oversight

Evergreen Home Loans, Las Vegas, NV, Branch Did Not Always Comply With HUD FHA Origination Regulations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-09-12.

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

                 Evergreen Home Loans,
                     Las Vegas, NV
        Federal Housing Administration Single-Family
            Housing Mortgage Insurance Program




Office of Audit, Region 9       Audit Report Number: 2016-LA-1011
Los Angeles, CA                                 September 12, 2016
To:            Robert Mulderig, Acting Deputy Assistant Secretary for Single Family Housing,
               HU
               Dane Narode, Associate Counsel for Program Enforcement, CACC
               //SIGNED//
From:          Tanya E. Schulze, Regional Inspector General for Audit, 9DGA
Subject:       Evergreen Home Loans, Las Vegas, NV, Branch Did Not Always Comply With
               HUD FHA Origination Regulations




Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of Evergreen Home 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-1011
                        Date: September 12, 2016

                        Evergreen Home Loans, Las Vegas, NV, Branch Did Not Always Comply
                        With HUD FHA Origination Regulations



Highlights

What We Audited and Why
We performed a survey of Evergreen Moneysource Mortgage Company, doing business as
Evergreen Home Loans, regarding its Federal Housing Administration (FHA) loan origination
process. The review was part of our efforts to improve the integrity of single-family insurance
programs. We selected Evergreen’s Las Vegas branch because of its compare ratio. 1 Our audit
objective was to determine whether Evergreen’s Las Vegas branch complied with U.S.
Department of Housing and Urban Development (HUD) requirements in the origination of FHA-
insured loans

What We Found
Evergreen did not always originate FHA-insured loans in accordance with HUD regulations.
Specifically, it did not identify unacceptable restrictive covenants 2 on 14 FHA loans that
received downpayment assistance. Also, 3 additional loans reviewed included significant
underwriting deficiencies, which would have affected the insurability of the loans. These
deficiencies resulted in potential losses to the FHA insurance fund of more than $1.1 million.

What We Recommend
We recommend that HUD’s Acting Deputy Assistant Secretary for Single Family Housing
require Evergreen to (1) work with HUD to nullify the restrictions on conveyance 3 that violate
HUD policy or indemnify HUD against future losses of $867,134 for the 14 loans; (2) indemnify
HUD for 3 actively insured loans, which could cause potential losses of $304,871 if they are
foreclosed upon and resold; (3) develop procedures to ensure that it reviews all closing


1
   The compare ratio is the percentage of originations that are seriously delinquent or were claim terminated
   divided by the percentage of originations that are seriously delinquent or were claim terminated for the selected
   geographic area. From November 1, 2013, through October 31, 2015, Evergreen’s Las Vegas branch had a
   compare ratio of 211 percent.
2
   Unacceptable restrictive covenants in this case are provisions found in any legal instrument, law or regulation
   applicable to the mortgagor or the mortgaged property, including but not limited to a lease, deed, and sales
   contract that attempts to cause a conveyance made by the mortgagor be subject to limits on the amount of sales
   proceeds retainable by the seller.
3
  Conveyance is the transfer of property from one person to another.
documents, including closing documents for second mortgages associated with downpayment
assistance, before closing the loan; and (4) ensure that it has adequately trained its employees
regarding HUD underwriting requirements, including unallowable restrictions on conveyance.
We also recommend that HUD’s Associate General Counsel for Program Enforcement pursue
civil and administrative remedies if legally sufficient.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding: Evergreen Did Not Always Originate FHA Loans in Accordance With
         HUD Requirements ........................................................................................................... 4

Scope and Methodology ...........................................................................................7

Internal Controls ......................................................................................................9

Appendixes ..............................................................................................................10
         A. Schedule of Funds To Be Put to Better Use ............................................................ 10
         B. Auditee Comments and OIG’s Evaluation ............................................................. 11
         C. Criteria ....................................................................................................................... 19
         D. Schedule of Estimated Losses for Loans With Significant Deficiencies .............. 23
         E. Narrative Loan Summaries for Significant Underwriting Deficiencies............... 24
         F. Schedule of Active Loans Containing Unacceptable Restrictions on
            Conveyance ................................................................................................................ 27




                                                                     2
Background and Objective
Evergreen Home Loans was founded in 1987 and is headquartered in Bellevue, WA. It was
approved as a nonsupervised direct endorsement lender 4 on July 1, 1993, and has 42 active
branch offices throughout the western United States. Evergreen’s Las Vegas branch, located at
8945 West Russell Road, Suite 210, Las Vegas, NV, was approved by the Federal Housing
Administration (FHA) on August 17, 2010. The Las Vegas branch originated 843 loans from
November 1, 2013, through October 31, 2015. During this period, 13 of the loans were at least
90 days delinquent, resulting in a compare ratio of 211 percent.
FHA provides mortgage insurance on loans made by FHA-approved lenders throughout the
United States and its territories. FHA insures mortgages on single-family homes. It is the largest
insurer of mortgages in the world, insuring more than 44 million properties since its beginning in
1934. FHA mortgage insurance provides lenders with protection against losses as the result of
homeowners’ defaulting on their mortgage loans. The 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. All transaction must be scored
through FHA’s Technology Open to Approved Lenders (TOTAL) Mortgage Scorecard 5, except
streamline refinances, refinanced transactions and assumptions. Lenders access TOTAL
Mortgage Scorecard through an approved Automated Underwriting System (AUS). The
mortgagee must verify the integrity of all data elements entered into the AUS to ensure the
outcome is valid.
The objective of the audit was to determine whether Evergreen’s Las Vegas branch complied
with HUD requirements in the origination of FHA-insured loans.




4
  Nonsupervised direct endorsement lender is one that has as its principal activity the lending or investing of funds in
   real estate mortgages and is permitted by HUD to underwrite single family mortgages without FHA’s prior
   review and submit them directly for FHA insurance endorsement.
5
  FHA TOTAL Mortgage Scorecard is a statistically derived algorithm developed by HUD to evaluate borrower
   credit history and application information.


                                                           3
Results of Audit

Finding: Evergreen Did Not Always Originate FHA Loans in
Accordance With HUD Requirements
Evergreen did not always originate FHA-insured loans in accordance with HUD requirements. It
did not identify unallowable restrictive covenants in 14 loans. Also, we found underwriting
deficiencies in 3 additional loans. Specifically, Evergreen did not always identify warning signs
that indicated irregularities, correctly calculate income, or identify all liabilities. This condition
occurred because Evergreen’s procedures did not provide for its underwriters or closing
department to review all closing documentation associated with second mortgages before
closing. Also, its underwriters failed to exercise due diligence and prudent underwriting. As a
result of the origination deficiencies noted in the FHA loans, Evergreen placed the FHA
insurance fund at an increased risk of loss of more than $1.1 million. Additionally the restrictive
covenants placed the borrowers at risk of paying more than the downpayment assistance
provided.

Evergreen Allowed Unallowable Restrictive Covenants
Evergreen did not identify unacceptable restrictive covenants on 14 loans. The borrowers on
these 14 loans received downpayment assistance ranging from about $7,500 to $25,000 from the
Neighborhood Stabilization Program (NSP) 6 through the City of Las Vegas (appendix F). In
exchange for the downpayment assistance, the borrowers agreed to a repayment clause that
required repayment to the City of an amount equal to the current market value of the property,
less any portion of the value attributable to expenditures of non-NSP3 funds for acquiring or
improvements to the property. The City may exercise this clause if the borrower sells, transfers,
leases, or otherwise loses possession of the property within the affordability period. 7 Under
these circumstances, the provisions at issue subjected the borrower to contractual liability other
than repayment of the assistance provided. This practice violated HUD regulations at 24 CFR
(Code of Federal Regulations) 92.254 and 24 CFR 203.41.

Evergreen Did Not Identify Warning Signs That Indicated Irregularities For One Loan
Evergreen did not identify warning signs of potential fraud when underwriting one loan (FHA
case number 332-5994293). The borrower received a pay raise just after closing that tripled his
income, which allowed him to qualify for the FHA mortgage. Only a month after closing, the
borrower’s salary dropped back to the original amount. FHA underwriting requires a careful
analysis of many aspects of the mortgage. HUD regulations state that the underwriter must be
aware of the warning signs that may indicate irregularities and be alert and able to detect fraud.
The regulations also state that simply establishing that a loan transaction meets the minimum


6
  HUD’s Neighborhood Stabilization Program provides grants to states, local communities and other organizations
   to purchase foreclosed or abandoned homes and to rehabilitate, resell, or redevelop these homes in order to
   stabilize neighborhoods and stem the decline of home values of neighboring homes.
7
  The affordability period for the 14 loans was 5 or 10 years, depending on the amount of assistance received.


                                                        4
standards does not necessarily constitute prudent underwriting. 8 The large increase in salary was
a significant warning sign that raised the level of risk for this loan. However, the underwriter did
not exercise prudent underwriting and took no additional action to ensure that the promotion was
legitimate.
Evergreen Did Not Correctly Calculate Income or Identify All Liabilities For Two Loans
Evergreen incorrectly calculated commission income when underwriting another loan (FHA case
number 332-5771783). HUD regulations state that commission income must be averaged over 2
years. 9 However, Evergreen’s underwriter made the decision to calculate income using a letter
from the employer of a new job the borrower started just before closing. Evergreen should have
calculated income using the average commission income for the previous 2-year period. As a
result of this error, Evergreen overstated the borrower’s income. If Evergreen had averaged the
income over a 2-year period, the front and back ratios would have been 39 and 60.75 percent 10,
respectively.
During the underwriting of a third loan (FHA case number 332-5857550), Evergreen incorrectly
calculated the borrower’s income and liabilities. HUD requirements state that a period of more
than 2 years must be used in calculating the average overtime income if it varies significantly. 11
In this case, the underwriter made the decision to use less than 2 years, despite a large increase in
the borrower’s overtime income. Evergreen also did not identify an increase in the borrower’s
child support liability. As a result of these errors, the underwriter overstated the overtime
income and understated the liabilities. If Evergreen had calculated the income and liabilities
correctly, the front and back ratios would have been 25.17 and 61 percent, respectively.
A more detailed analysis of each loan is documented in appendix E of the report.
Conclusion
Evergreen’s failure to follow HUD’s FHA regulations and requirements placed the FHA
insurance fund at increased risk for losses. Fourteen loans contained unallowable restrictive
covenants, and three had significant underwriting deficiencies. This condition occurred because
Evergreen did not have procedures to identify unallowable restrictive covenants and underwriters
did not always exercise sound judgment and due diligence when underwriting FHA loans. The
total unpaid mortgage balance for the loans with significant underwriting deficiencies was more
than $2.3 million with an estimated loss to HUD of more than $1.1 million (appendix D).




8
  HUD Handbook 4155.2, paragraph 2-A(4)(b); HUD Handbook 4155.1, paragraph 4-F(1)(b)
9
  HUD Handbook 4155.1, paragraph 4-D(2)(g)
10
   FHA’s limit for the mortgage payment to income (front) ratio is 31 percent and total obligations to income (back)
    ratio is 43 percent.
11
   HUD Handbook 4155.1, paragraph 4-D(2)(c)


                                                          5
Recommendations
We recommend that the Acting Deputy Assistant Secretary for Single Family Housing require
Evergreen to
1A.    Work with HUD to nullify the restrictions on conveyance that violate HUD policy or
       indemnify HUD. This action will protect HUD against future losses of $867,134 for the
       14 loans (appendix F).
1B.    Indemnify HUD against potential losses of $304,871 for the three loans that did not
       comply with FHA underwriting requirements (appendix E).
1C.    Develop and implement procedures to ensure that it reviews all closing documents,
       including closing documents for second mortgages associated with downpayment
       assistance, before closing the loan.
1D.    Ensure that it has adequately trained its employees regarding HUD underwriting
       requirements, including calculating commission and overtime income, identifying
       irregularities and red flags, and unallowable restrictions on conveyance.
We recommend that HUD’s Associate General Counsel for Program Enforcement
1E.    Determine legal sufficiency and if legally sufficient, pursue civil and administrative
       remedies, civil money penalties, or both against Evergreen, its principals, or both for
       incorrectly certifying to the integrity of the data, the eligibility for FHA mortgage
       insurance, or that due diligence was exercised during the origination of FHA loans.




                                                 6
Scope and Methodology
Our audit period covered loans with beginning amortization dates from November 1, 2013, to
October 31, 2015. We selected the Las Vegas branch because its compare ratio was 211 percent.
We conducted our fieldwork at the Las Vegas branch office between February and May 2016.
To accomplish our objective, we
   ●   Reviewed HUD regulations and reference materials on single-family requirements;
   ●   Reviewed reports and information in HUD’s Neighborhood Watch system;
   ●   Reviewed the lender’s processing, underwriting, and closing policies and procedures;
   ●   Conducted interviews with lender staff;
   ●   Reviewed the lender’s FHA-insured loan files;
   ●   Reviewed the quality control plan and reviews; and
   ●   Performed site visits to employers when available to reverify employment documentation

During the course of the audit we received a referral from HUD related to an Evergreen loan
with NSP down payment assistance. As a result, we reviewed the closing documents for all
loans that received downpayment assistance from NSP. We obtained a listing of all NSP
downpayment assistance loans awarded by the City of Las Vegas, Clark County, and the City of
Henderson. Using HUD’s Single Family Data Warehouse, an extensive collection of database
tables organized and dedicated to support analysis of single-family housing data, we identified
which downpayment assistance loans were associated with FHA loans and originated by
Evergreen. We determined that Evergreen originated 28 FHA-insured loans that received NSP
downpayment assistance and were still active; this included the one loan referred to us by HUD.
The City of Las Vegas provided the NSP downpayment assistance for 14 of the 28 loans
identified. We obtained and reviewed the closing documents for all 28 loans.
Also, we reviewed the underwriting documentation for 13 FHA-insured loans. We used
Neighborhood Watch, HUD’s online information system for FHA-insured loans, to identify all
loans originated by the branch that were seriously delinquent which is defined as 90 days or
more days past due. We identified and reviewed all13 loans that were seriously delinquent. As a
result, we are unable to project our results. The 13 loans had a total mortgage amount of more
than $2.7 million. We used the data from Neighborhood Watch to identify loans for review but
did not rely on the data as a basis for our conclusions. Therefore, we did not assess the reliability
of the data.
We used the source documents provided by the lender and HUD for our review. Our testing and
review included (1) analysis of borrowers’ income, assets, and liabilities; (2) review of
borrowers’ savings ability and credit history; (3) verification of selected data on the underwriting
worksheet and settlement statements; and (4) confirmation of employment.




                                                  7
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.




                                                8
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:

    •   Policies and procedures intended to ensure that FHA-insured loans are properly
        originated, underwritten, and closed.

    •   Policies and procedures intended to ensure that the lender’s quality control program is an
        effective tool in reducing underwriting errors and noncompliance.

We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, the
reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.
Significant Deficiencies
Based on our review, we believe that the following item is a significant deficiency:

    •   Evergreen did not have adequate internal controls to reasonably ensure that loan
        originations complied with HUD requirements and prudent lending practices (finding).




                                                  9
Appendixes

Appendix A


                       Schedule of Funds To Be Put to Better Use
                          Recommendation Funds to be put
                              number         to better use 1/
                                   1A              $867,134
                                   1B              304,871
                                  Total            1,172,005


1/   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. If HUD implements our recommendations to indemnify
     loans not originated in accordance with FHA requirements, it will reduce FHA’s risk of
     loss to the insurance fund. Recommendation 1A represents the total loan amount of
     $867,134 for the 14 loans containing unallowable restrictive covenants. When the
     covenants are removed or FHA insurance is terminated, this will reduce risk to the FHA
     insurance fund. The projected loss of $304,871 for recommendation 1B is equal to 50
     percent of the unpaid balance of loans containing significant underwriting deficiencies. It
     is based on HUD’s calculation that FHA loses on average 50 percent of the claim amount
     when it sells a foreclosed-upon property. 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 fiscal year 2015. (The calculation is shown in appendix
     D.)




                                              10
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG
Evaluation    Auditee Comments




                               11
Comment 1




            *Names redacted for privacy reasons.




                            12
Comment 2


Comment 3




Comment 4




            13
Comment 5




            14
Comment 6




Comment 7




            15
Comment 8




            16
                         OIG Evaluation of Auditee Comments


Comment 1   Evergreen is correct that we did not perform a statistical sample. We reviewed
            100 percent of all loans listed as seriously delinquent in Neighborhood Watch. As
            a result, the results of our audit pertain to the files reviewed and cannot be
            projected to the entire universe of Evergreen FHA loans. We revised the wording
            to two of the paragraph headings in the finding section of the report.
Comment 2   We disagree with Evergreen’s statement that the audit seeks to place new
            requirements on Evergreen. HUD policy HUD Handbook 4155.2, paragraph
            2(A)(4)(b) requires lenders to review all closing documents and legal instruments.
Comment 3   We disagree with Evergreen’s statement that the audit report seeks to make it
            responsible for determining whether the repayment clause in the City’s legal
            documents complied with NSP requirements. The restrictive covenants violated
            NSP (24 CFR 92.254) and FHA requirements (24 CFR 203.41.) Evergreen’s
            responsibility was to review the closing documents and identify the violation of
            FHA policies found in 24 CFR 203.41.
Comment 4   OIG did not analyze the city of Las Vegas’ compliance with NSP requirements.
            The objective of this audit was to determine if Evergreen originated FHA insured
            loans in accordance with HUD regulations. Evergreen did not originate the loans
            identified in Appendix D in accordance with HUD requirements. Evergreen did
            not review the closing documents and legal instruments as required by HUD
            Handbook 4155.2 paragraph 2 (A)(4)(b) and did not identify the covenants which
            violate 24 CFR 203.41, an FHA requirement.
Comment 5   We disagree with Evergreen’s statement that it did not violate 24 CFR 203.41(d.).
            Evergreen did violate the exceptions found in 24 CFR 203.41(d.) because the
            repayment clause subjects the borrower to a contractual liability other than the
            repayment of the assistance provided. Also, the policy does not make any
            exceptions based on market conditions as described by Evergreen. Comment 6
            We disagree with Evergreen’s statement that it correctly calculated income for
            FHA case 332-5771783. As stated in Appendix E of the report HUD requires
            lenders to average commission income over a two year period. In this case the
            borrower used a period of less than 2 years to average the income. Evergreen
            used 18.5 months as the basis for calculating the income. However, income
            information in the file showed that the borrower worked the two years prior to
            loan closing with only a two week gap in work when he moved from California to
            Nevada and the two months he voluntarily left work because of a disagreement in
            pay. Commission income can be very unpredictable as was the case here. As a
            result, Evergreen should have averaged the borrower’s income over the full 24
            months as required by HUD to better establish the borrower’s ability to repay the
            loan.




                                             17
Comment 7   We disagree with Evergreen’s statement that it correctly calculated income for
            FHA case 332-5857550. The borrower earned overtime income for three years
            prior to receiving the home loan and the borrower’s overtime income increased
            significantly during that time period. Evergreen’s response shows the borrower’s
            over time income as $4,599 in 2011, $6,605 in 2012, and $17,250 in 2013. From
            2011 to 2013, the overtime increased by 275%. HUD regulations require the
            lender to use a period of more than two years if the income varies significantly
            from year to year. In this case, using a period of less than two years was not
            justified. As a result of using 2 years instead of 3, Evergreen overstated the
            borrower’s monthly income by $212.
Comment 8   We disagree with Evergreen’s statement that its underwriter was justified in using
            the amount of $400 in child support payments to qualify the borrower. The Order
            of Child Support required the borrower to pay $350 in child support plus $50 for
            every $10,000 increase in earnings. The borrower’s income at the time of the
            agreement was $26,000. The borrower earned just over $67,000 in 2013. This
            increase resulted in a total potential child support liability of $550. The file did
            not have documentation releasing the borrower from the responsibility of paying
            the additional child support in the future. Also, the file was missing an
            explanation from the underwriter explaining why the additional child support was
            not included in qualifying the borrower.




                                              18
               Appendix C

                                             Criteria


HUD Handbook 4155.2, paragraph 2-A(4)(b)
Detection of Warning Signs: The underwriter must be

   •   attuned to warning signs that may indicate any irregularities, and
   •   alert and be able to detect fraud.
Closing Review and Certification: The underwriter (or the lender or the lender’s closing
department) must

   •   Review all
           o closing documents
           o certifications on the closing statements, and
           o legal instruments and other documents executed at closing, and
   •   certify on page 4 of form HUD-92900-A, HUD/VA [U.S. Department of Veterans
       Affairs] Addendum to Uniform Residential Loan Application, that the
           o transaction and loan meet statutory and regulatory requirements of the FHA and
               National Housing Act, and
           o loan has been closed in accordance with the terms and sales price specified in the
               sales contract.

HUD Handbook 4155.1, paragraph 4-F(1)(b)
Underwriting requires a careful analysis of many aspects of the mortgage.

Each loan is a separate and unique transaction, and there may be multiple factors that
demonstrate a borrower’s ability and willingness to make timely mortgage payments.

Simply establishing that a loan transaction meets minimal standards does not necessarily
constitute prudent underwriting. When qualifying a borrower, it is important to avoid the danger
of “layering flexibilities” when assessing the mortgage insurance risk.

HUD Handbook 4155.1, paragraph 4-D(2)(g)
Commission income must be averaged over the previous two years. To qualify with commission
income, the borrower must provide

   •   copies of signed tax returns for the last two years, and
   •   the most recent pay stub.
Commission income showing a decrease from one year to the next requires significant
compensating factors before a borrower can be approved for the loan.



                                                 19
A borrower whose commission income was received for more than one year, but less than two
years may be considered favorably if the underwriter can
   • document the likelihood that the income will continue, and
   • soundly rationalize accepting the commission income.

HUD Handbook 4155.1, paragraph 4-D(2)(c)
The lender must establish and document an earnings trend for overtime and bonus income. If
either type of income shows a continual decline, the lender must document in writing a sound
rationalization for including the income when qualifying the borrower.

A period of more than two years must be used in calculating the average overtime and bonus
income if the income varies significantly from year to year.

HUD Handbook 4155-1, paragraph 4-C(4)(b)
When computing the debt-to-income ratio, the lender must include the following recurring
obligations:

   •   monthly housing expense, and
   •   additional recurring charges extending ten months or more, such as
          o payments on installment accounts
          o child support or separate maintenance payments
          o revolving accounts, and
          o alimony
HUD Handbook 4155.1, paragraph 4-C(6)(a)
Debt payments such as a student loan or balloon note scheduled to begin or come due within 12
months of the mortgage loan closing must be included by the lender as anticipated monthly
obligations during the underwriting analysis.

Debt payments do not have to be classified as projected obligations if the borrower provides
written evidence that the debt will be deferred to a period outside the 12-month timeframe.

HUD Handbook 4155.1, paragraph 4-F(2)(b)
Mortgage Payment Expense to Effective Income Ratio
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. For those borrowers who qualify under FHA’s Energy
Efficient Homes (EEH), the ratio is set at 33%.




                                                20
HUD Handbook 4155.1, paragraph 4-F(2)(c)
Total Fixed Payments to Effective Income Ratio
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%.

FHA TOTAL Mortgage Scorecard User Guide
The lender must conduct a manual underwriting review according to FHA requirements for all
loan applications that generate a “refer” rating. The DE underwriter must determine if the
borrower is creditworthy in accordance with FHA standard credit policies and requirements. It is
FHA policy that no borrower be denied an FHA insured mortgage loan solely based on a risk
assessment generated by TOTAL.

24 CFR 203.41
(b) Policy of free assumability with no restrictions. A mortgage shall not be eligible for
insurance if the mortgage property is subject to legal restriction on conveyance, except as
permitted by this part.

(c) Exception for eligible governmental or nonprofit programs. Legal restrictions on
conveyance are acceptable if:
       (1) The restrictions are part of an eligible governmental or nonprofit program and are
       permitted by paragraph (d) of this section; and
       (2) The restrictions will automatically terminate if title to the mortgaged property is
       transferred by foreclosure or deed-in-lieu of foreclosure, or if the mortgage is assigned to
       the Secretary.

(d) Exception for eligible governmental or nonprofit programs—specific policies. For
purposes of paragraph (c) of this section, restrictions of the following types are permitted for
eligible governmental or nonprofit programs, provided that a violation of legal restrictions on
conveyance may not be grounds for acceleration of the insured mortgaged or for an increase in
the interest rate, or for voiding a conveyance of the mortgagor’s [borrower] interest in the
property, terminating the mortgagor’s interest in the property, or subjecting the mortgagor to
contractual liability other than requiring repayment (at a reasonable rate of interest) of assistance
provided to make the property affordable as low or moderate-income housing.

24 CFR 92.254(a)(5)(ii)(A)

The following options for recapture requirements are acceptable to HUD. The participating
jurisdiction may adopt, modify or develop its own recapture requirements for HUD approval. In



                                                  21
establishing its recapture requirements, the participating jurisdiction is subject to the limitation
that when the recapture requirement is triggered by a sale (voluntary or involuntary) of the
housing unit, the amount recaptured cannot exceed the net proceeds, if any. The net proceeds are
the sales price minus superior loan repayment (other than HOME [HOME Investment
Partnerships program] funds) and any closing costs.




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Appendix D
         Schedule of Estimated Losses for Loans With Significant Deficiencies


                                                                 Estimated loss to
  FHA case no.         Deficiency         Mortgage balance
                                                                   HUD (50%)
   332-5813440    Restrictive covenants        $184,734               $92,367
   332-5916924 Restrictive covenants            173,918                86,959
   332-5831710    Restrictive covenants         152,814                76,407
   332-5759928    Restrictive covenants         139,413                69,707
   332-5774881    Restrictive covenants         136,564                68,282
   332-5684104    Restrictive covenants         135,355                67,678
   332-5701299    Restrictive covenants         131,092                65,546
   332-5730165    Restrictive covenants         126,224                63,112
   332-5765453    Restrictive covenants         114,624                57,312
   332-5613744    Restrictive covenants         112,804                56,402
   332-5758315    Restrictive covenants         105,137                52,569
   332-5726790    Restrictive covenants         100,031                50,016
   332-5362214    Restrictive covenants          61,531                30,766
   332-5461596 Restrictive covenants             60,021                30,011
            Total Recommendation 1A            1,734,262              867,134
    332-5994293          Income                 259,107               129,554
    332-5771783          Income                 203,681               101,841
    332-5857550 Income & liabilities            146,951                73,476
            Total Recommendation 1B             609,739               304,871
     Total recommendations 1A and 1B           2,344,001             1,172,005




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Appendix E
            Narrative Loan Summaries for Significant Underwriting Deficiencies


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

FHA case number: 332-5994293
Loan amount: $265,505
Closing date: December 31, 2014
Status: active
Unpaid balance: $259,107


Evergreen Did Not Identify Warning Signs Indicating Fraud
We are seeking indemnification of this loan because Evergreen’s underwriter did not exercise
due diligence and prudent underwriting. The income used to qualify the borrower was based on
a promotion, which increased the borrower’s income from $27,000 per year to $85,000 per year.
We identified issues with the quality of the job offer letter, and a verification of employment
conducted during postclosing stated that the borrower returned to his original position and salary
after just 1 month. HUD Handbook 4155.1, paragraph 4-F(1)(b), states that simply establishing
that a loan transaction meets minimal standards does not necessarily constitute prudent
underwriting. Additionally, HUD Handbook 4155.2-A(4)(b) states that an underwriter must be
aware of the warning signs, which may include any irregularities, and alert and able to detect
fraud. The borrower worked for the same employer for 3 years without a significant change in
salary. Also, the file indicated that the borrower was still a student and, therefore, had likely not
experienced a change in his qualifications that would have justified such a large pay raise. Yet,
Evergreen did not recognize the large pay raise as an indicator of potential fraud. As a result,
Evergreen did not take additional steps to ensure that the job offer was valid. Without the raise,
the borrower would not have qualified for the loan.


FHA case number: 332-5771783
Loan amount: $212,480
Closing date: October 10, 2013
Status: active
Unpaid balance: $203,681


Evergreen Did Not Calculate the Borrower’s Income Correctly
We are seeking indemnification of this loan because Evergreen incorrectly calculated the
borrower’s commission income. The borrower had an established history of earning commission
income. However, Evergreen calculated the borrower’s income based on potential earnings


                                                  24
stated in a letter from a new employer. HUD Handbook 4155.1, paragraph 4-E(5)(d), states that
projected income from a new job is acceptable for qualifying purposes if there is a guaranteed
nonrevocable contract for employment. Evergreen did not obtain support that the contract was
guaranteed and nonrevocable. Therefore, Evergreen was required to follow HUD Handbook
4155.1, paragraph 4-D(2)(g), which states that commission income must be averaged over the
previous 2 years. We averaged the borrower’s income over 2 years and determined that
Evergreen overstated the borrower’s income by $380 per month. Using the correct income, we
calculated the front and back ratios as 39 and 60.75 percent, respectively. FHA’s limit for the
front ratio and back ratios are 31 and 43 percent.

We obtained access to HUD’s FHA Connection, which has a Total Mortgage Score Card
emulator. We submitted the loan through the emulator using the correct income and ratios. The
emulator returned a “refer” recommendation because the back ratio was too high. A feedback
message of “refer” requires the lender to manually underwrite the loan 12. When manually
underwritten, the qualifying ratios can be exceeded only when there are significant compensating
factors. Because this loan was not manually underwritten and there was a lack of significant
compensating factors, this loan was not eligible for FHA insurance


FHA case number: 332-5857550
Loan amount: $152,625
Closing date: January 17, 2014
Status: active
Unpaid Balance: $146,951


Evergreen Did Not Correctly Calculate the Borrower’s Income and Did Not Identify an Increase
in Liabilities
We are seeking indemnification of this loan because Evergreen did not calculate the borrower’s
income correctly and did not include all of the borrower’s liabilities. The borrower’s overtime
income varied significantly, increasing from approximately $6,600 in 2012 to approximately
$17,300 in 2013. HUD Handbook 4155.1, paragraph 4-D(2)(C), states that a period of more than
2 years must be used in calculating the average overtime if the income varies significantly from
year to year. Evergreen, however, averaged the borrower’s income over less than 2 years,
despite having 3 years of overtime data available. We calculated the overtime income using the
3 years of overtime data available and determined that Evergreen overstated income by $212 per
month.
Also, Evergreen did not identify a potential increase to the borrower’s liabilities. HUD
Handbook 4155.1, paragraph 4-C(6)(a), states that debt payments, such as a student loan or
balloon note scheduled to begin or come due within 12 months of the mortgage loan closing,

12
     TOTAL Scorecard Emulator is used to assist lenders in making credit decisions. FHA TOTAL Scorecard
     evaluates a borrower’s creditworthiness and returns either an Accept or Refer underwriting decision. A Refer
     decision indicates the borrower may not be a good risk. In this case, the loan must be manually underwritten in
     order to make a final determination of the borrower’s creditworthiness for the loan.


                                                           25
must be included by the lender as anticipated monthly obligations during the underwriting
analysis. The borrower’s divorce decree stated that she was required to pay child support
payments of $350 per month, plus an additional $50 for every $10,000 made annually in excess
of $26,000. Based on the income used to qualify the borrower, the child support liability for the
following year was $150 per month more than Evergreen calculated. Using the correct income
and liabilities, we calculated front and back ratios as 25.17 and 60.89 percent, respectively.
HUD’s limit for the front ratio is 31 percent and back ratio is 43 percent.
We obtained access to HUD’s FHA Connection, which has a Total Mortgage Score Card
emulator. We submitted the loan through the emulator using the correct income, liabilities, and
ratios. The emulator returned a “refer” recommendation because the back ratio was too high. A
feedback message of ”refer” requires the lender to manually underwrite the loan. When
manually underwritten, the qualifying ratios can be exceeded only when there are significant
compensating factors. Because this loan was not manually underwritten and there was a lack of
significant compensating factors, this loan was not eligible for FHA insurance.




                                                26
Appendix F
    Schedule of Active Loans Containing Unacceptable Restrictions on Conveyance


                 Origination       Mortgage       Downpayment       Affordability
 FHA case no.
                    date           Balance          assistance      period (years)

 332-5813440      10/1/2013         $184,734         $17,650              10
 332-5916924       8/1/2014          173,918          17,080              10
 332-5831710       1/1/2014          152,814          14,395               5
 332-5759928       6/1/2013          139,413          14,549               5
 332-5684104       3/1/2013          135,355          14,779               5
 332-5774881       7/1/2013         136,534           14,819               5
 332-5701299       3/1/2013          131,092          25,000              10
 332-5730165       5/1/2013          126,224          14,343               5
 332-5765453       6/1/2013          114,624          13,118               5
 332-5613744      12/1/2012          112,804          12,238               5
 332-5758315       8/1/2013          105,137          12,772               5
 332-5726790       5/1/2013          100,031          21,856              10
 332-5362214       5/1/2011           61,531           7,597               5
 332-5461596       2/1/2012           60,021          19,128              10
    Totals                         1,734,262         219,324




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