oversight

Southwest Stage Funding, LLC, dba Cascade Financial Services, Took Corrective Action on Loans That Did Not Meet All HUD and FHA Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-07-23.

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

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




                                                     July 23, 2014
                                                                                             MEMORANDUM NO:
                                                                                                  2014-FW-1803

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

               //signed//
FROM:          Gerald Kirkland
               Regional Inspector General for Audit, 6AGA

SUBJECT:       Southwest Stage Funding, LLC, dba Cascade Financial Services, Took Corrective
               Action on Loans That Did Not Meet All HUD and FHA Requirements


                                                 INTRODUCTION

We reviewed Southwest Stage Funding, LLC, dba Cascade Financial Services, based on our goal
to improve the integrity of Federal Housing Administration (FHA) single-family insurance
programs. We selected Southwest Stage because it originated 1,841 loans totaling more than
$244 million during calendar years 2012 and 2013. Further, it had received more loan
endorsements on manufactured housing loans than any other lender in Texas since
January 1, 2009. Our objective was to determine whether the lender complied with U.S.
Department of Housing and Urban Development (HUD) and FHA requirements when
originating single-family FHA loans.

                                      METHODOLOGY AND SCOPE

We performed the audit work at our offices in Fort Worth and San Antonio, TX between
February and April 2014. In an effort to determine the integrity of loans made in a defined area,
we selected all 18 loans originated during calendar years 2012 and 2013 by Southwest Stage in
two zip codes in Bexar County. The mortgages for the 18 loans totaled $2,052,152.

   To accomplish our objective, we

   •   Reviewed applicable HUD regulations, requirements, and mortgagee letters;




                                                Office of Audit (Region 6)
                                 819 Taylor Street, Suite 13A09, Fort Worth, TX 76102
                                      Phone (817) 978-9309, Fax (817) 978-9316
                           Visit the Office of Inspector General Website at www.hudoig.gov
    •   Reviewed reports and information on HUD’s Neighborhood Watch system; 1
    •   Obtained loan data from HUD’s Single Family Data Warehouse system to determine the
        universe of loans selected; 2
    •   Reviewed the lender’s quality control plan and internal policies and procedures;
    •   Reviewed quality control reviews on loans that were included in our review;
    •   Obtained electronic loan files for all 18 loans that were originated in the two zip codes
        selected;
    •   Reviewed eight loans with mortgages totaling $961,361; and
    •   Interviewed two appraisers.

After completing eight file reviews, we only identified a total of three material deficiencies and
three technical deficiencies in four loans. As a result, we determined that additional review was
not warranted.

We did not evaluate the reliability of HUD’s Single Family Data Warehouse or Neighborhood
Watch systems because we were not auditing the systems and used them only to select an auditee
and to determine the current loan status. During the file review, we tested documents, assets,
income, credit history, appraisals, borrower eligibility, etc., against the automated underwriter
system approval and HUD requirements.

                                                 BACKGROUND

FHA offers various mortgage insurance programs, which protect approved lenders against losses
on mortgage loans. FHA-insured mortgages may be used to purchase homes, improve homes, or
refinance existing mortgages. Under FHA’s Direct Endorsement program, approved lenders
may underwrite and close mortgage loans without FHA’s prior review or approval. All of
FHA’s single-family programs are authorized by Title II of the National Housing Act.

Southwest Stage Funding, LLC, dba Cascade Financial Services, was approved to originate FHA
mortgages on April 23, 2003, as a nonsupervised direct endorsement lender. It has two
FHA-approved active branch offices. According to its Web site, it was 100 percent dedicated to
providing manufactured housing financing options, and it had tailored specific products to the
needs of manufactured housing. Also, according to its Web site, Southwest Stage was the
leading lender in manufactured housing government lending.

                                            RESULTS OF REVIEW

Southwest Stage originated and approved four loans that had material underwriting deficiencies
or had technical deficiencies with appraisals. These deficiencies occurred because Southwest
Stage did not exercise due diligence when reviewing documents and appraisals. Southwest Stage
took corrective action to resolve the deficiencies. Specifically, it corrected the deficiencies

1
    Neighborhood Watch is Web-based software that displays loan performance data for FHA-insured single-family
    loans. The system is designed to highlight exceptions so that potential problems are readily identifiable.
2
    The Single Family Data Warehouse is a large collection of database tables organized and dedicated to support
    analysis, verification, and publication of FHA single-family housing data.




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identified in the draft report, and stated that it had addressed the deficiencies with all
underwriters and property compliance personnel. We reviewed the information supplied by the
lender along with other information and revised our conclusions. 3

                                          RECOMMENDATIONS

The lender corrected the deficiencies identified in the draft report, and stated that it addressed the
deficiencies with all underwriters and property compliance personnel. Therefore, no further
recommendations are warranted.




3
    See OIG Evaluation of Auditee Comments on page 7.




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Appendix A


        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                          4
Comment 3




            5
Comment 4




            OIG Evaluation of Auditee Comments



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                         OIG Evaluation of Auditee Comments

Comment 1   We recognize the lender for its efforts to resolve this matter. While the lender
            should have resolved this “deficiency” before approving the loan, we removed the
            issue because the lender was able to provide sufficient documentation that it was
            not a deficiency, but rather a mistake.

Comment 2   We did not include the exhibits, but they are available for review upon request.

Comment 3   The lender stated the only remaining debris in the crawlspace was extra skirting
            material. Based upon the lender’s response and actions, and our review of
            applicable criteria, we removed the issue from the audit report.

Comment 4   HUD Handbook 4150.2, CHG-1, appendix D-2 required the appraiser to explain
            comparable properties with adjustments in both square feet and room count.




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