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. 2 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. 3 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 6 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. 7
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)