oversight

Sun West Mortgage Company, Cerritos, CA, Did Not Always Meet HUD-FHA Loan Underwriting and Quality Control Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-08-29.

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

          Sun West Mortgage Company,
                 Cerritos, CA
        Federal Housing Administration Single-Family
            Housing Mortgage Insurance Program




Office of Audit, Region 9       Audit Report Number: 2016-LA-1010
Los Angeles, CA                                    August 29, 2016
To:            Robert Mulderig
               Acting Deputy Assistant Secretary for Single Family Housing, HU
               //SIGNED//
From:          Tanya E. Schulze, Regional Inspector General for Audit, 9DGA
Subject:       Sun West Mortgage Company, Cerritos, CA, Did Not Always Meet HUD-FHA
               Loan Underwriting and Quality Control Requirements


Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of Sun West Mortgage Company’s underwriting of
Federal Housing Administration (FHA)-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
213-534-2471.
                    Audit Report Number: 2016-LA-1010
                    Date: August 29, 2016

                    Sun West Mortgage Company, Cerritos, CA, Did Not Always Meet HUD-
                    FHA Loan Underwriting and Quality Control Requirements




Highlights

What We Audited and Why
We reviewed Sun West Mortgage Company’s loan underwriting activities, including quality
controls, based on a citizen complaint alleging that the mortgage company was deficient in
underwriting its loans. The complaint further alleged that the mortgage company used
unauthorized staff in another country and shared user identification numbers to “pre-underwrite”
Federal Housing Administration (FHA)-insured loans. Our objective was to determine whether
Sun West followed U.S. Department of Housing and Urban Development (HUD) requirements
related to underwriting, responsibilities for its employees, and control over and access to
Computerized Homes Underwriting Reporting System identification numbers.

What We Found
Sun West did not always meet HUD underwriting requirements when underwriting its FHA-
insured loans. Of 16 loans reviewed, 2 had significant deficiencies. HUD paid a claim of
$144,891 for one loan, and the borrower for the second loan was in bankruptcy. Therefore, the
HUD-FHA insurance fund was at an increased risk of an additional loss of $97,937. Sun West
also did not always obtain all documentation required for review of loans that defaulted early,
and did not follow up on unanswered reverifications for its routine quality control reviews. In
addition, it did not include all items required by HUD in its branch office reviews.
We could not substantiate the complaint allegation that Sun West used unauthorized employees
in another county to underwrite its FHA-insured loans. Although Sun West used an affiliated
company in another country for services, the services provided were for quality control, not
mortgage underwriting. The lender also maintained reasonable policies and procedures for its
employees’ user identification numbers and passwords.

What We Recommend
We recommend that HUD require Sun West to reimburse the FHA insurance fund for the
$144,891, the claim amount paid by HUD for one loan. The lender should also indemnify HUD
against potential losses of $97,937 for one FHA-insured loan that did not comply with
underwriting requirements. In addition, the lender should improve its policies and procedures to
ensure that responsible employees are aware of HUD-FHA underwriting requirements and
policies related to HUD’s quality control program requirements.
Table of Contents
Background and Objective......................................................................................3
         Results of Audit ................................................................................................................. 5
         Finding 1: Sun West Mortgage Company Did Not Always Meet HUD-FHA
         Underwriting Requirements ............................................................................................ 5
         Finding 2: Sun West Mortgage Company Did Not Always Comply With HUD-FHA
         Quality Control Requirements ........................................................................................ 8

Scope and Methodology .........................................................................................11

Internal Controls ....................................................................................................13

Appendixes ..............................................................................................................14
         A. Schedule of Questioned Costs and Funds To Be Put to Better Use ...................... 14
         B. Auditee Comments and OIG’s Evaluation ............................................................. 15
         C. Criteria ....................................................................................................................... 36
         D. Schedule of Actual and Estimated Losses for Loans With Significant Deficiencies
            ..................................................................................................................................... 44
         E. Narrative Loan Summaries for Significant Underwriting Deficiencies............... 45




                                                                       2
Background and Objective
The Federal Housing Administration (FHA) was created by Congress in 1934 and provides
mortgage insurance on loans made by FHA-approved lenders throughout the United States and
its territories. FHA is the largest insurer of mortgages in the world, having insured more than 44
million properties since its inception. FHA’s Mutual Mortgage Insurance Fund provides lenders
with protection against losses as a result of homeowners defaulting on their mortgage loans.
Lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner’s
default. Loans must meet certain requirements established by FHA to qualify for insurance.
FHA generally operates from self-generated income.
In December 2000, the U.S. Department of Housing and Urban Development (HUD)
implemented the FHA TOTAL (Technology Open to All Lenders) Scorecard to automate the
underwriting of its loans. The Scorecard assesses the credit worthiness of FHA borrowers by
evaluating certain mortgage application and borrower credit information that has been
statistically proven to accurately predict the likelihood of borrower default. TOTAL Scorecard
relies heavily on borrower credit information. Therefore, these loans are not required to comply
with traditional HUD underwriting requirements, including documented explanations for
collection accounts and payment-to-income ratios that exceed HUD requirements. Loans
approved using the Scorecard also do not require compensating factors when borrowers’ ratios
exceed HUD’s benchmark guidelines of 31 percent and 43 percent of gross effective income. 1
HUD now requires all transactions to be scored using the Scorecard except for transactions
involving borrowers without credit scores and loans that are streamline refinances. However, if a
loan receives a “refer” decision through the TOTAL Scorecard, the lender must manually
underwrite the loan using standard HUD underwriting requirements.
According to HUD’s Neighborhood Watch Early Warning System, 2 Sun West Mortgage
Company was approved to underwrite mortgages on October 30, 1980. The lender has 27 active
and 79 terminated branches. It serves consumers nationwide, including locations in Arizona,
California, Hawaii, and Nevada. Sun West’s main office is located at 18000 Studebaker Road,
Cerritos, CA.




1
  HUD considers the relationship between the borrower’s mortgage payment and income to be acceptable when the
total mortgage payment does not exceed 31 percent of gross effective income. HUD considers the relationship
between the borrower’s total obligations to income to be acceptable when the total mortgage payment and all
recurring obligations do not exceed 43 percent of the borrower’s gross effective income.
2
  Neighborhood Watch is intended to aid HUD/FHA staff in monitoring lenders and HUD/FHA programs, and to aid
lenders and the public in self-policing the industry. The system is designed to highlight exceptions, so that potential
problems are readily identifiable. In addition, the system can be used to identify loan programs, geographic areas
and lenders that are performing well.



                                                           3
On November 17, 2015, HUD’s Office of Inspector General (OIG) received a complaint alleging
that Sun West deficiently underwrote its loans and allowed a company based in another country
to underwrite its FHA-insured mortgages. In addition, the complaint alleged that employees at
Sun West shared Computerized Homes Underwriting Reporting System (CHUMS) user
identification numbers with employees in another country to facilitate this practice.
Our objective was to determine whether Sun West followed HUD requirements related to
underwriting, responsibilities for its employees, and control over and access to CHUMS
identification numbers.




                                              4
Results of Audit
Finding 1: Sun West Mortgage Company Did Not Always Meet
HUD-FHA Underwriting Requirements
Sun West underwrote FHA-insured loans that did not always comply with HUD-FHA
requirements. We identified two loans that contained significant underwriting deficiencies,
including excessive qualifying ratios and insufficient compensating factors. The deficiencies
occurred because the lender had inadequate controls in place to prevent it from disregarding
HUD-FHA underwriting requirements for its manually underwritten loans. As a result, the
HUD-FHA insurance fund was placed at an increased risk. HUD paid a claim of $144,891 for
one loan, and the borrower for the second loan was in bankruptcy. Therefore, the HUD-FHA
insurance fund was at risk for loss of an additional $97,937. 3

Loans Contained Significant Underwriting Deficiencies
Of the 16 Sun West loans reviewed, 2 were inappropriately underwritten with deficiencies such
as excessive qualifying ratios and insufficient compensating factors. The two loans were
manually underwritten and did not have sufficient compensating factors to justify loan approval.
The lender attempted to process the loans through the TOTAL Scorecard; however, the system
returned a “refer” decision, and the lender had to manually underwrite the loans.
The two loans had borrowers with payment-to-income ratios that significantly exceeded HUD’s
31 percent and 43 percent of gross effective income benchmarks. The lender calculated
borrower ratios of 47/52 for the first loan and 38/56 for the second loan. HUD Handbook 4155.1
requires lenders to provide significant compensating factors to approve loans that exceed HUD-
FHA’s limits. Acceptable compensating factors include the borrower’s ability to make housing
payments, a large downpayment, and minimal increases in the borrower’s housing expense
(appendix C).




3
 HUD calculates that the FHA loses an average of 50 percent of the unpaid principal balance when it sells a
foreclosed-upon property. The loss rate is based on HUD’s Single Family Acquired Asset Management System’s
“case management profit and loss by acquisition” computation for 2016.


                                                      5
The lender cited a lack of increase in the borrower’s housing payments as a compensating factor
for the first loan and also documented that the borrower had reestablished good credit and had a
FICO score above 620. The first compensating factor was supported and complied with the
requirements of the handbook. The borrower also reestablished credit after his bankruptcy
(second compensating factor); however, at the time of the loan, one account was in collection
and in dispute by the borrower. The third factor listed, FICO score above 620, did not comply
with the requirements of the handbook. Although the borrower’s housing payment did not
increase, the mortgage payment represented almost 50 percent of the income that the lender
calculated. In response to our report, the lender recalculated a higher monthly income by not
deducting meals and entertainment expenses it had previously deducted from the borrower’s
income. The recalculation lowered the borrower’s mortage payment-to-income ratio to 41
percent. However, the revised ratio still far exceeded the HUD benchmark of 31 percent
(appendix E).
On the second loan, the lender recorded one compensating factor, stating that the borrower had a
FICO score above 620. This factor was not one of the HUD-approved compensating factors
listed in the handbook and, therefore, was invalid.
Additional details of our analysis for each loan is documented in appendix E of the report.
The Lender Provided Written Explanations for Deficiencies
After we notified the lender of deficiencies identified during audit fieldwork, the lender provided
new analysis of the documentation that was used to underwrite the two loans. However, our
objective was to determine whether the lender’s original underwriting decision complied with
HUD-FHA requirements. We evaluated the new information, but did not consider it to be
sufficient justification to drop the related deficiencies. In response to our report, the lender
provided documentation that assisted in clarifying its underwriting decision. We reviewed the
information and made adjustments to our report where necessary.
Conclusion
Sun West underwrote two loans with significant deficiencies that in one case caused HUD to pay
a claim of $144,891 (appendix D). The borrower for the remaining loan was in bankruptcy. The
deficiencies occurred because the lender had inadequate controls in place to prevent it from
disregarding standard HUD-FHA underwriting requirements for its manually underwritten loans.
In addition, Sun West did not fully implement a quality control program in accordance with
HUD requirements (finding 2), which contributed to its deficient underwriting of the loans.
Therefore, the FHA insurance fund was placed at an additional risk for the HUD-FHA estimated
loss of $97,937 (appendix D).
Recommendations
We recommend that the Acting Deputy Secretary for Single Family Housing require Sun West to
       1A. Reimburse the FHA insurance fund for $144,891 in claims paid for one loan (045-
           8098001) that did not meet HUD underwriting requirements.
       1B. Indemnify HUD against potential losses of $97,937 for one loan that did not comply
           with HUD underwriting requirements (048-7976048).



                                                 6
1C. Improve controls to prevent it from disregarding HUD underwriting requirements,
    particularly those related to manually underwritten loans.




                                       7
Finding 2: Sun West Mortgage Company Did Not Always Comply
With HUD-FHA Quality Control Requirements
Sun West did not always follow HUD quality control requirements when reviewing FHA-insured
loan files. Specifically, it did not always reverify borrowers’ employment, asset, and appraisal
documentation for early payment defaults. 4 In addition, it did not follow up on unanswered
reverifications for its routine quality control reviews and did not include all items required by
HUD in its branch office reviews. This condition occurred because the lender disregarded the
quality control requirements listed in its quality control plan and in HUD Handbook 4060.1. As
a result, the FHA insurance fund was placed at risk for fraud, waste, and abuse. The quality
control deficiencies also contributed to Sun West’s underwriting issues as discussed in finding 1.

Early Payment Default Reviews Did Not Include All Required Items
Mortgagee Letter 2011-02, Quality Control Requirements for Direct Endorsement Lenders,
requires lenders to perform written reverifications of early payment defaults within 45 days from
the end of the month in which the loan is reported as 60 days past due. Examples of items that
the lender must reverify include the borrower’s employment or other income, earnest money
deposits, escrow deposits, and gift funds. Sun West did not include the required items in its
reviews of loans that were 60 days past due within the first six payments as follows:

    •    One of five loans was not reviewed within the required timeframe,

    •    Four of five loans reviewed did not include reverification of the borrowers’ or
         coborrowers’ employment,

    •    Five files reviewed did not include reverification of the borrowers’ gift funds, earnest
         money deposits, and escrow deposits, and

    •    Five files reviewed did not include a desk review of the borrowers’ appraisal.

Quality Control Reviews Did Not Include Followup Attempts
Sun West sent reverification requests for its routine quality control reviews to the appropriate
parties. However, several loan files reviewed contained no documented followup attempt by the
lender to obtain reverification. The handbook states that if a written reverification is not returned
to the lender, a documented attempt must be made to conduct a telephone verification. The
following items were not reverified:

    •    One of three files reviewed did not include a followup attempt to reverify borrower or
         coborrower employment,




4
 In addition to the loans selected for routine quality control reviews, HUD requires mortgagees to review all loans
going into default within the first six loan payments. HUD defines early payment defaults as loans that become 60
days past due within the first six payments.


                                                          8
      •   One of three loan files did not contain a desk review of the borrower’s appraisal, and

      •   Three files reviewed did not include a followup attempt to reverify borrower or
          coborrower gifts and earnest money deposits.
   The table below provides additional details.

                                                                                      No
                                                                                  followup
                                                                       No
                 Loan not          No             No followup                      attempt
                                                                 reverification                  No desk
 FHA case        reviewed     reverification       attempt to                         to
                                                                   of assets                    review of
   no.            within            of              reverify                       reverify
                                                                    (gifts &                    appraisal
                timeframe      employment         employment                        assets
                                                                   deposits)
                                                                                   (gifts &
                                                                                  deposits)
Early payment defaults
022-2372978       X                  X                                 X                           X
048-7695674                          X                                 X                           X
022-2467883                          X                                 X                           X
048-7946452                          X                                 X                           X
332-6067165                                                            X                           X
Quality control reviews
022-2488752                                             X                             X
043-9328531                                                                           X            X
044-5265825                                                                           X

   The Lender Provided Additional Documentation for Quality Control Deficiencies
   The lender provided additional documentation showing that it completed the missing
   reverifications identified during our fieldwork. However, the documentation in question was
   dated after our request for explanations of the missing items and did not support it had previously
   been done. Therefore, we did not adjust our original assessment of the lender’s review of early
   payment defaults and routine quality control reviews.
   Branch Office Reviews Did Not Include All Required Items
   We reviewed branch office reports covering 2012 through 2015 for Sun West branch offices
   located in Arizona, California, Hawaii, and Nevada and determined that Sun West’s branch
   office reviews were missing several required items that should have been included in its branch
   office review checklists:

      •   For 2012, Sun West did not include 5 of the required items for each of the four branch
          offices reviewed.

      •   For 2013, Sun West did not include 5 of the required items for each of the 6 branch
          offices reviewed.



                                                    9
   •   For 2014, Sun West did not include 5 of the required items for each of the 10 branch
       offices reviewed.

   •   For 2015, Sun West did not include six items required by HUD for three branch offices.
       Specifically, the branch office review reports concluded that all required items were
       reviewed. However, the items were missing from the review checklists, which identify
       the items and date reviewed.
Examples of items that were missing and that the lender must include were (1) a check to ensure
that procedures are revised to reflect changes in HUD requirements and that personnel are
informed of the changes, (2) a check to ensure that personnel at the branch offices are all
employees of the lender or contract employees performing functions that HUD allows to be
outsourced, and (3) verification that branch offices provide toll-free lines or provide for
acceptance of collect calls from borrowers. These items must be reviewed to determine whether
the branches, which operate under the lender’s authority, comply with HUD’s underwriting
requirements
Conclusion
Sun West did not always follow HUD quality control requirements when reviewing FHA-insured
loan files because the lender had inadequate controls to ensure that it complied with the HUD
quality control requirements listed in its quality control plan and in HUD Handbook 4060.1. As
a result, the FHA insurance fund was placed at an increased risk of loss and risk of fraud, waste,
and abuse. The deficiencies also contributed to issues with Sun West’s underwriting of loans as
discussed in finding 1. Reverification of borrower documentation is an important step in
ensuring that the loan underwriting decision was sound. Also, lenders must ensure that branch
reviews cover all elements required by HUD to ensure consistency among offices and overall
compliance with basic quality control requirements.
Recommendations
We recommend that the Acting Deputy Secretary for Single Family Housing require Sun West to
       2A. Improve its quality controls to ensure that loans selected for review, to include early
           payment defaults, comply with HUD quality control document reverification
           requirements.
       2B. Improve its quality controls to ensure that branch office reviews meet all HUD-FHA
           requirements.
       2C. Provide additional training to ensure that responsible staff is aware of HUD’s quality
           control program requirements.




                                                 10
Scope and Methodology
We performed our onsite audit fieldwork from November 2015 through May 2016 at Sun West’s
main office in Cerritos, CA. Our audit period covered loans endorsed from October 2012
through October 2015.
To accomplish our objective, we

   •   Reviewed HUD regulations, handbooks, and guidebooks related to single-family
       requirements;
   •   Reviewed the documentation in FHA case files and the lender’s origination files for 16
       loans;
   •   Reviewed the citizen complaint and interviewed the complainant to gain an
       understanding of the allegations made against Sun West;
   •   Reviewed Sun West’s contract and invoices with its quality control contractor;
   •   Reviewed quality control plans and the lender’s reports documenting its review of early
       payment defaults, quality control samples, and branch office reviews;
   •   Reviewed Sun West’s policies and procedures related to use and safeguards for its
       employees’ user IDs and passwords;
   •   Reviewed loan data in Neighborhood Watch;
   •   Interviewed Sun West management and staff; and
   •   Interviewed the responsible HUD quality assurance program representative.

We selected our loans from an audit universe of 6,757 loans that were originated and
underwritten in Arizona, California, Hawaii, and Nevada. We determined that 72 of the loans
were either seriously delinquent or had a claim paid. We excluded 41 of the 72 loans for
potential review because they were refinanced and had different underwriting requirements than
loans for purchases of property. We evaluated the remaining 31 loans based on the following
risk factors:

   •   Fraud (as reported in HUD’s Neighborhood Watch Early Warning System),
   •   Deficient underwriting (as reported in HUD’s Neighborhood Watch Early Warning
       System),
   •   Loan defaulted in fewer than 6 payments,
   •   Loan defaulted in more than 6 but fewer than 12 payments,
   •   Loan was consistently delinquent,
   •   Borrower had excessive obligations, and


                                                 11
    •   Borrower had excessive payment-to-income ratios.

Based on our analysis, we identified 16 loans that contained the highest number of the above risk
factors and selected those loans for review. Our audit results were limited to the loans in our
sample and cannot be projected to the universe.

•   To perform our review of the lender’s quality controls, we requested and reviewed the
    quality control plans, quality control sample reviews, and branch office reviews covering our
    audit period. We obtained and reviewed the lender’s quality control logs from October 2012
    to October 2015. We selected and reviewed 3 loans from the logs that were part of our audit
    sample. We also reviewed Neighborhood Watch to obtain a sample of 6 early payment
    default loans to test the lender’s compliance with HUD’s quality control requirements.
    Although we selected 6 loans for review, one loan had been included in the lender’s routine
    quality control sampling, and no early payment default review was conducted for the loan.
    Therefore, we only tested 5 early payment default reviews for compliance.
Complaint Issue - Loans Underwritten by Unauthorized Parties
We attempted to address the complaint issue concerning unauthorized parties from another
country underwriting FHA-insured loans. We could not substantiate the complaint allegation.

    •   We reviewed sample loan file records (as noted above).
    •   We reviewed Sun West’s applicable policies and procedures.
    •   We spoke to Sun West’s underwriters handling FHA-insured loans.
    •   We looked into Sun West’s use of an affiliate organization based in another country and
        reviewed the applicable contract and invoices. We determined that the activity was for
        quality control functions rather than underwriting.
We also interviewed the lender’s employees and reviewed its policy manuals and concluded that
the lender had reasonable policies and procedures related to its employees’ use and safeguarding
of user identification numbers and passwords.
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 objective.




                                                12
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 objective:

    •   Controls intended to ensure that the lender underwrites (approves) FHA-insured loans in
        accordance with HUD’s requirements (finding 1).
    •   Controls intended to ensure that the lender implements a quality control program that
        complies with HUD’s requirements (finding 2).
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 are significant deficiencies:

•   Sun West did not have adequate controls to ensure that two loans were underwritten in
    accordance with HUD-FHA requirements (finding 1).
•   Sun West did not have adequate controls to ensure that its quality control program complied
    with HUD quality control requirements (finding 2).




                                                  13
Appendixes

Appendix A


           Schedule of Questioned Costs and Funds To Be Put to Better Use


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

                        1A            $144,891

                        1B                                 $97,937

                      Totals          $144,891             $97,937


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. The ineligible amount is the claim paid by HUD in association
     with FHA case no. 045-8098001.
2/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (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 (FHA case nos. 048-7976048).
     If HUD implements our recommendation to indemnify the loan not approved in
     accordance with HUD-FHA requirements, it will reduce FHA’s risk of loss to the
     insurance fund. The amount noted reflects HUD’s calculation that FHA loses an average
     of 50 percent of the unpaid principal balance when it sells a foreclosed-upon property
     (appendix D). The 50 percent loss rate is based on HUD’s Single Family Acquired Asset
     Management System’s “case management profit and loss by acquisition” computation for
     the first quarter of fiscal year 2015 based on actual sales. Since 2015, the rate has been
     reviewed quarterly but has remained relatively constant.




                                              14
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




                               15
                        Auditee Comments and OIG’s Evaluation




Ref to OIG Evaluation    Auditee Comments




Comment 1




                          * Names redacted for privacy reasons



                                           16
             Auditee Comments and OIG’s Evaluation




Ref to OIG                     Auditee Comments
Evaluation




Comment 1




                               17
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 1




                               18
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 1




                               19
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 1




                               20
                        Auditee Comments and OIG’s Evaluation




Ref to OIG Evaluation    Auditee Comments




Comment 2




                          * Names redacted for privacy reasons



                                           21
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 2




                               22
                        Auditee Comments and OIG’s Evaluation




Ref to OIG Evaluation    Auditee Comments




Comment 2




                                          23
                        Auditee Comments and OIG’s Evaluation




Ref to OIG Evaluation    Auditee Comments




Comment 3




                          * Names redacted for privacy reasons



                                           24
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 3




                               25
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 3




                               26
                        Auditee Comments and OIG’s Evaluation




Ref to OIG Evaluation    Auditee Comments




Comment 4




                          * Names redacted for privacy reasons



                                           27
                        Auditee Comments and OIG’s Evaluation




Ref to OIG Evaluation    Auditee Comments




Comment 4




                          * Names redacted for privacy reasons



                                           28
                        Auditee Comments and OIG’s Evaluation




Ref to OIG Evaluation    Auditee Comments




Comment 5




                                          29
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 5




                               30
                        Auditee Comments and OIG’s Evaluation




Ref to OIG Evaluation    Auditee Comments




Comment 5




                   * Enclosures and attachments available upon request



                                            31
                         OIG Evaluation of Auditee Comments


Comment 1   We applied the requirements of HUD Handbook 4155.1 to this loan since it was
            closed before Mortgagee Letter 2014-02, Manual Underwriting became effective
            in April 2014.
            We generally agree that the file documentation shows that the borrower had a
            satisfactory housing payment history and had a minimal increase in housing
            expense. The borrower also re-established credit after his bankruptcy by opening
            and maintaining several new accounts. However, one account was in collection
            and in dispute by the borrower.
            Our report stated that Sun West used the borrower’s FICO score, which is not a
            HUD approved compensating factor, to support loan approval. In its response,
            Sun West stated that the FICO Score was listed on the FHA Loan Underwriting
            and Transmittal Summary for internal reference purposes. However, the FICO
            Score was listed and identified as a compensating factor along with two others on
            the transmittal summary. There was no notation on the form that stated or
            otherwise indicated that the factor was for Sun West’s internal reference purposes.
            Our report stated that the surplus income that was calculated for the borrower was
            not one of the original compensating factors used by Sun West to support loan
            approval. The factor was submitted in response to deficiencies we demonstrated
            to the lender during audit fieldwork. However, after further review, we removed
            the statement that a different tax schedule was used to calculate surplus income
            for the borrower.
            We reviewed Sun West’s updated calculations for the borrower’s income. The
            new calculations result in a higher monthly income by not deducting meals and
            entertainment expenses, and the revised mortgage payment-to-income ratio was
            reduced from 47 percent to 41 percent. However, the revised ratio still far
            exceeded the HUD benchmark of 31 percent. Therefore, we disagree that the loan
            had sufficient compensating factors to perform, as stated in the Sun West
            response. The loan did not perform and went into foreclosure. The property was
            recently conveyed to HUD and HUD paid $144,891 in insurance claims.
Comment 2 We applied the requirements of Mortgagee Letter 2014-02, Manual Underwriting
          to this loan, since the loan case number was issued after the guidance became
          effective in April 2014.
            We reviewed the additional documentation provided by Sun West which clarified
            that withdrawals could be made from the borrower’s retirement account under
            circumstances such as purchase of a principal residence and payment to prevent
            foreclosure or eviction. Sun West also indicated in its response that when the
            loan was initially processed, it was intended for funds from the borrower’s
            retirement account to be used to satisfy cash to close requirements. According to


                                             32
            the borrower’s account statement, the borrower had a vested account balance of
            $13,592. The FHA Loan Underwriting and Transmittal Summary reflected
            monthly mortgage payments of $1,535. Therefore, the borrower had liquid
            retirement account funds which could serve as cash reserves equal to or exceeding
            three total monthly mortgage payments, as required by Mortgagee Letter 2014-02.
            We made the appropriate adjustments to our report.
            We disagree that the borrower had additional compensating factors, which
            included bonus and residual income.
            Only one compensating factor, “FICO Score above 620”, was provided during the
            original underwriting of the loan. This factor did not comply with HUD
            requirements and Sun West provided bonus income as a compensating factor in
            response to deficiencies that we demonstrated to the lender during audit
            fieldwork. However, we found the bonus income to be questionable because the
            borrower’s Verification of Employment described the income as vacation,
            birthday, holiday, and safety pay. The verification did not clearly identify how
            much, if any, of the amount was bonus pay. Sun West included the amount in its
            calculation of the borrower’s residual income, which was also presented as a
            compensating factor during our audit fieldwork. Since it was unclear whether the
            borrower had bonus income, the amount should not have been included in the
            residual income calculation. After excluding bonus income, the borrower had
            negative residual income.
            The HUD Quality Assurance Division issued a March 2016 letter, which also
            stated that the loan did not meet manual underwriting requirements. Although
            HUD later closed out its findings after receiving a written response letter from
            Sun West, our review disclosed the loan did not comply with the requirements of
            Mortgagee Letter 2014-02, which states that the maximum allowable qualifying
            ratios for borrowers with minimum credit scores of 580 or more and one
            compensating factor are 37 percent and 47 percent of gross effective income. We
            found that the borrower’s ratios of 38 percent and 56 percent of gross effective
            income far exceeded the maximum allowed by HUD. Additionally, there were
            other issues that were noted in HUD’s March 2016 letter, but that were not
            addressed by Sun West in its response. Sun West did not document the
            borrower’s housing payment history and failed to document explanations for a
            collection account and credit inquiries. These issues were also noted in our audit
            report.
            Neighborhood Watch currently shows that a bankruptcy plan was confirmed for
            the borrower and that the cause for delinquency was “excessive obligations.” The
            loan was closed in August 2014, became delinquent in November 2014, and went
            into foreclosure in May 2015.
Comment 3 We applied the requirements of HUD Handbook 4155.1 to this loan, since it was
          underwritten using TOTAL Scorecard, and manual underwriting requirements do
          not apply.


                                             33
            We acknowledge Sun West’s action to pay down the outstanding minimum
            investment balance not met by the borrower.
            Our audit report also stated that Sun West overstated the borrowers’ monthly
            income by including overtime that would not continue. Sun West originally
            calculated a combined monthly income of $4,508 for the borrower and co-
            borrower (Table 1 in Sun West’s response). The borrowers’ ratios were 21
            percent and 40 percent)
            In response to our audit finding, Sun West recalculated the income by excluding
            the overtime and determined that the combined monthly income was instead
            $4,491 per month (Table 5 in Sun West’s response). The revised amount resulted
            in $17 per month less in monthly income and a minimal change to the borrowers’
            ratios to 21 and 41 percent.
            After further review and consideration of the co-borrower’s Verification of
            Employment, which would have resulted in a combined monthly income of
            $4,491, we agree with Sun West’s calculation.
            We noted that both revised calculations did not consider base pay from all years
            listed on the borrower and co-borrower’s Verifications of Employment. If the
            amounts from all years were considered, the combined monthly income for both
            borrowers would have been $4,450, $58 less per month than the $4,508 originally
            calculated by Sun West, The borrowers’ ratios would have remained at 21 and 41
            percent.
            Given that the revised monthly income amounts calculated by Sun West and OIG
            did not significantly vary from the original (between $17 and $58), and there was
            almost no change to the borrowers’ ratios, we have concluded that either shortage
            likely did not significantly impact the borrowers’ ability to make mortgage
            payments. Therefore, we removed the deficiency from our audit finding and
            made the appropriate adjustment to the report.
Comment 4   OIG acknowledges Sun West’s efforts to take the corrective actions necessary to
            ensure that HUD requirements are met with respect to timely review of early
            payment defaults and reverifications of borrower documentation for early
            payments and routine quality control reviews.
            However, the reverifications that Sun West performed for the loans that we
            questioned occurred after the end of our fieldwork. Therefore, the deficiencies
            that we identified will remain in our report.
Comment 5   We acknowledge Sun West’s commitment to update its branch review reports to
            include the missing items that we identified in our report. However, we disagree
            that Sun West’s branch reviews were in compliance with HUD quality control
            requirements. The Sun West response stated that it complied with the handbook
            requirements that pertained to branch office reviews and gave examples of



                                             34
compliance in the areas noted in our review. However, the issue that we
identified in our report was that the branch review reports or “checklists” did not
include all of the items that are required by HUD Handbook 4060.1. Compliance
could not be verified if the review items were not included in the branch review
reports.
We adjusted our report to exclude those branch reviews that were performed after
HUD revised its guidance in September 2015. The guidance eliminated specific
items that must be reviewed, and now requires compliance with general staffing,
office facilities, operating requirements and licensing requirements that are
covered throughout HUD Handbook 4000.1. During audit fieldwork, we did not
analyze the branch reviews that were conducted during or after September 2015
for compliance with the new guidance. Therefore, we revised the report to only
address those branch reviews that took place before the September 2015 update.




                                  35
Appendix C
                                             Criteria


HUD Handbook 4155.1 (1)(B)(2)(c)
The lender must obtain a written Verification of Deposit (VOD) and the borrower’s most recent
statements for all asset accounts to be used in qualifying.

Alternative Documentation
As an alternative to obtaining a written VOD, the lender may obtain from the borrower original
asset statements covering the most recent three-month period. Provided that the asset statement
shows the previous month’s balance, this requirement is met by obtaining the two most recent,
consecutive statements.

TOTAL Scorecard Accept/Approve Recommendation
If a written VOD is not obtained, the lender may obtain a statement showing the previous
month’s ending balance for the most recent month. If the previous month’s balance is not
shown, the lender must obtain statements for the most recent two months to verify that there are
sufficient funds to close.

Mortgagee Letter 2014-02, Manual Underwriting, Definition of Reserves
  • the sum of verified and documented borrower funds; minus
  • the sum the borrower is required to pay at closing, including the cash investment, closing
      costs, prepaid expenses, any payoffs that are a condition of loan approval, and any other
      expense required to close the loan; but not including
  • the amount of cash taken at settlement in cash-out transactions or incidental cash received
      at settlement in other loan transactions, gift funds in excess of the amount required for the
      cash investment and other expenses, equity in another property, and borrowed funds from
      any source.

Mortgagee Letter 2014-02, Manual Underwriting, Reserve Requirement
All manually underwritten loans must meet or exceed the following minimum reserve
requirements:

   •   1 and 2 Unit Properties. Reserves must equal or exceed one total monthly mortgage
       payment.
   •   3 and 4 Unit Properties. Reserves must equal or exceed three total monthly mortgage
       payments.

This new policy replaces the current 2-month minimum reserve requirement for one and two unit
properties for borrowers with insufficient credit.




                                                 36
HUD Handbook 4155.1 (4)(F)(2)(a)
Qualifying ratios are used to determine if the borrower can reasonably be expected to meet the
expenses involved in home ownership, and provide for his/her family. In order to make this
determination, the lender must calculate

   •   the Mortgage Payment Expense to Effective income ratio as described in HUD 4155.1
       4.F.2.b, and
   •   the Total Fixed Payment to Effective Income ratio, as described in HUD 4155.1 4.F.2.c

Note: The underwriter must calculate the qualifying ratios for entry into the Automated
Underwriting System (AUS) in order to be evaluated by the Technology Open To Approved
Lenders (TOTAL) Scorecard.

HUD Handbook 4155.1 (4)(F)(2)(b)
The relationship of the mortgage payment to income is considered acceptable if the total
mortgage payment does not exceed 31% of the gross effective income. A ratio exceeding 31%
may be acceptable only if significant compensating factors, as discussed in HUD 4155.1 4.F.3,
are documented and recorded on Form HUD-92900-LT, FHA Loan Underwriting and
Transmittal Summary.

HUD Handbook 4155.1 (4)(F)(2)(c)
The relationship of total obligations to income is considered acceptable if the total mortgage
payment and all recurring monthly obligations do not exceed 43% of the gross effective income.

A ratio exceeding 43% may be acceptable only if significant compensating factors, as discussed
in HUD 4155.1 4.F.3, are documented and recorded on Form HUD-92900-LT, FHA Loan
Underwriting and Transmittal Summary. For those borrowers who qualify under FHA’s EEH,
the ratio is set at 45%.

HUD Handbook 4155.1 (4)(F)(3)(b)
The table below describes the compensating factors that may be used to justify approval of
mortgage loans with ratios that exceed FHA benchmark guidelines.




                                                37
HUD Handbook 4155.1 (5)(B)(4)(c)
The gift donor may not be a person or entity with an interest in the sale of the property, such as

   •   the seller
   •   the real estate agent or broker
   •   the builder, or
   •   an associated entity

Gifts from these sources are considered inducements to purchase, and must be subtracted from
the sales price.

Mortgagee Letter 2014-02, Manual Underwriting
Definition of Manually Underwritten Loans
When a loan receiving an Accept scoring recommendation [through FHA’s TOTAL Scorecard]
is downgraded to a Refer, the loan must be underwritten in accordance with all provisions of this
Mortgagee Letter.

Borrowers With Minimum Decision Credit Scores of 580 or More and No Compensating Factors
The maximum allowable qualifying ratios for borrowers with minimum decision credit scores of
580 or more and no compensating factors are as follows:
   • total monthly mortgage payment may not exceed 31% of gross effective monthly income
       (33% for Energy Efficient Homes); and
   • total monthly fixed payment may not exceed 43% of gross effective monthly income
       (45% for Energy Efficient Homes).



                                                  38
Borrower’s With Minimum Decision Credit Scores of 580 or More and One Compensating Factor

  The maximum allowable qualifying ratios for borrowers with minimum decision credit scores of
  580 or more provided they meet one of the compensating factors specified below are as follows:
    •   total monthly mortgage payment may not exceed 37% of gross effective monthly income;
        and
    •   total monthly fixed payment may not exceed 47% of gross effective monthly income.
  Acceptable compensating factors are limited to the following:
    •   Verified and documented cash reserves that equal or exceed three total monthly mortgage
        payments (one and two units) or that equal or exceed six total monthly mortgage payments
        (three and four units);
    •   New total monthly mortgage payment is not more than $100 or 5% higher than previous total
        monthly housing payment, whichever is less, and there is a documented twelve month
        housing payment history with no more than one 30 day late payment. In cash-out transactions
        all payments on the mortgage being refinanced must have been made within the month due
        for the previous twelve months.
    •   Residual income.
Maximum Qualifying Ratio Matrix
 Manual Underwriting Matrix For Case Numbers Issued on or After April 21, 2014
580 and above      31/43        No compensating factors required.
580 and above      37/47        One of the following:
                                    • Verified and documented cash reserves equal
                                        to at least three total monthly mortgage
                                        payments (1-2 units).
                                    • New total monthly mortgage payment is not
                                        more than $100 or 5% higher than previous
                                        total monthly housing payment, whichever is
                                        less; and there is a documented twelve month
                                        housing payment history with no more than
                                        one 30 day late payment.
                                    • Residual Income
580 and above      40/40        Borrower has established credit lines in his/her own
                                name open for at least six months but carries no
                                discretionary debt (i.e., monthly total housing
                                payment is only open installment account and
                                borrower can document that revolving credit has
                                been paid off in full monthly for at least the previous
                                six months).
580 and above      40/50        Two of the following:
                                    • Verified and documented cash reserves equal
                                        to at least three total monthly mortgage
                                        payments (1-2 units).


                                                  39
                                          •   New total monthly mortgage payment is not
                                              more than $100 or 5% higher than previous
                                              total monthly housing payment, whichever is
                                              less; and a there is documented twelve month
                                              housing payment history with no more than
                                              one 30 day late payment.
                                          •   Verified and documented significant
                                              additional income that is not considered
                                              effective income (i.e., part-time or seasonal
                                              income verified for more than one year but
                                              less than two years).
                                          •   Residual Income.

HUD Handbook 4155.1 (2)(A)(2)(a)
The maximum mortgage amount that FHA will insure on a purchase is calculated by multiplying
the appropriate loan-to-value (LTV) factor by the lesser of the property’s

       •   sales price, subject to certain required adjustments, or
       •   appraised value.

In order for FHA to insure this maximum loan amount, the borrower must make a required
investment of at least 3.5% of the lesser of the appraised value or the sales price of the property.

HUD Handbook 4155.1 (4)(D)(2)(a)
The lender must analyze the income of each borrower who will be obligated for the mortgage
debt to determine whether the borrower’s income level can be reasonably expected to continue
through at least the first three years of the mortgage loan.

In most cases, a borrower’s income is limited to salaries or wages. Income from other sources
can be considered as effective, if properly verified and documented by the lender.

Mortgagee Letter 2011-02, Quality Control Requirements for Direct Endorsement Lenders
Early Payment Defaults
In addition to the loans selected for routine quality control reviews, mortgagees must review all
loans that are originated or underwritten by their company and that are originated by their
Sponsored Third Party Originators that go into default within the first six payments (referred to
as early payment defaults). Handbook 4060.1, REV-2 defines early payment defaults as loans
that become 60 days past due within the first six payments. Mortgagees must perform reviews of
early payment defaults within 45 days from the end of the month the loan is reported as 60 days
past due. The Early Payment Default review report and follow-up, including review findings and
any actions taken, along with procedural information (as specified in HUD Handbook 4060.1
Rev.-2, Paragraph 7-6 (E)), must be retained by the mortgagee for a period of two years.




                                                  40
HUD Handbook 4060.1, REV-2, Paragraph 7-6(D)
In addition to the loans selected for routine quality control reviews, mortgagees must review all
loans going into default within the first six payments. As defined here, early payment defaults
are loans that become 60 days past due.

HUD Handbook 4060.1, REV-2, Paragraph 7-6(E)
Documentation Review and Verification. The Quality Control Program must provide for the
review and confirmation of information on all loans selected for review.

       1. Credit Report. A new credit report must be obtained for each borrower whose loan is
       included in a Quality Control review, unless the loan was a streamline refinance or was
       processed using a FHA approved automated underwriting system exempted from this
       requirement. A credit report obtained for a Quality Control review may be a Residential
       Mortgage Credit Report, a three repository merged in-file report or, when appropriate, a
       business credit report. The report must comply with the credit report standards described
       in HUD Handbook 4155.1 (as revised). A full Residential Mortgage Credit Report must
       be obtained from a different credit source on cases in which the in-file report reveals
       discrepancies with the original credit report.

       2. Credit Document Reverification. Documents contained in the loan file should be
       checked for sufficiency and subjected to written reverification. Examples of items that
       must be re-verified include, but are not limited to, the mortgagor’s employment or other
       income, deposits, gift letters, alternate credit sources, and other sources of funds. Sources
       of funds must be acceptable as well as verified. Other items that may be re-verified
       include mortgage or rent payments. If the written reverification is not returned to the
       mortgagee, a documented attempt must be made to conduct a telephone reverification. If
       the original information was obtained electronically or involved alternative documents, a
       written reverification must still be attempted. Any discrepancies must be explored to
       ensure that the original documents (except blanket verification releases) were completed
       before being signed, were as represented, were not handled by interested third parties and
       that all corrections were proper and initialed. All conflicting information in the original
       documentation should have been resolved before the complete file was submitted to the
       underwriter.

       3. Appraisals. A desk review of the property appraisal must be performed on all loans
       chosen for a Quality Control review except streamline refinances and HUD Real Estate
       Owned (REO) sales. The desk review must include a review of the appraisal data, the
       validity of the comparables, the value conclusion (“as repaired” to meet safety and
       soundness requirements in HUD Handbook 4905.1 (as revised)), any changes made by
       the underwriter and the overall quality of the appraisal.

       Mortgagees are expected to perform field reviews on 10 % of the loans selected during
       the sampling process outlined previously in paragraph 7-6 C and D. Field reviews must
       be performed by licensed appraisers listed on FHA’s Roster of Appraisers. Mortgagees




                                                 41
       should select loans for field reviews based on factors such as those listed previously in
       paragraph 7 6(C)(2) and the following:

       •      Property complaints received from mortgagors;
       •      Discrepancies found during desk reviews;
       •      Large adjustments to value;
       •      Comparable sales more than six months old;
       •      Excessive distances from comparables to the subject property;
       •      Repetitive sales activity for the subject property;
       •      Investor-sold properties;
       •      Identity of interest between buyer and seller;
       •      Seller identity differs from owner of record; and
       •      Vacant properties.

       In addition, a field review should be completed on loans selected in accordance with
       paragraphs 7-6(C) and (D) where the desk review revealed significant
       problems/deficiencies with the appraisal report. If serious deficiencies or patterns are
       uncovered, mortgagees must report these items, in writing, to the Quality Assurance
       Division in the HUD Homeownership Center having jurisdiction.

       4. Occupancy Reverification. In cases where the occupancy of the subject property is
       suspect, mortgagees must attempt to determine whether the mortgagor is occupying the
       property. The failure of the mortgagor to occupy the property may be an indication that
       the loan contains other problems. If it is found that the mortgagor is not occupying a
       property mortgaged as owner-occupied, mortgagees must report this, in writing, to the
       Quality Assurance Division in the HUD Homeownership Center having jurisdiction. It
       also would be advisable to review other similar loans for occupancy.

HUD Handbook 4060.1, REV-2, Paragraph 7-3(G)(1)
Site Review. A mortgagee’s offices, including traditional, nontraditional branch and direct
lending offices engaged in origination or servicing of FHA-insured loans, must be reviewed to
determine that they are in compliance with the Department’s requirements.

       1.     Review Items. The review must include, but not necessarily be limited to,
              confirmation of the following items:

              •   The office is properly registered with FHA and the address is current;
              •   Operations are conducted in a professional, business-like environment;
              •   If located in commercial space, the office is properly and clearly identified for
                  any walk-in customers; has adequate office space and equipment; is in a
                  location conducive to mortgage lending; and is separated from any other
                  entity by walls or partitions (entrances and reception areas may be shared);
              •   If located in non-commercial space, the office has adequate office space and
                  equipment; displays a fair housing poster if the public is received; if it is open
                  to receive the public, it must be accessible to persons with disabilities,


                                                 42
    including those with mobility impairments; if it is not open to the public, but
    used occasionally to meet with members of the public, alternate means of
    accommodation may be used to serve persons with disabilities;
•   The servicing office provides toll-free lines or accepts collect calls from
    mortgagors;
•   The office is sufficiently staffed with trained personnel;
•   Office personnel have access to relevant statutes, regulations, HUD issuances
    and Handbooks, either in hard copy or electronically;
•   Procedures are revised to reflect changes in HUD requirements and personnel
    are informed of the changes;
•   Personnel at the office are all employees of the mortgagee or contract
    employees performing functions that FHA allows to be outsourced; and
•   The office does not employ or have a contract with anyone currently under
    debarment or suspension, or a Limited Denial of Participation.




                                  43
Appendix D
   Schedule of Actual and Estimated Losses for Loans With Significant Deficiencies


                                            Amount of
                       Unpaid mortgage                      Estimated loss to
       FHA case no.                       Claims Paid by
                           balance                            HUD (50%)
                                              HUD
       045-8098001                              $144,891
       048-7976048             $195,874                               $97,937
                               $195,874          $144,891             $97,937




                                          44
Appendix E
     Narrative Loan Summaries for Significant Underwriting Deficiencies

The following narratives provide the details for the significant underwriting deficiencies noted
for finding 1.

FHA case number: 045-8098001
Loan amount: $123,117
Settlement date: February 5, 2014
Status: Claim – property conveyed to HUD
Loss to HUD: $144,891


The Borrower’s Payment-to-Income Ratios Far Exceeded HUD’s Benchmarks
We are seeking reimbursement for HUD losses because the borrower’s monthly obligations were
too high as a percentage of the borrower’s income. This condition impacted the borrower’s
ability to meet monthly obligations. The loan was manually underwritten; therefore, the
borrower’s ratios were required to fall within the HUD-established limits. The borrower only
made six loan payments before the first 90-day delinquency was reported. HUD was unable to
contact the borrower, therefore a reason for the borrower’s delinquency could not be obtained.
According to the lender’s calculations, the borrower earned $1,873 per month. However, the
borrower’s mortgage payment was $888 per month. As a percentage, the borrower’s mortgage
payment represented 47 percent of the borrower’s income.
The borrower’s total monthly fixed payments, including the monthly mortgage, exceeded the
HUD total fixed payment-to-income ratio of 43 percent. The borrower’s total monthly payments
were $975. As a percentage, the borrower’s total monthly obligations represented 52 percent of
the borrower’s monthly income.
HUD Handbook 4155.1 (4)(F)(2)(b) states that a mortgage-payment-to-income ratio that exceeds
31 percent of gross effective income is acceptable only if significant compensating factors are
documented on Form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary
(appendix C).
Similarly, HUD Handbook 4155.1 (4)(F)(2)(c) states that a mortgage-payment-to-income ratio
that exceeds 43 percent of gross effective income is acceptable only if significant compensating
factors are documented on Form HUD-92900-LT, FHA Loan Underwriting and Transmittal
Summary (appendix C).
In its original analysis, the lender recorded three compensating factors on the FHA Loan
Underwriting and Transmittal Summary. The first stated that the borrower’s housing payment
was not increasing. The second factor stated that the borrower had reestablished good credit, and
the third stated that the borrower had a FICO score above 620. We compared the factors listed


                                                 45
by the lender to those listed in HUD Handbook 4155.1 (4)(F)(3)(b) (appendix C). We
determined that the original factors were insufficient because the borrower had not reestablished
good credit (second factor) and the third factor was not listed as an approved compensating
factor in the handbook. Although the borrower’s housing payment did not increase (first factor),
the borrower’s mortgage payment represented almost 50 percent of the income that the lender
calculated. Therefore, the compensating factor that the borrower’s housing payment did not
increase was not strong enough to support loan approval.
During our fieldwork, the lender provided additional information, which stated that the borrower
had surplus income and a satisfactory housing payment history for more than 3 years and that the
borrower’s housing payment had declined. We evaluated the information and confirmed, as we
had in our original analysis, that the borrower had a 3-year history of housing payments as
shown on the borrower’s verification of rent. We also confirmed that the borrower’s housing
payment expense had decreased. However, the lender determined that the borrower had surplus
income that was not included in the original underwriting of the loan. Therefore, we did not
consider it as a compensating factor since the lender underwrote and approved the loan with the
original calculation. The lender also cited that the borrower’s housing payment had declined
(“housing payment not increasing”) in its original analysis. The remaining compensating factor,
satisfactory housing payment history for more than 3 years, is comparable to the housing
expense payments factor listed in HUD Handbook 4155.1, which can be used if the borrower has
demonstrated the ability to pay housing expenses greater than or equal to the proposed monthly
expense for the new mortgage over the past 12-24 months (appendix C). However, the factor
was provided after the original underwriting of the loan and the borrower’s obligations remained
excessive when compared to monthly income. Therefore, we concluded that the loan did not
meet FHA underwriting requirements at the time of loan approval, despite the additional
information provided by the lender.




                                                46
FHA case number: 048-7976048
Loan amount: $202,268
Settlement date: August 5, 2014
Status: Bankruptcy plan confirmed
Unpaid balance: $195,874


The Borrower’s Payment-to-Income Ratios Exceeded HUD’s Benchmarks, and File
Documentation Did Not Support the Borrower’s Assets
We are seeking indemnification of this loan because the borrower’s monthly obligations were
too high as a percentage of the borrower’s income to justify loan approval. This condition
impacted the borrower’s ability to meet monthly obligations. In addition, there was no history of
the borrower’s housing payments in the file, and no explanations were documented for a
collection account and credit inquires. The loan was manually underwritten; therefore, all of the
foregoing were required before the loan was underwritten. The borrower made 8 loan payments
before the first 90-day delinquency was reported. HUD listed the cause for delinquency as
“excessive obligations.”
According to the lender’s calculations, the borrower earned $3,996 per month. However, the
borrower’s mortgage payment was $1,535 per month. As a percentage, the borrower’s mortgage
payment represented 38 percent of the borrower’s income.
Similarly, the borrower’s total monthly payments were $2,247. As a percentage, the borrower’s
total monthly obligations represented 56 percent of the borrower’s monthly income.
According to Mortgagee Letter 2014-02, Manual Underwriting (appendix C), the maximum
qualifying ratios for a borrower with a credit score of 580 or more and one compensating factor
are 37 and 47 percent. HUD also requires that the borrower have one of the following
compensating factors:
        •   Verified and documented cash reserves that equal or exceed three total monthly
            mortgage payments.
        •   New total monthly mortgage payment that is not more than $100 or 5 percent higher than
            previous total monthly housing payment, whichever is less, and there is a documented
            12-month housing payment history with no more than one 30-day late payment.
            Residual income.
Our original analysis disclosed that the borrower’s 38/56 percent ratios exceeded the 37/47 percent
limit imposed by HUD. In addition, the borrower’s previous housing payment was $850 per month,
and the mortgage amount was $1,535. Therefore, the borrower’s housing payment had increased
more than the $100 or 5 percent allowed by HUD. There was no housing or rental history
documented in the file for the previous 12 months, and the borrower had no residual income. The
lender recorded one compensating factor on the FHA Loan Underwriting and Transmittal
Summary, stating that the borrower’s FICO score was above 620. This factor did not comply
with the requirements of the mortgagee letter.




                                                  47
During our fieldwork, the lender provided additional information, stating that the loan had strong
compensating factors, including verified cash reserves, debts with fewer than 10 payments,
bonus income, and residual income. We evaluated the information and determined that it was
not sufficient to justify loan approval. However, in response to our report, the lender provided
documentation that showed the borrower had sufficient liquid retirement funds to meet HUD’s
verified cash reserves requirement (appendix B).
The compensating factor “debts with less than ten payments” is not a HUD-approved
compensating factor. The lender did not exclude these accounts from its analysis of the
borrower’s liabilities during the original underwriting of the loan. However, excluding the
accounts would only lower the borrower’s total monthly fixed payment-to-income ratio from 56
percent to 50 percent. The ratios would still exceed the HUD limit of 43 percent.
During our original analysis, we noted that the borrower’s verification of employment included
bonus income that was comprised of vacation, birthday, and holiday pay. The borrower’s
verification of employment did not clearly show how much of the amount was bonus pay. The
lender excluded the amount from its original income calculation. However, it included the
amount in its response to our audit results to calculate residual income for the borrower. Since
the amount was not previously included in the lender’s original analysis and is questionable, the
compensating factors of bonus income and residual income are not sufficient to justify loan
approval. Despite the additional information provided by the lender, we determined that the loan
did not meet HUD underwriting requirements at the time of loan approval.




                                                48