oversight

The Virginia Housing Development Authority, Richmond, VA, Did Not Always Accurately Report Its Servicing Actions in HUD's Single Family Default Monitoring System

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-09-30.

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

         Virginia Housing Development
           Authority, Richmond, VA
   HUD’s Loss Mitigation Program for Loans Insured by
          the Federal Housing Administration




Office of Audit, Region 3     Audit Report Number: 2015-PH-1007
Philadelphia, PA                              September 30, 2015
To:            Kathleen A. Zadareky, Deputy Assistant Secretary for Single Family Housing,
               HU
               //signed//
From:          David E. Kasperowicz, Regional Inspector General for Audit, Philadelphia
               Region, 3AGA
Subject:       The Virginia Housing Development Authority, Richmond, VA, Did Not Always
               Accurately Report Its Servicing Actions in HUD’s Single Family Default
               Monitoring System




Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final report of our review of the Virginia Housing Development Authority’s
implementation of HUD’s Loss Mitigation program for Federal Housing Administration-insured
loans.
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 215-
430-6730.
                       Audit Report Number: 2015-PH-1007
                       Date: September 30, 2015

                       The Virginia Housing Development Authority, Richmond, VA, Did Not
                       Always Accurately Report Its Servicing Actions in HUD’s Single Family
                       Default Monitoring System



Highlights

What We Audited and Why
We audited the Virginia Housing Development Authority’s implementation of the U.S.
Department of Housing and Urban Development’s (HUD) Loss Mitigation program for loans
insured by the Federal Housing Administration (FHA). We conducted the audit because the
Authority had the largest active portfolio and the largest number of delinquent loans for servicers
located in Virginia as of October 31, 2014. Our objectives were to determine whether the
Authority (1) properly implemented HUD’s Loss Mitigation program, (2) properly initiated
foreclosures without using loss mitigation, (3) complied with HUD reporting requirements, and (4)
developed and implemented its quality control program in accordance with HUD requirements.

What We Found
The Authority did not always accurately report its servicing actions in HUD’s Single Family
Default Monitoring system. 1 Of the 26 loans reviewed, 10 contained an improper status code.
This condition occurred because the Authority’s automated system was incorrectly programed,
which triggered the inaccurate status code. The Authority also lacked a control to ensure that
accurate status codes were reported in HUD’s system. As a result, HUD was unable to assess the
effectiveness of the Authority’s servicing activities and the potential risk to the FHA insurance
fund. The Authority initiated corrective action during the audit to address this problem. It replaced
its automated system and implemented an additional control.
Additionally, the Authority properly implemented HUD’s Loss Mitigation program and properly
initiated foreclosures without using loss mitigation for the 26 loans reviewed, and it generally
developed and implemented a quality control program in accordance with HUD requirements.

What We Recommend
We recommend that HUD require the Authority to provide verification that it has taken
appropriate action to correct its erroneous reporting of the “loss mitigation option failure” status
code in HUD’s Single Family Default Monitoring system.




1
 HUD’s Single Family Default Monitoring system tracks data on delinquent loans until a delinquency is cured or a
claim is submitted.
Table of Contents
Background and Objectives ....................................................................................3

Results of Audit ........................................................................................................5
         Finding: The Authority Did Not Always Accurately Report Its Servicing Actions in
         HUD’s Single Family Default Monitoring System ......................................................... 5

Scope and Methodology ...........................................................................................8

Internal Controls ....................................................................................................10

Appendixes ..............................................................................................................11
         A. Auditee Comments and OIG’s Evaluation ............................................................. 11

         B. File Review Details .................................................................................................... 13




                                                                 2
Background and Objectives
The Virginia Housing Development Authority is an approved Federal Housing Administration
(FHA) loan servicer located in Richmond, VA. It services more than 22,000 FHA-insured loans.

The U.S. Department of Housing and Urban Development (HUD) established the Loss Mitigation
program in 1996 to ensure that distressed FHA-insured borrowers would have opportunities to
retain their homes and reduce losses to FHA’s insurance fund. Loss mitigation is considered critical
to FHA because it fulfills the goal of helping borrowers in default retain home ownership while
reducing, or mitigating, the economic impact on the insurance fund.

The Loss Mitigation program gives lenders responsibility for managing loan defaults and provides
financial incentives to recognize them for their efforts. Lenders have a responsibility to compare the
loss mitigation options and take appropriate actions that can generate the smallest financial loss to
HUD. The program consists of reinstatement options to allow borrowers to keep their homes and
disposition options that assist them in the disposing of their homes. The lender must evaluate the
borrower for both informal and formal forbearance plans2 before considering one of FHA’s loss
mitigation home retention options. These forbearance plans are the only options available for
delinquent borrowers without verifiable losses of income or increases in living expenses. Mortgage
forbearance is an agreement made between a mortgage lender and delinquent borrower, in which
the lender agrees to not foreclose on a mortgage and the borrower agrees to a mortgage plan that
will, over a certain period, bring the borrower current on his or her payments. A forbearance
agreement, however, is not a long-term solution for delinquent borrowers. It is designed for
borrowers who have temporary financial problems caused by unforeseen problems, such as
temporary unemployment or health problems.

Once forbearance plans are considered, the loss mitigation home retention options must be
considered in the following order: (1) special forbearances, (2) loan modifications, and (3) FHA’s
Home Affordable Modification Program (HAMP). A special forbearance is a written agreement
between a lender and borrower to reduce or suspend mortgage payments. This option is available
only to borrowers who are unemployed. A loan modification is a permanent change to the terms of
a borrower’s loan. FHA-HAMP typically involves the combination of a loan modification and a
partial claim, which may include an amount needed to cover arrears in loan payments and an
additional amount for principal deferment. However, it may now involve the use of one or both of
the loss mitigation options.

The disposition options are preforeclosure and deed in lieu of foreclosure. The preforeclosure
option allows the defaulted borrower to sell his or her house and use the sales proceeds to satisfy the



2
 Informal forbearance plans are oral agreements relating to a period of 3 months or less. Formal forbearance plans
are written agreements relating to a period of greater than 3 months and less than 6 months.


                                                         3
mortgage debt, although the proceeds may be less than the amount owed. A deed in lieu of
foreclosure allows a borrower to turn his or her home over to HUD in exchange for a release from
all mortgage obligations.

Our objectives were to determine whether the Authority (1) properly implemented HUD’s Loss
Mitigation program, (2) properly initiated foreclosures without using loss mitigation, (3) complied
with HUD reporting requirements, and (4) developed and implemented its quality control program
in accordance with HUD requirements.




                                                 4
Results of Audit

Finding: The Authority Did Not Always Accurately Report Its
Servicing Actions in HUD’s Single Family Default Monitoring
System
The Authority did not always accurately report status codes when reporting its servicing actions
to HUD for 10 of the 26 loans reviewed. This condition occurred because the Authority’s
automated system was incorrectly programed, which triggered an inaccurate status code. The
Authority also lacked a control to ensure that accurate status codes were reported in HUD’s
system. As a result, HUD was unable to assess the effectiveness of the Authority’s servicing
activities and the potential risk to the FHA insurance fund. The Authority initiated corrective
action during the audit to address this problem. It replaced its automated system and implemented
an additional control. Additionally, the Authority properly implemented HUD’s Loss Mitigation
program and properly initiated foreclosures without using loss mitigation for the 26 loans reviewed,
and it generally developed and implemented a quality control program in accordance with HUD
requirements.

The Authority Reported Inaccurate Status Codes in HUD’s Single Family Default
Monitoring System
The Authority used inaccurate status codes when reporting its servicing actions in HUD’s Single
Family Default Monitoring system for 10 of the 26 loans reviewed. HUD required the Authority
to promptly and accurately report an up-to-date account of the status and trends of FHA-insured
mortgages. 3 For the 10 loans, the Authority used the “loss mitigation option failure” status code
in HUD’s system. The Authority should have used this status code when a borrower had failed
to perform under the terms of a loss mitigation tool. 4 However, the files did not contain evidence
that the Authority used a loss mitigation tool and that the borrowers failed to perform under the
terms of a loss mitigation tool. For the 10 loans reviewed, the files contained consolidated notes
logs 5 to show that the Authority should have coded 9 of the loans as “delinquent” and one of the
loans as the “borrower’s financial information was under review.” This condition occurred
because the Authority’s automated system was incorrectly programed, which triggered the
inaccurate status code. Specifically, its automated system was programed to report a broken
“promise to pay” in the same manner as a broken “repayment” plan. The Authority also lacked a
control to ensure that accurate status codes were reported in HUD’s system. As a result, HUD
was unable to assess the effectiveness of the Authority’s servicing activities and the potential risk
to the FHA insurance fund.




3
  HUD Handbook 4330.1, REV-5, paragraph 7-8(A)
4
  Mortgagee Letter 2013-15
5
  The consolidated notes log is a record of the Authority’s servicing actions on a loan.


                                                           5
The Authority initiated action to correct the flaw in June 2015 by replacing its automated system.
In July 2015, it also created and implemented an additional control to identify erroneous “loss
mitigation option failure” status codes that it reported in HUD’s system. The control tasked the
Authority’s internal audit division to review a report of all loans with the status code “loss
mitigation option failure” on a monthly basis and select a sample of loans to verify that the status
codes were accurate. The internal audit division implemented this control for the first time in
September 2015.

The Authority Properly Implemented the Program
The Authority properly implemented HUD’s Loss Mitigation program for 12 FHA-insured loans
reviewed. For each of the 12 loans, the Authority requested financial information from the
borrowers to evaluate all loss mitigation options before three full monthly installments were due
and unpaid as required. 6 It properly determined whether the borrowers were either eligible or
ineligible for the program in accordance with applicable requirements. Appendix B provides
details on our file reviews.

The Authority Properly Initiated Foreclosures Without Using Loss Mitigation
The Authority properly initiated foreclosures without using loss migitation for 14 FHA-insured
loans reviewed. For each of the 14 loans, it made an effort to consider all loss mitigation options
before initiating foreclosures as required. 7 The Authority repeatedly made phone calls or sent
letters to the borrowers to inform them of loss mitigation options before three full monthly
installements were due and unpaid as required. It properly initiated foreclosures without using
loss mitigation because the borrowers (1) abandoned or vacated their property, (2) failed to
respond to the Authority’s repeated efforts to inform them of loss mitigation, (3) passed away
before loss mitigation could be completed and there were no co-borrowers on the mortgage, (4)
decided to walk away from his or her home because they could no longer afford the property, (5)
had income that created a monthly deficit, (6) defaulted on the mortgage, or (7) failed to satisfy
excessive judgments. Appendix B provides details on our file reviews.

The Authority Developed and Implemented a Quality Control Plan as Required
The Authority developed and implemented a quality control plan in accordance with HUD
requirements. 8 Its quality control plan contained the required elements, such as determining
whether (1) all appropriate loss mitigation tools had been considered and documented and that
borrowers were provided every reasonable opportunity to remedy a delinquency or default before
the decision to foreclose, (2) accurate documentation of collection efforts was maintained, (3)
effective collection activities were pursed in a timely fashion; and (4) borrower information was
reported to credit bureaus. Based on the quality control reports reviewed, the Authority
generally followed its plan when conducting quality control reviews.




6
  Mortgagee Letters 2000-05, 2012-22, and 2013-32
7
  Regulations at 24 CFR (Code of Federal Regulations) 203.606(a) and Mortgagee Letter 2000-05
8
  HUD Handbook 4060.1 REV-2, chapter 7


                                                      6
Conclusion
The Authority did not always accurately report its servicing actions to HUD as required. This
condition occurred because the Authority’s automated system was incorrectly programed, which
triggered an inaccurate status code. The Authority also lacked a control to ensure that accurate
status codes were reported in HUD’s system. As a result, HUD was unable to assess the
effectiveness of the Authority’s servicing activities and the potential risk to the FHA insurance
fund. The Authority initiated corrective action during the audit to address this problem.
Recommendations
We recommend that the Deputy Assistant Secretary for Single Family Housing require the
Authority to

       1A.     Provide verification that it has taken appropriate action to correct its erroneous
               reporting of the “loss mitigation option failure” status code in HUD’s Single
               Family Default Monitoring system.




                                                 7
Scope and Methodology
We conducted the audit from February through September 2015 at the Authority’s servicing
office located at 4224 Cox Road, Glen Allen, VA, and our office located in Richmond, VA. The
audit covered the period January 2008 through January 2015.

To accomplish our objectives, we reviewed

    •   Relevant background information;
    •   Applicable regulations, HUD handbooks, and mortgagee letters;
    •   Applicable policies and procedures related to the Authority’s servicing, collection, and
        quality control programs;
    •   The Authority’s organizational charts;
    •   The Authority’s servicing, collection, and quality control files; and
    •   HUD’s report of its monitoring of the Authority’s procedures for servicing FHA-insured
        loans, performed the week of January 9, 2012.

We interviewed responsible Authority employees and HUD officials located in Washington, DC,
and Philadelphia, PA.

To achieve our audit objectives, we relied in part on computer-processed data in HUD’s
Neighborhood Watch 9 and Single Family Data Warehouse 10 systems, which contain data from
HUD’s Single Family Default Monitoring system. Although we did not perform a detailed
assessment of the reliability of the data, we performed a minimal level of testing and found the
data to be adequate for our purposes.

As of December 2014, the Authority serviced more than 22,000 FHA-insured loans. Of those
loans, 3,490 were listed as delinquent in Neighborhood Watch. For the loss mitigation actions
used most by the Authority, we sorted the data in descending order by unpaid principal balance
and selected loans with the largest unpaid principal balance. We selected and reviewed a sample
of 12 loans with a total unpaid principal balance of about $3.7 million, based on loss mitigation
actions coded in Neighborhood Watch, to determine whether the Authority properly
implemented the program. The 12 loans had the following codes in Neighborhood Watch:

    •   4 were coded as “loss mitigation option failure,”



9
  Neighborhood Watch is a secure Web-based application designed to provide comprehensive data querying,
reporting, and analysis capabilities for tracking the performance of loans originated, underwritten, and serviced by
FHA-approved lending institutions.
10
   HUD’s Single Family Data Warehouse system provides case-level data on single-family properties and associated
loans, claims, and defaults.


                                                         8
   •   3 were coded as “FHA-HAMP,”
   •   2 were coded as “borrower’s financial information was under review,”
   •   2 were coded as “forbearance,” and
   •   1 was coded as “ineligible for loss mitigation.”

As of February 2015, data in HUD’s Single Family Data Warehouse showed 1,309 loans that
went into foreclosure with no loss mitigation for the period January 2008 to January 2015. From
the universe of 1,309 loans, we initially identified a stratified, systematic, statistical sample of 95
loans. The universe was divided into six strata according to claim amount to control for
variance. We used a systematic sample within each stratum to control for differences in the
payment problems associated with each loan. After strata boundaries were determined, the data
were sorted and sampled using a computer program written in SAS, using the survey select
procedure with a random-number seed value of 7. We reviewed 14 of the 95 loans, with total
claims paid of more than $1.9 million, to determine whether the Authority considered all loss
mitigation options before initiating foreclosures.

We compared data reported in HUD’s Single Family Default Monitoring system to supporting
documents for each of the 26 FHA-insured loans selected for review to determine whether the
Authority complied with HUD reporting requirements. We also reviewed reports for the quality
control reviews that the Authority performed on its FHA-insured loans between November 2012
and October 2014 and the Authority’s quality control plan to determine whether the Authority
complied with HUD requirements.

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




                                                   9
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:

•   Validity and reliability of data – Policies and procedures that management has implemented
    to reasonably ensure that valid and reliable data are obtained, maintained, and fairly
    disclosed in reports.
•   Compliance with laws and regulations – Policies and procedures that management has
    implemented to reasonably ensure that resource use is consistent with laws and regulations.
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, the
reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.
Significant Deficiency
Based on our review, we believe that the following item is a significant deficiency:
    •   The Authority lacked a control to ensure that servicing actions were accurately reported
        in HUD’s Single Family Default Monitoring system.




                                                  10
Appendixes

Appendix A
             Auditee Comments and OIG’s Evaluation



Ref to OIG   Auditee Comments
Evaluation




Comment 1




                                11
                          OIG Evaluation of Auditee Comments


Comment 1   The Authority noted that it replaced the system causing the incorrect codes, added
            an additional monitoring control to its existing controls, and provided evidence to
            support these actions. After the exit conference, the Authority provided
            additional documentation to show that it replaced the system causing the incorrect
            codes and added an additional monitoring control to its existing controls. The
            Authority tasked its internal audit division to review a sample of loans with the
            “loss mitigation option failure” status code on a monthly basis to verify that the
            status codes were accurate. It conducted its initial test in September 2015, and the
            results of the initial test showed that not all of the “loss mitigation option failure”
            codes were accurate. Therefore, as part of the audit resolution process, the
            Authority needs to provide HUD verification that it has taken appropriate action
            to correct its erroneous reporting of the “loss mitigation option failure” status
            code in HUD’s system.




                                              12
Appendix B


                                                 File Review Details


The following paragraphs provide details on our review of the 12 sample delinquent loans with a
total unpaid principal balance of about $3.7 million.

       •   For the four loss mitigation option failure loans, the files contained consolidated notes
           logs 11 to show that the Authority requested financial information from the borrower to
           evaluate all loss mitigation options within the required timeframe. The consolidated
           notes logs for the four files showed that the Authority contacted the borrowers and
           accepted their promises to make a one-time payment to bring the loan current. However,
           the borrowers did not make the payments at that time.

       •   For the three FHA-HAMP loans, the files contained consolidated notes logs to show that
           the Authority requested financial information from the borrower to evaluate all loss
           mitigation options within the required timeframe. In addition, the files contained a
           completed FHA loss mitigation retention priority order (waterfall) form and the
           borrower’s financial information to show that the Authority selected the appropriate
           reinstatement option, a combination of a loan modification, and a partial claim under
           FHA-HAMP and it followed the requirements for implementing that option.

       •   For the two loans in which the borrower’s financial information was under review, the
           files contained consolidated notes logs to show that the Authority requested financial
           information from the borrowers to evaluate all loss mitigation options within the required
           timeframes. The files contained evidence that the Authority reviewed documentation,
           such as pay stubs, monthly expenses, bank statements, hardship letters, and tax returns, to
           evaluate the borrowers’ financial condition.

       •   For the two loans in forbearance, the files contained consolidated notes logs to show that
           the Authority requested financial information from the borrowers to evaluate all loss
           mitigation options within the required timeframes. The files contained evidence that the
           Authority reviewed unemployment insurance documents and letters from their employers
           to determine that the borrowers experienced a loss of income due to unemployment. The
           Authority executed written agreements with the borrowers for a special forbearance to
           suspend mortgage payments as required.




11
     The consolidated notes log is a record of the Authority’s servicing actions on a loan.


                                                            13
       •   For the ineligible for loss mitigation loan, the file contained evidence that the Authority
           reviewed documentation, such as a credit report, pay stubs, monthly expenses, bank
           statements, a hardship letter, and tax returns, to determine that the borrower had a
           monthly deficit of more than $1,600.
The following paragraphs provide details on our review of the 14 sample loans that went into
foreclosure with no loss mitigation with total claims paid of more than $1.9 million.

       •   For seven loans, the consolidated notes logs showed that the Authority initiated
           foreclosures because the borrowers did not respond to the Authority’s repeated efforts to
           inform them of loss mitigation.

       •   For two loans, the consolidated notes logs, foreclosure recommendations, 12 and
           inspection reports showed that the Authority initiated foreclosures because the properties
           were either abandoned or vacant for more than 60 days.

       •   For one loan, the consolidated notes log and a foreclosure recommendation showed that
           the Authority initiated foreclosure because the borrower passed away before loss
           mitigation could be completed and there were no coborrowers on the mortgage.

       •   For one loan, the consolidated notes log and a written letter from the borrower showed
           that the Authority initiated foreclosure because the borrower decided to walk away from
           the home because the borrower could no longer afford the property.

       •   For one loan, the consolidated notes log and a foreclosure recommendation showed that
           the Authority initiated the foreclosure because the borrower’s income created a monthly
           deficit, which made the borrower ineligible for loss mitigation. Specifically, the file
           contained evidence that the Authority reviewed pay stubs, monthly expenses, bank
           statements, and a credit report to determine that the borrower had a monthly deficit of
           more than $1,700.

       •   For one loan, the consolidated notes log and a foreclosure recommendation showed that
           the Authority initiated foreclosure because the borrower defaulted on the mortgage. The
           file contained evidence that the Authority offered the borrower a 3-month forbearance
           plan. However, during the forbearance period, the borrower made only one payment and
           filed for bankruptcy. During the bankruptcy, the borrower continued to default on the
           mortgage, and the Authority initiated foreclosure once the bankruptcy stay was lifted.

       •   For one loan, the consolidated notes log showed that the Authority initiated foreclosure
           because there were excessive judgments against the borrower, which the borrower was
           unable to satisfy.



12
     A foreclosure recommendation contains the Authority’s recommendation to initiate foreclosure on a loan.


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