




Comment 9




            33
Comment 9




Comment 10




Comment 11




             34
Comment 12




Comment 12




Comment 12




             35
Comment 12




Comment 12




Comment 12




Comment 12




             36
Comment 12




Comment 12




Comment 12




Comment 13




             37
Comment 13




             38
Comment 13




             39
Comment 13




             40
Comment 13




             41
Comment 13




Comment 13




             42
Comment 1




            43
Comment 14




Comment 15




             44
Comment 16




Comment 15




             45
Comment 15




Comment 6




             46
Comment 1




            47
Comment 6




            48
49
Comment 6




Comment 3




            50
Comment 6




Comment 17




             51
Comment 18




             52
Comment 19




             53
Comment 20




             54
Comment 5




Comment 21




             55
Comment 22




Comment 7




             56
Comment 14




Comment 22




             57
58
59
OIG Evaluation of Auditee Comments

Comment 1:    Cornerstone disagreed with the findings and disputed the accuracy of the report
              and OIG’s interpretation of rules. We reviewed Cornerstone’s comments and
              the supporting documentation. We changed the report where appropriate.

Comment 2:    Cornerstone noted that the information in the report was dated and therefore did
              not reflect current operations. Cornerstone also questioned whether a report
              should even be issued due to the lag time. Further, Cornerstone believed that
              the lengthy passage of time since the audit work prevented the OIG and HUD
              from taking action against it for the findings in the report. Cornerstone further
              stated that it had closed Branch 87 more than 2 years ago when the branch
              manager accepted employment elsewhere. Cornerstone noted that OIG agreed
              at the exit conference to clarify that the findings were based on dated
              information.

              The conditions in the report were the conditions at the time of the audit. The lag
              time in audit work and report issuance was due to pending Department of
              Justice work and does not reflect upon the standards in which our audit work
              was conducted. Further, even though much time has passed, HUD OIG has a
              right to report what it found. However, we made changes where appropriate in
              the report to clarify that the information was dated and may not reflect current
              operations.

Comment 3:    Cornerstone noted that the marketing agreements terminated in 2009 and 2010,
              but was inconsistent on the termination dates, twice reporting them as October
              2009 and March 2010, and once reporting them as December 2009 and April
              2010.

              Even though the marketing agreements mentioned in the report had terminated,
              one of the managers told OIG at the exit conference that Cornerstone has
              continued to use marketing agreements. Based on this response, we added a
              recommendation that HUD review both the new agreements and Cornerstone’s
              payments under those agreements to determine whether Cornerstone is currently
              violating RESPA.

Comment 4:    Cornerstone provided updated background data. We used the data to update the
              Background and Objectives section of the report.

Comment 5:    Cornerstone stated that HUD withdrew a Credit Watch proceeding initiated in
              March 2010, and interpreted this to mean that HUD did not attribute Branch
              87’s high default and claim rate to any wrongdoing or deficient loan origination
              or underwriting by Branch 87.

              Cornerstone did not provide a copy of any HUD documentation regarding a
              withdrawal of a Credit Watch proceeding. Further, according to Cornerstone,



                                             60
             HUD initiated the Credit Watch proceeding in March 2010, which was well
             after the audit period and withdrew the proceeding at some later date which
             Cornerstone also did not provide. Since the proceeding and withdrawal were
             after the audit period, they cannot reasonably be expected to absolve
             Cornerstone from its obligation to have reviewed Branch 87 annually during the
             audit period. We did not change the report based on this comment.

Comment 6:   Regarding RESPA violations, Cornerstone stated that (1) its marketing
             agreements did not violate RESPA and involved fixed payments for marketing
             and promotional services to realtors for services rendered instead of payment for
             referrals, and that such payments are expressly allowed by HUD’s 2010
             interpretive rule (2) there was no conflict of interest in connection with the
             agreements, (3) there was no conflict of interest with personnel because HUD
             Handbook 4060.1 REV-2, paragraph 2-9(B) and (C) specifically allowed
             officers to be owners, officers, partners, or members of other entities, (4) HUD
             is no longer responsible for RESPA and the statute of limitations has expired,
             and (5) OIG misinterpreted Section 8(a) of RESPA, and that it does not prohibit
             paying marketing fees to realtors in exchange for exclusive rights.

             We disagree with Cornerstone on all 5 RESPA issues that it raised. Cornerstone
             did not explain why it was necessary for the agreements to be exclusive, why its
             employees worked in a realtor’s office, why payments were more than the
             agreed upon $11,000 per month, and why it made additional payments to
             another entity owned by the same realtor without a marketing agreement.
             Further, Cornerstone’s denial of a conflict of interest relationship did not
             address the second part of HUD Handbook 4060.1 REV-2, paragraph 2-9 (C),
             which requires a clear and effective separation between the two entities. The
             shared management and ownership, exclusive agreement, co-location of
             employees, and payment structures all demonstrate that Cornerstone violated
             the requirement to clearly separate itself from the realty company.

             Also, while HUD may no longer be responsible for investigating RESPA
             violations, and while the statute of limitations for some actions may have
             expired, HUD may have the right to take administrative actions. Further, OIG
             has a right to report its findings and to refer them to other agencies, especially
             since Cornerstone is still using marketing agreements.

             Finally, regarding the applicability of Section 8(a) of RESPA, OIG contends
             that the exclusivity of the agreements appears to be an attempt to stifle
             competition, while the inconsistency of the payments under those agreements
             appears to be payments for referrals.

             Therefore, we did not change the audit report or the recommendations based on
             Cornerstone’s comments regarding RESPA.




                                             61
Comment 7:     Cornerstone noted that the loans were dated, and that it was not required to keep
               loan documentation after 2 years. Cornerstone also noted that OIG relied on
               other information which it can no longer locate. Cornerstone stated that since
               the information in the report was dated, it was at a significant disadvantage in
               responding to the finding.

               At the exit conference, OIG extended its usual comment period by 2 weeks and
               offered to send the electronic files it used for its review to Cornerstone.
               Cornerstone did not request the files. Further, Cornerstone did not request the
               documents that we used to support our reverification analysis.

Comment 8:     Cornerstone stated that the only relevant date was the date that the borrower
               executed the contract, that it had a right to rely on the sales dates in the sales
               contracts, and that when the date fields were blank, the dates could be found in
               other documents such as the date field in the appraisal.

               Based on documentation in the files, the contracts were agreed too much earlier
               than reported by the sales contract in the file. The blank dates in the contracts
               show that Cornerstone used incomplete documents, and the sales date had to be
               a calculated number. Further, Cornerstone wants to use the dates in other
               documents such as the appraisal reports which the audit found to be
               questionable. We did not change the report based on Cornerstone’s comments
               regarding sales contract dates.

Comment 9:     Cornerstone stated that most of the properties were in a presidentially-declared
               disaster area, which should have exempted them from the anti-flipping rule.
               Cornerstone referred to Mortgagee Letter 2006-14.

               Cornerstone’s position is not valid. We could not find any indication of an
               exemption for counties in Texas during the affected period. Mortgagee Letter
               2006-14 states that FHA will announce eligibility for exemptions to the
               restrictions of the property flipping rule in a Mortgagee Letter. Further, the
               Mortgagee Letter will specify how long the exemption will be in effect and the
               specific disaster area affected. Cornerstone did not provide evidence showing
               that Harris County had an exemption from the anti-flipping rule. We did not
               change the report based on this comment.

Comment 10: Cornerstone stated HUD’s definition of property flipping was reselling recently
            acquired properties for considerable profit with artificially inflated values.
            Cornerstone further stated that there was no reason for it to believe property
            values were artificially inflated.

               Many of the properties in the report had artificially inflated values as noted by
               the OIG reappraisals at Table 3. Also, had Cornerstone exercised due diligence
               in reviewing both the erroneous appraisals at Table 3 and the appraisal reports at
               Table 2, it should have noticed that many of the property values were artificially



                                              62
                inflated. Further, the 8 properties questioned for property flipping in the report
                increased in cost by an average of 116 percent from the prior sale to the current
                sale which should have been a red flag to Cornerstone. We did not change the
                report based on this comment.

Comment 11: Cornerstone noted that HUD’s prohibition against property flipping was no
            longer in effect when OIG conducted the audit.

                As stated in the report, the waiver occurred after Cornerstone originated the
                subject loans; thus, the waiver was not applicable to them.

Comment 12: Cornerstone stated that it received the questioned appraisals prior to the closing
            date. Cornerstone further stated that it had discussed the issue with the
            appraiser, and blamed any inconsistencies in dates on the appraiser’s software
            which it stated updated automatically to reflect the current date each time the
            appraiser printed the report. Cornerstone addressed each case separately and
            provided copies of invoices to support appraisal dates.

                Cornerstone did not provide a copy of a statement from the appraiser or any
                other source to support its position on automatic dates in the appraisal reports.
                Further, the invoices are not useful because they do not indicate whether the
                appraisal services could have been pre-paid. In any case, OIG reviewed the
                appraisals in the files and did not find multiple copies of appraisals with
                different signature dates. Therefore, if the dates were automatically updated,
                then Cornerstone’s underwriters would have been relying on appraisals that had
                not been finalized before the closing. We did not change the finding based on
                this comment.

Comment 13: Cornerstone stated that it had not had access to the OIG’s appraisals, and that it
            did not find anything on the face of its appraisals that suggested they were
            incorrect. Cornerstone defended each of the six appraisals separately.

                Cornerstone did not request copies of the appraisals either at or after the exit
                conference and their response failed to mention numerous appraisal errors and
                inconsistencies that its underwriters either did not detect or did not question.
                Further, the report specifically mentioned two appraisals that were at the upper
                end of the value range for their locations. If Cornerstone’s quality control
                program had been adequate at that time and had its underwriters exercised due
                diligence and professional skepticism, Cornerstone should have identified and
                investigated these anomalies, which should have determined that the appraisals
                were erroneous. Cornerstone was responsible for its appraisers, and it did not
                follow the HUD requirements outlined in HUD Handbook 4150.2.

                We summarized the errors for each of the 6 appraisals in their case reviews at
                Appendix C. Each appraisal had similar errors. Thus, rather than rebut each of
                Cornerstone’s arguments that the appraisals were accurate, we included the



                                               63
appraisal errors for FHA Case Number 493-86934872 below as an example of
the types of appraisal errors that we found.

Cornerstone’s appraiser

1. Failed to properly measure and calculate the correct gross living area of the
   subject property.

   The appraiser stated the gross living area was 1,601 square feet, while the
   Harris County Appraisal District stated the size to be 1,538 square feet. Our
   actual measurements provided a gross living area of 1,536 square feet. The
   Houston Area Realtor Multiple Listing System (MLS) also listed the
   property’s gross living area as 1,538 square feet. The appraiser overstated
   the gross living area by 63 square feet. This overstatement under adjusted
   the larger home comparables and over adjusted the smaller comparables,
   and therefore favored the contract price of the subject property as compared
   to the comparables.

2. & 3. The appraiser selected comparable properties that were not truly
   comparable to the subject property and used comparable property appraisals
   that provided the value conclusion only in the upper value range. Further,
   the appraiser disregarded a number of comparable properties in the
   neighborhood that were more similar to the subject property.

   The appraiser stated the value range of properties in the neighborhood was
   $41,000 to $180,000 with a predominant value of $89,000. However, the
   subject property’s value at $120,500 was well above the predominant value
   with only a comment that the subject property was one of the larger homes
   and in average/updated condition in the market area. A review of
   neighborhood MLS listings and sold information, and Harris County
   Appraisal District data showed that the subject’s gross living area was very
   comparable to other homes in the neighborhood and the subject was not one
   of the larger homes in the neighborhood. MLS at the time of the subject
   appraisal indicated several listings and sold properties ranging in size from
   +/-1,400 to +/-1,800 square feet. The appraiser misled the reader with his
   statement, and incorrectly justified a higher market value for the subject
   property.

   Of the comparables used in the sales grid, it appeared that the comparables
   selected were all in the upper end of the price range and were in superior
   condition compared to the subject property. The appraiser noted the subject
   and all of the comparables as average/updated, which masked the condition
   of the subject. Information available indicated the subject’s condition
   should have been rated fair and condition adjustments made for differences
   between subject and comparables. The appraiser made some positive




                              64
   adjustments to comparables 1 and 3 and made no adjustments to
   comparables 2 and 4 for condition adjustments.

   The appraiser made no distinction between the subject and comparables for
   age. However, in the narrative section, he discussed age adjustments as
   follows: “Age adjustments were applied at the rate of 0.5% of sales price,
   per year’s difference between subjects and comparable’s effective age.”
   This statement is confusing since no age adjustments were made.

4. Failed to make proper adjustments for dissimilarities (seller concessions,
   fireplace, storage sheds) between the subject property and the comparable
   properties.

   The appraiser analyzed a total of six properties using the sales grid
   approach, four of which were closed sales, one that was a current listing,
   and one that was a pending sale. Of the four sales, two were more than 6
   months old with no comments. Appendix D: Protocol states - “If a sale of
   over six months is used, an explanation must be provided.” The appraiser
   did not provide an explanation.

   The HUD Handbook requires that the appraiser verify concessions with
   sources other than MLS. The appraiser provided no evidence in the report
   or in the work file that he obtained verification. Of the four closed
   comparable sales in the report, concessions were disclosed in MLS for two,
   but the appraiser noted them as conventional and no seller points. The
   appraiser’s failure to disclose and make appropriate adjustments resulted in
   inflated adjusted values on comparables sales # 3 ($6,720) and #4 ($3,400).

   The appraiser failed to note or make adjustments for upgrades on some
   comparables. Comparables 2 and 3 had storage sheds, and 3 also had an
   above ground pool. Lack of these adjustments favored the contract price of
   the subject property.

5. Failed to properly disclose the subject property’s condition and make proper
   condition adjustments to the comparable property appraisals.

   The offering and list price stated by the appraiser were very misleading.
   The appraiser stated “MLS Listing #3296054; listed 10/20/2007 for
   $94,900; DOM (days on market) – 36.” However, this was not the listing as
   of the date of the contract. The listing as of date of contract was for sale by
   owner.

   The subject property was listed as MLS #3296054 on October 20, 2007, for
   $89,900. The price changed several times, and ranged from $82,900 to
   $89,900. The MLS listing was terminated on November 25, 2007. This
   appears to have been a pre-foreclosure listing. The property was relisted on


                              65
December 31, 2007, as MLS #7575874 for $69,900 with a pending sale on
February 18, 2008, and a closing date of May 3, 2008, for $60,000.
Apparently the property was a “For Sale by Owner” at the time the current
purchasers signed the contract on July 25, 2008. According to LexisNexis,
the contract date was July 29, 2008, and the recording date of the deed was
August 6, 2008. Attached to the contract was an FHA/VA amendment
clause dated July 31, 2008, and a lead base paint disclosure signed on May
25, 2008. The appraiser was required to research, verify, analyze, and report
on any current agreement for sale of the subject property, and any offering
for sale within the 12 months prior to the effective date of the appraisal.
The appraiser signed a certification affirming that he had researched and
analyzed and reported all listing and offerings and had analyzed each.
However, there was no evidence that he had done so, and no mention of any
of the previous listings or the “For sale by Owner” in the subject portion of
the appraisal report. The appraiser made no mention of the analysis of any
of these listings as to whether they were market or below market and what
repairs had been made since the May 3, 2008 purchase of the property.

The MLS indicated at the time of the subject appraisal that the
neighborhood had several foreclosed properties and real estate owned
properties being offered. MLS information showed that the Sterling Green
community had a total of 178 properties that were sold between January 5,
2007, and June 30, 2008, ranging in price from $44,900 to $140,000. Of
these properties, 63 (35 percent) real estate owned and distressed sale
properties sold, ranging in value from $44,900 to $135,000. Typically, an
area with relatively large numbers of real estate owned properties indicates a
market area suffering a decline. Even though some data for the subject’s zip
code indicates increasing values for the first two quarters of 2008, with a
decline in the 3rd and 4th quarters, MLS data indicated possible distress in
the immediate market of the subject property. The appraiser needed to
address these issues and make a determination as to whether or not the area
around the subject property was suffering a decline due to real estate owned
and distressed properties. Instead, the appraiser stated the area was stable
and in balance for housing trends.

The appraiser stated the year built as 1977 (actual age – 31 years) with an
effective age of 15 years. Effective age is based on the entire structure
including the foundation, framing, plumbing, wiring, etc. Based on our
review, the effective age appeared to be understated. An average quality
brick veneer home has a typical building life of 60 years. Using the
appraiser’s effective age the remaining effective life would be 45 years
rather than 60 years as the appraiser claimed.

The appraiser stated in the narrative portion of the report “The subject house
has been updated with quality hard wood, tile and carpet flooring throughout
the house, new paint (inside and outside), fixtures, wainscoting, bathrooms



                           66
   and kitchen have been redone.” However, an inspection on April 12, 2009,
   and conversations with another appraiser who inspected the property on
   August 20, 2009, showed no hardwood flooring.

   Handbook 4150.2 requires that the appraiser provide photos at an angle so
   that the front/side and rear/side can be seen. The appraiser provided straight
   on front and rear photos that did not provide a view of the sides. Further,
   the appraiser appears to have cut and pasted photos from the MLS listing
   information. Appendix D: Valuation Protocol (D-13) requires that the
   appraiser include the appraiser’s photographs. If MLS photos are included,
   they can be included as a reference to show the condition of property at the
   time of listing/closing. The appraiser did not mention that the photos were
   from the MLS; however it was very evident when comparing MLS photos
   with the ones in the report that they had been cut and pasted.

   HUD Handbook 4150.2 does not require a cost approach on older dwellings.
   The appraiser developed the cost approach using “Average” quality
   construction and arriving at a cost of $121,744 with a remaining effective
   life of 60 years. The cost approach value is inflated because the appraiser
   failed to calculate the correct gross living area, and underestimated the
   effective age. Using the cost approach resulted in a value that is inflated by
   about 26 percent.

6. The appraiser made other errors

   The property was noted as “vacant” at time of the inspection. If a property
   is vacant at the time of the inspection, protocol requires the appraiser to
   comment in the “Improvement” section whether the utilities were on or off.
   If utilities are off, the appraiser should have conditioned the appraisal on a
   satisfactory re-inspection. The appraiser made no comment.

   The appraiser made several non-applicable boiler-plate comments in the
   narrative section on the report. While these comments were not applicable
   to the subject appraisal, they would confuse the reader.

   The building sketch did not show dimensions of the front porch and the
   patio and whether they were covered or not covered. The subject property
   had a covered front porch located at the front door and a small patio located
   at the rear of dwelling. After the purchase, the current owners expanded the
   patio and built a cover over it. HUD Handbook required the appraiser to
   include in the sketch the patio, decks, etc., and indicate whether they were
   covered or not covered.

   The appraiser stated that the gross living area “adjustments were made at the
   rate of $20 per square foot for differences greater than +/- 100 sq ft per
   Uniform Standards of Professional Appraisal Practice (USPAP) guidelines.”
   This was an erroneous statement because USPAP does not provide


                              67
                   guidelines or address adjustments to be made. USPAP requires the
                   appraiser to research, analyze and report the market reactions for
                   adjustments.

                   The appraiser described the location of the subject and comparables as
                   average. HUD Handbook 4150.2; Appendix D: requires the appraiser to
                   state subdivision name for the subject and each comparable, noting
                   comparables as superior, equal, or inferior. Location adjustments should be
                   made for superior and inferior location if the market indicates.

                   The appraiser described the view of the subject and comparables as
                   residential. HUD Handbook 4150.2; Appendix D: requires the appraiser to
                   state them as residential/good or residential/fair and make adjustments for
                   differences, if needed.

                As noted, the appraisal contained many errors. The other sample appraisals
                contain similar discrepancies. We did not change the report based on
                Cornerstone’s comments regarding the appraisals.

Comment 14: Cornerstone stated that the marks on the documentation in the file did not mean
            that the borrower was unemployed at closing. Further, it stated that a recent
            income verification showed that the borrower was employed at the time of
            closing. Cornerstone provided some documentation, including a
            post-employment verification which it obtained on March 4, 2014.

                OIG had already reviewed and considered all of the documentation provided.
                The post-employment verification showed the last pay date for the borrower as
                October 31, 2007, which was one day after closing. We did not change the
                report based on the comment.

Comment 15: Cornerstone stated that one of the loans had adequate compensating factors to
            justify exceeding the ratios, while income for the other loan was calculated
            correctly. Cornerstone provided various file documents to support its position.

                We considered the documents provided by Cornerstone during the audit, and
                they did not refute our analysis. For FHA Case 493-8567176, the auditee
                accepted a note written by the loan processor to the underwriter which claimed
                that the non-purchasing spouse received child support and was employed. A
                note is not sufficient documentation. Further, the non-purchasing spouse’s
                name did not appear on the HUD-1 and the underwriter did not document the
                compensating factor on the MCAW Form as required. For FHA Case
                493-8480034, the verification of income was not legible, and we based our
                calculations on figures from the pay stub. We did not change the report based
                on the comment.




                                              68
Comment 16: Cornerstone stated that it obtained a credible explanation for a large increase in
            the borrower’s bank account.

                Cornerstone provided a copy of a tax return showing that the borrower was due
                a large refund. However, OIG had already reviewed this document during the
                audit and determined that the increase in the borrower’s bank account was
                unsupported because the documentation did not adequately support the $4,000
                bank deposit. The deposit was significantly less than the refund amount, was
                less than 1 week (6 days) after the return was filed, and there was no
                documentation for a refund loan or a letter of explanation from the borrowers as
                required by HUD. We did not change the finding based on the comment.

Comment 17: Cornerstone stated that the referenced individual was never a Cornerstone
            employee and that Cornerstone never represented him in that way. Also,
            Cornerstone stated that OIG is aware of this and that the language in the draft
            report is prejudicial and inflammatory.

                The report laid out all the facts obtained regarding the referenced individual
                during the audit. Further, it noted the auditee’s response regarding his
                employment. Despite Cornerstone’s response, the totality of the facts, including
                (1) collocation of businesses, (2) payments to the individual, (3) the trade
                magazine article that referred to the individual as a Cornerstone owner, and (4)
                the auditee’s quality control reports that utilized the individual’s name to
                describe a branch argue that the individual was a Cornerstone employee.

Comment 18: Cornerstone noted that the quality control plan that OIG reviewed had been
            superseded by a new plan, and provided an undated copy of the new plan.
            Cornerstone stated that OIG admitted at the exit conference that it might be
            appropriate to delete the quality control finding from the report.

                OIG evaluated Cornerstone’s quality control system as it existed at the time of
                the audit. The system may have changed, and Cornerstone provided a quality
                control handbook as part of its response to the draft report, but the handbook
                was undated and we have not determined if or when Cornerstone implemented
                it. Further, Cornerstone’s statement about OIG agreeing to remove the quality
                control finding was incorrect. OIG only agreed to reword the finding to show
                that the quality control information is dated, and the current quality control
                system has not been evaluated – not to remove it from the report. We added
                language to the report to clarify that the finding relates to Cornerstone’s quality
                control system during the audit period, and that the audit period may not
                represent Cornerstone’s current quality control performance.

Comment 19: Cornerstone admitted that it did not conduct all of its required quality control
            reviews timely during the audit period because it was in transition from an in-
            house review system to a contracted review system. However, Cornerstone




                                               69
                stated that its contractor reviewed all of the files for which reviews were
                required.

                The contractor came aboard in March 2009. Our review of the quality control
                reports showed deficiencies as late as August 2009 which included the
                contractor's work. We did not change the report based on the comment.

Comment 20: Cornerstone stated that the requirement to review 10 percent or a statistical
            random sample of rejected loan applications applied to the company as a whole,
            and not to a specific branch. Further, Cornerstone stated that three of Branch
            87’s 51 rejected loans during the audit period had been reviewed.

                The OIG requested denied and rejected loan reviews for Cornerstone - not
                solely for Branch 87. Cornerstone stated in multiple interviews that it reviewed
                all denied and rejected applications daily but failed to provide copies of the
                reviews and stated in its response that they were not retained. Cornerstone's
                policy specifically stated that the retention for denied and rejected records was
                25 months and quality assurance records were retained for 2 years or 24 months.

Comment 21: Cornerstone noted that it has changed the checklist that it uses to review Branch
            offices since the audit, and provided a copy of the checklist.

                We have not evaluated the checklist or determined whether Cornerstone
                actually implemented it.

Comment 22: Cornerstone stated that prompt corrective actions were taken as required to
            address quality control report findings.

                Cornerstone did not provide any evidence to support its assertion. We did not
                change the report based on this comment.




                                               70
Appendix C

       NARRATIVE CASE SUMMARIES – UNDERWRITING
                     DEFICIENCIES

FHA case number:             493-8447975
Loan amount:                 $81,357
Settlement date:             October 30, 2007
Status:                      Claim paid - property conveyed to HUD and resold
Loss to HUD:                 $73,880
Requesting reimbursement:    Yes

We are seeking reimbursement for HUD losses on this loan because the lender did not properly
verify the property value before closing the loan.

The Lender Used Unsupported Income To Qualify the Borrower
HUD Handbook 4155.1, paragraph 4-D(1)(a), prohibits lenders from using income in evaluating
the borrower’s loan if the income cannot be verified, is unstable, or will not continue. The
borrower was no longer employed; therefore, the income was incorrect. The lender obtained
income documentation, including pay stubs and verification of employment, but ignored the
verification, which stated that it was for previous employment and showed salary, the probability
of continued employment, and the probability of bonus and overtime as zero.

Failure To Review Appraisal Report Before Settlement
The loan settlement was dated October 30, 2007, while the appraisal report was dated November
14, 2007. Therefore, the lender could not have reviewed the appraisal report before approving
and closing the loan. This action was in direct violation of regulations in HUD Handbook
4155.2, paragraph 4-1(e), which states that “lenders are responsible for properly reviewing
appraisals and determining if the appraised value used to determine the mortgage amount is
accurate and adequately supports the value conclusion.”


FHA case number:             493-8567176
Loan amount:                 $109,137
Settlement date:             July 8, 2008
Status:                      Claim paid - property conveyed to HUD and resold
Loss to HUD:                 $97,207
Requesting reimbursement:    Yes

We are seeking reimbursement for HUD losses on this loan because the lender did not properly
verify the property value before closing the loan.




                                               71
The Lender Miscalculated the Borrower’s Income
The income calculation was based on an hourly rate of $17 per hour x 40 hours per week when
the pay stubs showed that the borrower worked an average of 35 hours per week. Therefore,
based on year-to-date income, the borrower’s mortgage payment-to-income ratio should have
been 44 percent, which exceeded HUD’s maximum of 31 percent. Further, there were no
compensating factors in the loan file to justify exceeding the limit.

Failure To Review Appraisal Report Before Settlement
The loan settlement was July 8, 2008, while the appraisal report was dated August 11, 2008.
Therefore, the lender could not have reviewed the appraisal report before approving and closing
the loan. This action was in direct violation of regulations in HUD Handbook 4155.2, paragraph
4-1(e), which states that “lenders are responsible for properly reviewing appraisals and
determining if the appraised value used to determine the mortgage amount is accurate and
adequately supports the value conclusion.”


FHA case number:              493-8959876
Loan amount:                  $84,550
Settlement date:              March 6, 2009
Status:                       Claim paid - property conveyed to HUD and resold
Loss to HUD:                  $76,749
Requesting reimbursement:     Yes

We are seeking reimbursement for HUD losses on this loan because the lender did not verify
assets and the property did not qualify for FHA insurance.

Inadequate Verification of Assets
The lender did not sufficiently verify borrower assets. The borrower had a large increase of
$4,000 in a bank account. However, the lender did not obtain a credible explanation of the
source of those funds as required. HUD Handbook 4155.1, paragraph 2-10(B), requires the
lender to obtain an explanation and evidence of the source of funds for any large increases in
bank accounts or recently opened accounts.

Flipping Sale
The property did not qualify for FHA insurance because it was resold less than 90 days after
acquisition. According to HUD Handbook 4155.2, paragraph 4-7(e), “if a property is resold 90
days or fewer following the date of acquisition by the seller, the property is not eligible for a
mortgage insured by FHA.” The seller acquired the property on November 18, 2008, and sold it
to the borrower on January 20, 2009, 63 days after acquisition. The sales price had increased by
60 percent. The lender ignored the flipping prohibition.




                                                72
FHA case number:              493-8547028
Loan amount:                  $80,612
Settlement date:              April 14, 2008
Status:                       Claim paid - property conveyed to HUD and resold
Loss to HUD:                  $74,449
Requesting reimbursement:     Yes

We are seeking reimbursement of this loan because the property did not qualify for FHA
insurance and because the lender did not adequately review the appraisal.

Flipping Sale
The property did not qualify for FHA insurance because it was resold less than 90 days after
acquisition. According to HUD Handbook 4155.2, paragraph 4-7(e), “if a property is resold 90
days or fewer following the date of acquisition by the seller, the property is not eligible for a
mortgage insured by FHA.” The seller acquired the property on December 20, 2007, and sold it
to the borrower on February 4, 2008, 46 days after acquisition. The sales price had increased by
225 percent. The lender ignored the flipping prohibition.

Failure To Adequately Review Appraisal
The lender did not adequately review the appraisal report, which contained several
noncompliance issues. According to HUD Handbook 4155.2, paragraph 4-1(e), “lenders are
responsible for properly reviewing appraisals and determining if the appraised value used to
determine the mortgage amount is accurate and adequately supports the value conclusion.”

Our review of the lender’s property appraisal showed that the lender’s appraiser overstated the
value of the subject property by failing to use due diligence in performing the appraisal.
Specifically, the appraiser

(1) Failed to use comparable property appraisals that were truly representative of the subject
    property and market conditions at the time of the appraisal;
(2) Failed to verify, document, and make adjustments for seller concessions for comparable
    property appraisals 1, 2, and 3;
(3) Included two comparable property appraisals that required excessive adjustments, which
    decreased the reliability of the comparable property appraisals;
(4) Failed to properly disclose the correct number of bathrooms in the subject property, leading
    to incorrect adjustments to the comparable property appraisals; and
(5) Made site adjustments with no support or documentation.


FHA case number:              493-8692510
Loan amount:                  $71,931
Settlement date:              July 28, 2008
Status:                       Claim paid - property conveyed to HUD and resold
Loss to HUD:                  $49,868
Requesting reimbursement:     Yes



                                               73
We are seeking reimbursement for HUD losses on this loan because the lender did not properly
verify the property value before closing the loan. Further, when the lender received the appraisal
report, it did not adequately review the report.

Failure To Review Appraisal Report Before Settlement and Adequately Review the Appraisal
The loan settlement was July 28, 2008, while the appraisal report was dated August 6, 2008.
Therefore, the lender could not have reviewed the appraisal report before approving and closing
the loan. The lender also did not adequately review the appraisal report, which contained several
noncompliance issues. These actions were in direct violation of HUD regulations in HUD
Handbook 4155.2, paragraph 4-1(e), which states that “lenders are responsible for properly
reviewing appraisals and determining if the appraised value used to determine the mortgage
amount is accurate and adequately supports the value conclusion.”

Our review of the lender’s property appraisal showed that the lender’s appraiser overstated the
value of the subject property by failing to use due diligence in performing the appraisal.
Specifically, the appraiser

(1)   Failed to properly measure and calculate the correct gross living area of the subject property,
(2)   Selected comparable properties that were not truly comparable to the subject property,
(3)   Failed to analyze and disclose amenities of comparable property appraisals, and
•     (4) Failed to make proper adjustments for dissimilarities between the subject property and the
      comparable properties.



FHA case number:                 493-8693472
Loan amount:                     $119,058
Settlement date:                 July 31, 2008
Status:                          Claim paid - property conveyed to HUD and resold
Loss to HUD:                     $63,080
Requesting reimbursement:        Yes

We are seeking reimbursement for HUD losses on this loan because the lender initiated the loan
for an ineligible property, did not properly verify the property value before closing the loan, and
did not adequately review the appraisal report.

The lender approved the loan for a property purchased for $60,000 but resold the property for
$119,999, $1 less than double the acquisition price, which would have required a second
appraisal. HUD Handbook 4155.2, paragraph 4-7(f), requires the lender to obtain a second
appraisal by a different appraiser if the resale price is 100 percent or more above the seller’s
acquisition price.

Flipping Sales
The property did not qualify for FHA insurance because it was resold less than 90 days after
acquisition. According to HUD Handbook 4155.2, paragraph 4-7(e), “if a property is resold 90



                                                    74
days or fewer following the date of acquisition by the seller, the property is not eligible for a
mortgage insured by FHA.” The seller acquired the property on March 18, 2008, and sold it to
the borrower on May 25, 2008, 68 days after acquisition. The sales price had increased by 100
percent. The lender ignored the flipping prohibition.

Failure To Review Appraisal Report Before Settlement and Adequately Review the Appraisal
The loan settlement was July 31, 2008, while the appraisal report was dated August 7, 2008.
Therefore, the lender could not have reviewed the appraisal report before approving and closing
the loan. The lender also did not adequately review the appraisal report, which contained several
noncompliance issues. These actions were in direct violation of HUD regulations in HUD
Handbook 4155.2, paragraph 4-1(e), which states that “lenders are responsible for properly
reviewing appraisals and determining if the appraised value used to determine the mortgage
amount is accurate and adequately supports the value conclusion.”

Our review of the lender’s property appraisal showed that the lender’s appraiser overstated the
value of the subject property by failing to use due diligence in performing the appraisal.
Specifically, the appraiser

(1) Failed to properly measure and calculate the correct gross living area of the subject property,
(2) Selected comparable properties that were not truly comparable to the subject property and
    used comparable property appraisals that provided the value conclusion only in the upper
    value range,
(3) Disregarded a number of comparable properties in the neighborhood that were more similar
    to the subject property,
(4) Failed to make proper adjustments for dissimilarities (seller concessions, fireplace, storage
    sheds) between the subject property and the comparable properties, and
(5) Failed to properly disclose the subject property’s condition and make proper condition
    adjustments to the comparable property appraisals.

If the appraisal had been performed properly, the appraiser would have arrived at a different
value conclusion that would have been more representative of the predominate value of
properties in the neighborhood. The lender’s appraiser valued the subject property at $120,500
(sold for $119,999). Our review appraisal showed that potential comparables ranged from
$79,500 to $99,900 and averaged about $90,000.


FHA case number:              491-9483914
Loan amount:                  $80,416
Settlement date:              May 1, 2009
Status:                       Claim paid - property conveyed to HUD and resold
Loss to HUD:                  $73,941
Requesting reimbursement:     Yes

We are seeking reimbursement for HUD losses on this loan because the lender did not properly
verify the property value before closing the loan.




                                                75
Failure To Review Appraisal Report Before Settlement
The loan settlement was May 1, 2009, while the appraisal report was dated May 25, 2009.
Therefore, the lender could not have reviewed the appraisal report before approving and closing
the loan. This action was in direct violation of regulations in HUD Handbook 4155.2, paragraph
4-1(e), which states that “lenders are responsible for properly reviewing appraisals and
determining if the appraised value used to determine the mortgage amount is accurate and
adequately supports the value conclusion.”


FHA case number:                   493-8753582
Loan amount:                       $79,373
Settlement date:                   August 25, 2008
Status:                            Reinstated by borrower
Requesting indemnification:        Yes
Unpaid balance:                    $75,234

We are seeking indemnification of this loan because the property did not qualify for FHA
insurance and because the lender did not properly verify the property value before closing the
loan.

Flipping Sales
The property did not qualify for FHA insurance because it was resold less than 90 days after
acquisition. According to HUD Handbook 4155.2, paragraph 4-7(e), “if a property is resold 90
days or fewer following the date of acquisition by the seller, the property is not eligible for a
mortgage insured by FHA.” The seller acquired the property on May 20, 2008, and sold it to the
borrower on July 22, 2008, 62 days after acquisition. 42 The lender used an effective date found
on the sales contract in the lender’s file, which was August 22, 2008. However, the title
company files did not show an effective date on the purchase agreement. Further, the purchase
agreement was faxed to the title company on July 25, 2008, with a cover letter stating,
“attachment: Landa 43 executed contract.pdf.” The title insurance commitment documents were
dated July 29, 2008. The sales price had increased by 129 percent. The lender ignored the
flipping prohibition.

Failure To Review Appraisal Report Before Settlement
The loan settlement was August 25, 2008, although both the original appraisal report and a
second appraisal report were dated after the loan settlement. The property required a second
appraisal report because the sales price was more than double the acquisition price. The
appraisal reports were dated August 28, 2008, and September 25, 2008, respectively. Therefore,
the lender could not have reviewed either appraisal report before approving and closing the loan.
This action was in direct violation of regulations in HUD Handbook 4155.2, paragraph 4-1(e),
which state that “lenders are responsible for properly reviewing appraisals and determining if the


42
     July 22, 2008, was one of three dates on the purchase agreement. The other dates were July 17, 2008, and
     August 22, 2008. The loan application was dated July 22, 2008.
43
     “Landa” is the name of the street where the property is located.



                                                        76
appraised value used to determine the mortgage amount is accurate and adequately supports the
value conclusion.”


FHA case number:              493-8925706
Loan amount:                  $94,261
Settlement date:              August 12, 2009
Status:                       Delinquent
Requesting indemnification:   Yes
Unpaid balance:               $105,052

We are seeking indemnification for HUD losses on this loan because the lender did not properly
verify the property value before closing the loan.

Failure To Review Appraisal Report Before Settlement
The loan settlement was March 6, 2009, while the appraisal report was dated March 12, 2009.
Therefore, the lender could not have reviewed the appraisal report before approving and closing
the loan. This action was in direct violation of regulations in HUD Handbook 4155.2, paragraph
4-1(e), which states that “lenders are responsible for properly reviewing appraisals and
determining if the appraised value used to determine the mortgage amount is accurate and
adequately supports the value conclusion.”


FHA case number:              493-8532052
Loan amount:                  $96,239
Settlement date:              February 29, 2008
Status:                       Claim paid - property conveyed to HUD and resold
Loss to HUD:                  $97,578
Requesting reimbursement:     Yes

We are seeking reimbursement for this loan because the lender did not adequately review the
appraisal report.

Failure To Adequately Review Appraisals
The lender did not adequately review the appraisal report, which contained several
noncompliance issues. According to HUD Handbook 4155.2, paragraph 4-1(e), “lenders are
responsible for properly reviewing appraisals and determining if the appraised value used to
determine the mortgage amount is accurate and adequately supports the value conclusion.”

Our review of the lender’s appraisal showed that the lender’s appraiser overstated the value of
the subject property by failing to use due diligence in performing the appraisal. Specifically, the
appraiser

(1) Failed to properly measure and calculate the correct gross living area of the subject property;




                                                77
(2) Selected comparable properties that were not truly comparable to the subject property and
    used comparable property appraisals that provided the value conclusion only in the upper
    value range;
(3) Disregarded a number of comparable properties in the neighborhood that were more similar
    to the subject property;
(4) Failed to make proper adjustments for dissimilarities (seller concessions, view, site, age,
    fireplace) between the subject and comparable properties; and
(5) Failed to properly disclose the condition of the subject property and make appropriate
    adjustments for the foundation and a number of electrical hazards that required further
    inspection, testing, and repairs before FHA underwriting and adjustments for the remaining
    economic life of the subject property.

If the appraisal had been performed properly, the appraiser would have arrived at a substantially
different value conclusion for the subject property. The lender’s appraiser valued the subject
property at $97,000 (sold for $97,000). Our review appraisal showed six potential comparable
property appraisals that ranged from $44,000 to $78,500 and averaged about $62,075.


FHA case number:              493-8558066
Loan amount:                  $79, 273
Settlement date:              August 12, 2009
Status:                       Claim paid - property conveyed to HUD and resold
Loss to HUD:                  $83,159
Requesting reimbursement:     Yes

We are seeking reimbursement for this loan because the lender did not adequately review the
appraisal report.

Failure To Adequately Review Appraisals
The lender did not adequately review the appraisal report, which contained several
noncompliance issues. According to HUD Handbook 4155.2, paragraph 4-1(e), “lenders are
responsible for properly reviewing appraisals and determining if the appraised value used to
determine the mortgage amount is accurate and adequately supports the value conclusion.”

Our review of the lender’s appraisal showed that the lender’s appraiser overstated the value of
the subject property by failing to use due diligence in performing the appraisal. Specifically, the
appraiser

(1) Failed to properly measure and calculate the correct gross living area of the subject property,
(2) Selected comparable properties that were not truly comparable to the subject property and
    used comparable property appraisals that provided the value conclusion only in the upper
    value range,
(3) Disregarded a number of comparable properties in the neighborhood that were more similar
    to the subject property,
(4) Failed to make proper adjustments for dissimilarities between the subject property and
    comparable properties, and



                                                78
(5) Failed to properly disclose the condition of the subject property and make appropriate
    adjustments for foundation repairs and problems that required further inspection and testing
    to determine the extent of the foundation problems and adjustments for the remaining
    economic life of the subject property.

The OIG appraiser concluded that “The mortgage underwriter should have reviewed the
(lender’s) appraisal and questioned several obvious omissions between the photographs and
adjustments made by the (lender’s) appraiser, requesting the appraiser to properly address these
issues prior to proceeding with the loan.”

The OIG appraiser further concluded that the true value “would have been within the
predominant range of values in the subject neighborhood and not higher than the predominant
value.” The predominant value was $50,000. The lender’s appraiser valued the subject property
at $80,000 (sold for $79,900), well above the predominant value for the neighborhood.


FHA case Number:              491-9141680
Loan amount:                  $86,317
Settlement date:              April 21, 2008
Status:                       Claim paid - property conveyed to HUD and resold
Loss to HUD:                  $67,611
Requesting reimbursement:     Yes

We are seeking reimbursement for HUD losses on this loan, because the property did not qualify
for FHA insurance.

Flipping Sales
The property did not qualify for FHA insurance because it was resold less than 90 days after
acquisition. According to HUD Handbook 4155.2, paragraph 4-7(e), “if a property is resold 90
days or fewer following the date of acquisition by the seller, the property is not eligible for a
mortgage insured by FHA.” The seller acquired the property on January 16, 2008, and sold it to
the borrower on February 12, 2008, 27 days after acquisition. The lender used an effective date
found on the sales contract in the lender’s file, which was April 17, 2008. However, earnest
money was received on February 11, 2008, and an appraisal was conducted on March 19, 2008.
Further, a second appraisal was conducted on April 2, 2008, because the sales price more than
doubled the acquisition price. The loan application was not dated at the time the lender took it.
The sales price had increased by 138 percent. The lender ignored the flipping prohibition.


FHA case number:              493-8480034
Loan amount:                  $142,871
Settlement date:              December 21, 2007
Status:                       Claim paid - property conveyed to HUD and resold
Loss to HUD:                  $97,812
Requesting reimbursement:     Yes




                                               79
We are seeking reimbursement for HUD losses on this loan because the lender did not properly
determine the borrower’s capacity to repay the loan, verify the property value before closing the
loan, or adequately review the appraisal report.

Income
The lender miscalculated the borrower’s income. HUD Handbook 4155.1, paragraph 4-D(1)(a),
prohibits lenders from using income in evaluating the borrower’s loan if the income cannot be
verified, is unstable, or will not continue. The lender’s income calculation was based on two
40-hour work weeks, while the most recent pay stub showed that the borrower worked only 24
hours. Based on year-to-date income, the front and back ratios would be 32 and 52 percent,
respectively. HUD limited the front and back ratios to 31 and 43 percent, respectively, in
Mortgagee Letter 2005-16. There were no compensating factors in the loan file to justify
exceeding the ratio limits.

Failure To Review Appraisal Report Before Settlement and Adequately Review the Appraisal
The loan settlement was December 21, 2007, while the appraisal report was dated February 4,
2008. Therefore, the lender could not have reviewed the appraisal report before approving and
closing the loan. The lender also did not adequately review the appraisal report, which contained
several noncompliance issues. These actions were in direct violation of regulations in HUD
Handbook 4155.2, paragraph 4-1(e), which states that “lenders are responsible for properly
reviewing appraisals and determining if the appraised value used to determine the mortgage
amount is accurate and adequately supports the value conclusion.”

Our review of the lender’s appraisal showed that the lender’s appraiser overstated the value of
the subject property by failing to use due diligence in performing the appraisal. Specifically, the
appraiser

(1) Failed to properly measure and calculate the correct gross living area of the subject property;
(2) Selected comparable properties that were not truly comparable to the subject property and
    used comparable property appraisals that provided the value conclusion only in the upper
    value range;
(3) Disregarded a number of comparable properties in the neighborhood that were more similar
    to the subject property;
(4) Failed to make proper adjustments for dissimilarities (seller concessions, size, garage, age)
    between the subject and comparable properties; and
(5) Failed to properly disclose the condition of the subject property and make appropriate
    adjustments for foundation and termite damage, rotten beams, siding and decking, and a
    number of hazardous electrical conditions, requiring further inspection, testing, and repairs
    before FHA insurance and adjustments for the remaining economic life of the subject
    property.

The OIG appraiser concluded that “The mortgage underwriter should have reviewed the
(lender’s) appraisal and questioned several obvious omissions between the photographs and
adjustments made by the (lender’s) appraiser, requesting the appraiser to properly address these
issues prior to proceeding with the loan.”




                                                80
The OIG appraiser further concluded that if the appraisal had been performed properly, the
lender’s appraiser would have arrived at a substantially different value conclusion for the subject
property. The lender’s appraiser valued the subject property at $148,000 (sold for $144,000),
while an OIG appraiser’s potential comparable with equal condition and equal location was sold
for $75,000. Other potential comparables with equal location and superior condition were sold
for $82,500, $84,500, and $87,000. Finally, a comparable with a slightly superior location and
superior condition was sold for $118,000, well below the lender’s appraisal for the subject
property.


FHA case number:              493-8724586
Loan amount:                  $88,301
Settlement date:              August 16, 2008
Status:                       Claim paid - property conveyed to HUD and resold
Loss to HUD:                  $71,514
Requesting reimbursement:     Yes

We are seeking reimbursement of this loan because the property did not qualify for FHA
insurance and because the lender did not verify the property value before closing the loan.

Flipping Sales
The property did not qualify for FHA insurance because it was resold less than 90 days after
acquisition. According to HUD Handbook 4155.2, paragraph 4-7(e), “if a property is resold 90
days or fewer following the date of acquisition by the seller, the property is not eligible for a
mortgage insured by FHA.” The seller acquired the property on May 9, 2008, and sold it to the
borrower on July 10, 2008, 62 days after acquisition. There was no “effective date” on the
contract. The sales price had increased by 134 percent. The lender ignored the flipping
prohibition.

Failure To Review Appraisal Report Before Settlement
The loan settlement was August 16, 2008, while the appraisal report was dated August 20, 2008.
Therefore, the lender could not have reviewed the appraisal report before approving and closing
the loan. This action was in direct violation of regulations in HUD Handbook 4155.2, paragraph
4-1(e), which states that “lenders are responsible for properly reviewing appraisals and
determining if the appraised value used to determine the mortgage amount is accurate and
adequately supports the value conclusion.”




                                                81
FHA case number:                   493-8721328
Loan amount:                       $107,153
Settlement date:                   August 8, 2008
Status:                            Foreclosure deed recorded - claim paid for $4,771
Requesting indemnification:        Yes
Unpaid balance:                    $115,591 44

We are seeking indemnification for the remainder of the loan because the property did not
qualify for FHA insurance.

Flipping Sales
The property did not qualify for FHA insurance because it was resold less than 90 days after
acquisition. According to HUD Handbook 4155.2, paragraph 4-7(e), “if a property is resold 90
days or fewer following the date of acquisition by the seller, the property is not eligible for a
mortgage insured by FHA.” The seller acquired the property on April 16, 2008, and sold it to the
borrower on June 30, 2008, 75 days after acquisition. The purchase agreement had several dates:
June 30, 2008, the date option fee received; July 25, 2008, the effective date; and August 7,
2008. However, the appraisal fee payment was dated June 12, 2008, and the appraisal was
conducted on July 10, 2008. The credit report was dated June 12, 2008, and the loan application
was dated August 5, 2008, 1 day before closing. The sales price had increased by 67 percent.
The lender ignored the flipping prohibition.


FHA case number:                   493-8544391
Loan amount:                       $109,038
Settlement date:                   April 22, 2008
Status:                            Claim paid - property conveyed to HUD and resold
Loss to HUD:                       $54,726
Requesting reimbursement:          Yes

We are seeking reimbursement of this loan because the property did not qualify for FHA
insurance.

Flipping Sales
The property did not qualify for FHA insurance because it was resold less than 90 days after
acquisition. According to HUD Handbook 4155.2, paragraph 4-7(e), “if a property is resold 90
days or fewer following the date of acquisition by the seller, the property is not eligible for a
mortgage insured by FHA.” The seller acquired the property on January 4, 2008, and sold it to
the borrower on January 22, 2008, 18 days after acquisition. The sales price had increased by 71
percent. The lender ignored the flipping prohibition.



44
     The loan balance increased after the loan was modified in December 2008 and again in January 2010.



                                                       82
Appendix D

     SCHEDULE OF LOSSES UPON PROPERTY SALES

                             Claims
                              paid        Resale     HUD loss
             Case number   (rounded)     amount      (rounded)
             493-8447975    $ 100,814     $ 33,500      $ 73,880
             493-8567176       123,887      41,000        97,207
             493-8959876        94,691      30,501        76,749
             493-8547028        96,530      29,000        74,449
             493-8692510        75,576      32,210        49,868
             493-8693472       125,835      72,500        63,080
             491-9483914        88,382      22,500        73,941
             493-8532052       110,303      19,500        97,578
             493-8558066        91,438      15,500        83,159
             491-9141680        94,761      33,100        67,611
             493-8480034       148,401      61,000        97,812
             493-8724586        95,525      32,101        71,514
             493-8544391       112,836      69,501        54,726
             Totals         $1,358,979    $491,913      $981,574




                                    83
Appendix E

                SUMMARY OF UNDERWRITING DEFICIENCIES
                                                                       Appraisal     Inadequate   Inadequate   Inadequate
        Case       Mortgage      Unpaid      Indemnification   Flip   report after    appraisal     income        asset
       number      amount       balance 45      amount 46      sale     closing        review       support    verification
     493-8447975     $81,357    Conveyed                                   X                          X
     493-8567176      109,137   Conveyed                                   X                          X
     493-8959876       84,550   Conveyed                        X                                                   X
     493-8547028       80,612   Conveyed                        X                        X
     493-8692510       71,931   Conveyed                                   X             X
     493-8693472      119,058   Conveyed                        X          X             X
     491-9483914       80,416   Conveyed                                   X
     493-8753582       79,373     $ 75,234          $ 39,122    X          X
     493-8925706       94,261     105,052             54,627               X
     493-8532052       96,239   Conveyed                                                 X
     493-8558066       79,273   Conveyed                                                 X
     491-9141680       86,317   Conveyed                        X
     493-8480034      142,871   Conveyed                                   X             X            X
     493-8724586       88,301   Conveyed                        X          X
     493-8721328      107,153     115,591             60,107    X
     493-8544391      109,038   Conveyed                        X
     Totals        $1,509,887    $295,877          $153,856     8          9             6            3             1




45
       Conveyed properties were foreclosed upon and resold. Losses to HUD are in appendix D.
46
       52 percent of the unpaid balance



                                                               84
Appendix F:

 SCHEDULE OF REFERRAL LOANS - RESPA VIOLATIONS


                 Case       Mortgage                     Case       Mortgage
     Count      number      amount            Count     number      amount
      1       493-8447975      $81,357         16     493-8544391       109,038
      2       493-8699656      123,523         17     493-8796775        74,778
      3       493-8427719       79,273         18     493-8917071        85,536
      4       493-8959876       84,550         19     493-8971746       135,745
      5       493-8724586       88,301         20     493-8972595       112,818
      6       493-8693472      119,058         21     493-8977840        83,361
      7       493-8753582       79,373         22     493-9020135       127,153
      8       493-8532052       96,239         23     493-8542224       101,398
      9       493-8558066       79,273         24     493-8678525        93,263
      10      493-8769771      105,687         25     493-8949284        65,786
      11      493-8707247      117,570         26     493-9022845       135,009
      12      493-8925706       94,261         27     493-8967163        92,592
      13      493-8480034      142,871         28     493-8809334        78,573
      14      493-8418819       69,451         29     493-8608705        64,490
      15      493-8845801      124,854         30     493-8915511        89,331
                                               31     493-8916111        74,594
                                                      Total          $3,009,106




                                         85
Appendix G:

     SAMPLE LOANS THAT WERE NOT REVIEWED BY OIG 47

                                             Original                                Unpaid
                                                                                48
           Count       Case number           mortgage          Loan status           balance         Claims
               1         493-9090011                $107,025   Claim                                  $127,559
               2         493-9094319                 151,304   Claim                                   161,403
               3         493-9130235                 110,953   Bankruptcy                $111,552          750
               4         493-8917071                  85,536   Claim                                    92,211
               5         493-8971746                 135,745   Delinquent                 135,527       14,491
               6         493-8990961                 126,663   Claim                                   137,689
               7         493-8483394                  39,099   Reinstated                  39,006
               8         493-8915511                  89,331   Delinquent                  94,916        1,750
               9         493-8972595                 112,818   Delinquent                 130,116       21,587
              10         493-8608705                  64,490   Reinstated                  65,515        1,000
              11         493-8743766                 106,422   Claim                       36,798       48,565
              12         493-8924312                  75,905   Reinstated                  74,191
              13         493-8977840                  83,361   Forebearance                69,182
              14         493-8992927                 139,690   Claim                                   155,671
              15         493-9002755                 116,353   Delinquent                 114,578
              16         493-9020135                 127,153   Ineligible                 135,878        1,700
              17         493-8750297                  79,070   Claim                                    88,934
              18         493-8542224                 101,398   Claim                                   122,028
              19         493-8678525                  93,263   Claim                                   100,693
              20         493-8941058                  78,341   Claim                                    95,692
              21         493-8949284                  65,786   Bankruptcy                  63,485          750
              22         493-9050120                 115,862   Claim                                   129,912
              23         492-8337332                  83,264   Claim                                    85,473
              24         493-8973767                  95,243   Promise to pay              83,894          750
              25         493-8986909                 106,184   Delinquent                 102,839
              26         493-8992904                  68,732   Claim                       39,871       41,354
              27         493-9022845                 135,009   Repayment                  125,698
              28         493-8709152                  93,600   FHA HAMP*                  101,505        1,500
              29         493-8908579                  97,646   Claim                                   104,088
              30         493-8592611                 111,122   Delinquent                 104,325
              31         493-8727229                 147,682   Reinstated                 141,606
              32         493-8926134                 117,358   Delinquent                 131,930          750
              33         493-8952514                  77,470   Delinquent                  71,992
              34         493-8965661                  61,927   Delinquent                  57,948
              35         493-8967163                  92,592   Reinstated                  91,840
              36         493-8906339                 115,232   Reinstated                 107,644
              37         493-8744574                  87,241   Reinstated **               94,214          750
              38         493-8626159                  46,842   Reinstated                  43,791
              39         493-8809334                  78,573   Delinquent                  59,776
              40         493-8929431                  81,557   Reinstated                  75,730
            Totals                              $3,902,842                            $2,505,347    $1,537,050
         * Home Affordable Modification Program

47
     Loan status, unpaid balance, and claims information current as of January 14 through January 16, 2014
48
     Bankruptcy = bankruptcy plan confirmed: Reinstated = reinstated by mortgagor: Reinstated ** = reinstated
     after loss mitigation: Forebearance = type II special forebearance: Ineligible = ineligible for loss mitigation



                                                          86