oversight

Waters Mortgage Corp., Plantation, FL

Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-05-13.

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

                                                                     Issue Date

                                                                          May 13, 1996
                                                                     Audit Case Number

                                                                          96-AT-221-1004




TO:            Nicolas P. Retsinas, Chairman, Mortgagee Review Board, H


FROM:          Kathryn Kuhl-Inclan
               District Inspector General for Audit-Southeast/Caribbean, 4AGA


SUBJECT:       Waters Mortgage Corporation
               Non-Supervised Mortgagee
               Plantation, Florida

Attached is our report on Waters Mortgage Corporation for selected HUD-insured Section 203(k)
rehabilitation home loans originated in Florida. The report identifies significant loan origination
deficiencies which warrant action by the Mortgagee Review Board.

We have provided a copy of our report to William M. Heyman, Director, Office of Lender
Activities and Land Sales Registration, to facilitate preparation for the Mortgagee Review Board
meeting. We are continuing to review additional loans originated by Waters Mortgage
Corporation. We will keep you advised of the results.

Should you or your staff have any questions, please contact Nancy H. Cooper, Assistant District
Inspector General for Audit, at (404) 331-3369.
Management Memorandum




                        This Page Left Blank Intentionally




96-AT-221-1004                        Page ii
Executive Summary
We completed a review of Waters Mortgage Corporation, a non-supervised mortgagee, generally
for the period July 1, 1993, through May 6, 1994. We extended some tests through August 10,
1995. The audit objective was to determine if Waters Mortgagee originated HUD-insured
Section 203(k) rehabilitation home loans according to HUD requirements. We reviewed Waters
Mortgage as part of a HUD-wide review to determine if the Section 203(k) Program promotes
home ownership in an effective, efficient, and economical manner.

Our test of 107 loans, all to the same borrower, showed that Waters Mortgage did not originate
the 203(k) loans in accordance with HUD requirements.




                                    In all 107 loans we reviewed, Waters Mortgage did not
 We identified
                                    follow HUD loan origination requirements. In 79 cases
                                    Waters Mortgage furnished HUD false or incomplete data
                                    to use in deciding whether to insure the loans. Waters
                                    Mortgage did not require the borrower to make a
                                    downpayment and approved even more loans after the
                                    borrower had failed to timely complete the property
                                    rehabilitation work for previous loans. For 95 of the loans,
                                    Waters Mortgage approved ineligible and unsupported
                                    closing costs which were paid to Waters Mortgage and the
                                    borrower.

                                    As a result, HUD insured abnormally high risk loans
                                    totaling $3.7 million which it may not have insured if
                                    Waters Mortgage had provided complete and accurate
                                    information to HUD. At the completion of our review, 8
                                    properties with loans totaling $572,550 were in the process
                                    of being conveyed to HUD, and 3 other loans totaling
                                    $237,450 were in default. Also, because the borrower did
                                    not timely complete the rehabilitation work, the borrower
                                    sold 44 of the 107 properties. The buyer of the 44
                                    properties obtained new 203(k) loans from Waters
                                    Mortgage which totaled $218,500 more than the original
                                    loans further increasing HUD's risk.

                                    Waters Mortgage did not exercise prudent lending practices
                                    or place proper emphasis on protecting HUD's interests in
                                    the loan origination process. We are recommending that
                                    the Mortgagee Review Board take appropriate sanctions
                                    against Waters Mortgage.


                                            Page iii                                96-AT-221-1004
Executive Summary




96-AT-221-1004      Page iv
                                     Executive Summary



We discussed our review results with the Waters Mortgage
Chief Executive Officer during our review. He generally
did not agree with the audit finding. We have included his
comments in the appendices supporting the audit finding as
appropriate. We also sent Waters Mortgage a copy of our
draft report on March 18, 1996. Waters Mortgage declined
to submit formal written comments for inclusion in this
report.




        Page v                                96-AT-221-1004
Table of Contents

Management Memorandum                                         i


Executive Summary                                            ii


Introduction                                                  1


Finding

                 Waters Mortgage Failed to Originate Loans
                 According to HUD Requirements                3


Internal Controls                                             7


Follow-Up On Prior Audits                                     9


Appendices

        A        Deficiencies in Loan Origination            11


        B        Narrative Case Presentation -
                 67 Riviera Beach Loans                      13


        C        Narrative Case Presentation -
                 28 Deerfield Beach Loans                    19


        D        Narrative Case Presentation -
                 12 Miami Loans                              21


        E        Loans Reviewed, Riviera Beach, Florida      23


96-AT-221-1004                       Page vi
           Table of Contents




Page vii         96-AT-221-1004
Table of Contents




        F        Loans Reviewed, Deerfield Beach, Florida              25


        G        Loans Reviewed, Miami, Florida                        27


        H        Sequence of Documents, Riviera Beach Loans            29


        I        Delays With 203(k) Rehabilitation                     31



Abbreviations
        CFR         Code of Federal Regulations
        FHLMC       Federal Home Loan Mortgage Corporation
        HUD         U.S. Department of Housing and Urban Development




96-AT-221-1004                           Page viii
Introduction

                          Waters Mortgage Corporation is a non-supervised
Background
                          mortgagee which originates loans in Florida and other
                          states. The main office is located at 8751 Broward
                          Boulevard, Suite 500, Plantation, Florida.            Waters
                          Mortgage also has offices in Georgia, Illinois, Virginia, and
                          Texas.

                          Waters Mortgage originates HUD-insured loans, including
                          203(k) loans. The 203(k) Program is HUD's primary
                          program for the rehabilitation and repair of single family
                          properties. The program enables the borrower to finance
                          both the acquisition and rehabilitation of a property with
                          just one loan, at a long-term fixed (or adjustable) rate.

                          Our objective was to determine if Waters Mortgage
Audit objectives, scope
                          originated HUD-insured 203(k) rehabilitation home loans
and methodology
                          according to HUD requirements. Our audit generally
                          covered the period July 1, 1993, through May 6, 1994. We
                          extended some tests through August 10, 1995. Our audit
                          included a review of Waters Mortgage's system of
                          administrative controls and practices. We reviewed 107
                          loans originated by Waters Mortgage consisting of 67 in
                          Riviera Beach, 28 in Deerfield Beach, and 12 in Miami.

                          The loans in each location involved the same borrower,
                          seller, and settlement agent and were closed at the same
                          time. The loans in Riviera Beach and Deerfield Beach were
                          for co-located properties. We made detailed reviews of the
                          loan origination files for four Riviera Beach loans, for two
                          Deerfield Beach loans, and for two Miami loans. Because
                          much of the documentation in each of the 3 groups of loans
                          was nearly identical, we scanned the loan origination files
                          for the remaining 99 loans.

                          For all 107 loans, we verified selected data on the
                          settlement statements. We inspected selected units in
                          Riviera Beach and Deerfield Beach. We reviewed the
                          rehabilitation escrow summary files for eight Deerfield
                          Beach and seven Riviera Beach loans. We verified the
                          mortgage status for all 107 loans. All of our samples were
                          selected on a judgment basis.




                                   Page 1                                  96-AT-221-1004
Introduction



                 We performed the audit from August 7, 1995, through
                 March 18, 1996 in accordance with generally accepted
                 government auditing standards.




96-AT-221-1004          Page 2
                                                                                          Finding




   Waters Mortgage Failed to Originate Loans
       According to HUD Requirements
Waters Mortgage did not exercise prudent lending practices or comply with HUD requirements
in the origination of HUD 203(k) loans. In 79 of 107 loans we reviewed, Waters Mortgage
furnished false or incomplete data to HUD to use in deciding whether to insure the loans. Waters
Mortgage did not require the borrower (a non-profit) to make a downpayment and approved the
borrower even after it had failed to timely complete the property rehabilitation work on previous
loans. For 95 of the loans tested, Waters Mortgage paid ineligible and unsupported closing costs
to itself and to the borrower. As a result, HUD insured abnormally high risk loans totaling $3.7
million which it may not have insured if Waters Mortgage had provided complete and accurate
information to HUD. At the completion of our review, 8 properties with loans totaling $572,550
were in the process of being conveyed to HUD, and 3 other loans totaling $237,450 were in
default.

                                     Title 24 of the Code of Federal Regulations, Part
 Criteria
                                     200.163(b) states that:

                                         The mortgagee shall exercise due diligence when
                                         underwriting mortgages. Due diligence means that care
                                         which a mortgagee would exercise in obtaining and
                                         verifying information for a loan in which the mortgagee
                                         would be entirely dependent on the property as security
                                         to protect its investment. Compliance with HUD's
                                         handbook requirements will be considered by HUD to
                                         be the minimum exercise of due diligence in the
                                         underwriting of mortgage loans. The mortgagee shall
                                         determine the eligibility of the property and prospective
                                         borrower in accordance with program requirements
                                         included in 24 CFR part 203.50.

                                     Applicable HUD requirements are included in Handbook
                                     4240.4 REV-2, 203K Handbook, Rehabilitation Home
                                     Mortgage Insurance; and Handbook 4155.1 REV-4,
                                     Mortgage Credit Analysis for Mortgage Insurance on One
                                     to Four Family Properties.




                                              Page 3                                  96-AT-221-1004
Finding



                            We reviewed 107 loans originated by Waters Mortgage
                            from July 1, 1993, through May 6, 1994, as shown on
                            Appendices E-G. The loans were made in three groups to
                            the same borrower, New Day Outreach Centers, Inc., a non-
                            profit organization.

                            All 107 loans included significant origination deficiencies
 Origination deficiencies
                            which are summarized on Appendix A and discussed in
                            detail in Appendices B-D.

                            For 79 loans, Waters Mortgage gave HUD documents
                            which Waters Mortgage knew included false information
                            about the borrower's downpayment. In 67 cases, the
                            purchase price of the properties was improperly inflated
                            resulting in excess loan proceeds of $342,336. Waters
                            Mortgage used $167,098 of the $342,336 so that the
                            borrower did not have to make downpayments for the loans.
                            Waters Mortgage kept the remaining $175,238. About 8
                            months later, Waters Mortgage approved 12 more loans
                            when it knew the borrower did not have sufficient assets to
                            make the required downpayments. For the borrower's
                            downpayments on the 12 loans, Waters Mortgage used
                            $31,668 of the $175,238 which it had kept from the closing
                            of the earlier loans.

                            Waters Mortgage approved 12 loans when it knew that the
                            borrower was not a good credit risk. At the time Waters
                            Mortgage approved the 12 loans, the borrower was behind
                            schedule in completing property rehabilitation work for 95
                            previous loans. Waters Mortgage did not give HUD this
                            information.

                            For 95 loans, Waters Mortgage was paid $16,675 for
                            ineligible closing fees and $8,400 for unsupported closing
                            fees. Waters Mortgage also approved ineligible closing
                            fees of $15,364 which were paid to the borrower.

                            Although HUD required the rehabilitation work to be
                            completed within 6 months, the borrower had not
                            completed the rehabilitation of 40 properties when we
                            inspected them over 23 months after the loan closings.




96-AT-221-1004                      Page 4
                                                                    Finding



                 As a result of the origination deficiencies, HUD insured
                 abnormally high risk loans totaling $3.7 million which it
                 may not have insured if Waters Mortgage had provided
                 complete and accurate information to HUD. All 107 loans
                 initially went into default. The borrower subsequently sold
                 95 of the properties and the new buyer assumed 51 of the
                 loans. For the other 44 properties, the original loans were
                 paid off and Waters Mortgage issued new 203(k)
                 mortgages. The 44 replacement loans totaled $218,500
                 more than the original loans further increasing HUD's risk.
                 As of March 8, 1996, 52 of the remaining 63 loans (107
                 less 44) were current, and 11 loans totaling $810,000 were
                 in default. The properties for 8 of the 11 loans totaling
                 $572,550 were in the process of being conveyed to HUD.

                 The problems occurred because Waters Mortgage did not
                 place proper emphasis on protecting HUD's interests in the
                 loan origination process.




Recommendation   We recommend that the Mortgagee Review Board take
                 appropriate sanctions against Waters Mortgage.




                         Page 5                                 96-AT-221-1004
Finding




                 This Page Left Blank Intentionally




96-AT-221-1004                 Page 6
Internal Controls
In planning and performing our audit, we considered the internal control systems of Waters
Mortgage Corporation to determine our auditing procedures and not to provide assurance on
internal control. Internal control is the process by which an entity obtains reasonable assurance
as to achievement of specific objectives. Internal control consists of interrelated components,
including integrity, ethical values, competence, and the control environment which includes
establishing objectives, risk assessment, information systems, communication, managing change,
and monitoring.

We determined that the following internal control category was relevant to our audit objectives:

    •     Origination of HUD 203(k) loans

We evaluated the control category identified above by determining the risk exposure and
assessing control design and implementation.

A significant weakness exists if internal control does not give reasonable assurance that the
entity's goals and objectives are met; that resource use is consistent with laws, regulations, and
policies; that resources are safeguarded against waste, loss, and misuse; and that reliable data are
obtained, maintained, and fairly disclosed in reports. Based on our review, we concluded that
weaknesses existed with Waters Mortgage Corporation's procedures for originating HUD 203(k)
loans. The weaknesses are discussed in the finding.




                                               Page 7                                   96-AT-221-1004
Internal Controls




                    This Page Left Blank Intentionally




96-AT-221-1004                    Page 8
Follow-Up On Prior Audits


Charles J. Boyer, Certified Public Accountant, performed the last audit of Waters Mortgage
Corporation for the year ended August 31, 1995. The report contained no audit findings.




                                          Page 9                               96-AT-221-1004
Follow-Up On Prior Audits




                            This Page Left Blank Intentionally




96-AT-221-1004                            Page 10
                                                                                                   Appendix A

Deficiencies in Loan Origination

             Cash to          Down-                Ineligible/            Faulty                Rehab Work
 No.         Close Not        payment              Unsupported            Underwriting          Not Timely
Loans        Verified         Falsified            Closing Fees           Decision              Completed

 671                             X                        X                                           X

 282                                                     X                                            X

 123           X                  X                                             X

Totals           12               79                      95                    12                    95




  1
       Loans for 67 properties in Riviera Beach, Florida. See Appendix E for the case numbers, amounts, and loan
       status. See Appendix B for a discussion of the origination deficiencies.

  2
       Loans for 28 properties in Deerfield Beach, Florida. See Appendix F for the case numbers, amounts, and loan
       status. See Appendix C for a discussion of the origination deficiencies.

  3
       Loans for 12 properties in Miami, Florida. See Appendix G for the case numbers, amounts, and loan status.
       See Appendix D for a discussion of the origination deficiencies.


                                                      Page 11                                       96-AT-221-1004
Appendix A




                 This Page Left Blank Intentionally




96-AT-221-1004                 Page 12
                                                                                   Appendix B

                   Narrative Case Presentation
                      Riviera Beach Loans
Transaction:   67 HUD-insured loans totaling $2,001,250 closed September 7, 1993, see
               Appendix E for individual case numbers and loan amounts

Borrower per HUD-1s:        New Day Outreach Centers, Inc.

Seller per HUD-1s:          Global Housing, a non-profit corporation.

Location of properties:     Riviera Beach, Florida

Status of loans as of March 8, 1996: 16 loans were paid off and were replaced with new loans,
the other 51 loans were current

Summary

Waters Mortgage submitted a HUD-1, Settlement Statement, to HUD for each of the 67 loans
which included false information on the amount paid by the borrower for the property and the
source of the borrower's downpayment. Instead of paying $342,336 of mortgage proceeds to the
seller of the property, Global Housing, as was indicated on the HUD-1s, Waters Mortgage used
$167,098 as the borrower's downpayment and closing costs, and Waters Mortgage and the
borrower kept the remaining $175,238. Waters also charged ineligible closing costs of $15,303.

False statements for the amount paid for the property and for the source of the borrower's
downpayment

Waters Mortgage, the borrower, the closing agent, and the rehabilitation contractor conspired to
furnish false information to HUD regarding the borrower's purchase of the 67 properties. The
false information was provided so the borrower would not have to make a downpayment and pay
closing costs from its own resources.

HUD Handbook 4155.1 REV-4, Mortgage Credit Analysis for Mortgage Insurance on One to
Four Family Properties, paragraph 2-10, and HUD Handbook 4240.4 REV-2, 203K Handbook,
Rehabilitation Home Mortgage Insurance, paragraph 4-9, state that the borrower's cash
investment in the property must equal the difference between the amount of the insured mortgage
and the total cost to acquire the property, including prepaid expenses.




                                             Page 13                                96-AT-221-1004
Appendix B



Each HUD-1 falsely stated the amount of mortgage proceeds paid to the seller of the property.
The HUD-1s showed Global Housing was paid $596,530 as follows:

                  Number                 Gross Amount Due Seller
                 of Loans               Per Property       Total
                   2                        $ 8,310       $ 16,620
                  16                          8,375        134,000
                  10                          8,660         86,600
                   2                          8,925         17,850
                  16                          8,950        143,200
                   5                          9,380         46,900
                  16                          9,460        151,360
                  67                                     $ 596,530

After reductions for settlement charges, the HUD-1s showed that Global Housing was paid a total
of $592,336. However, the closing disbursement records showed no loan proceeds were
disbursed to Global Housing. The records showed loan proceeds of $219,573 were paid to the
Federal Home Loan Mortgage Corporation (FHLMC), $175,238 was paid to Waters Mortgage,
$30,427 was paid the borrower for items paid outside of closing, and the balance was used as the
borrower's downpayment. The HUD-1s showed that the borrower paid $167,098 to close the
loans. This information was also false because the borrower made no such payments. The
$167,098 was the net amount of loan proceeds not disbursed at closing ($592,336 - $219,573 -
$175,238 - $30,427).

The $167,098 for the borrower's downpayment and the $175,238 paid to Waters Mortgage were
generated from an unnecessary sale of the 67 properties. The circumstances involved are
summarized in Appendix H. Waters Mortgage originated the loans on the basis that the borrower
purchased the properties from Global Housing. However, the borrower did not need to purchase
the properties from Global Housing because on July 28, 1993, the borrower completed an
agreement to buy the 67 properties from the Federal Home Loan Mortgage Corporation
(FHLMC) for $250,000 making a deposit of $12,500 at that time. The borrower could have
purchased from FHLMC for $250,000 if it had been able to make a downpayment of about
$160,000 from its own funds to close the 203(k) loans. Apparently the borrower did not have
the funds and arranged to make the purchase for $596,530 from Global Housing. The price
increase generated the additional mortgage proceeds of $342,336, $167,098 used for the
borrower's downpayment and $175,238 paid to Waters Mortgage.

The manner in which the property sale was processed further documented the unnecessary nature
of the transaction. As shown in Appendix H, the HUD-1s for the HUD insured loans were dated
September 7, 1993. However, the HUD-1 for Global Housing's purchase of the properties from
FHLMC was not dated until September 17, 1993, and the borrower did not assign its sales
agreement with FHLMC to Global Housing until September 21, 1993.




96-AT-221-1004                               Page 14
                                                                                    Appendix B



The sole reason for the borrower purchasing the properties from Global Housing instead of
FHLMC was to generate additional cash for the benefit of the borrower.

The person who signed the HUD-1s for Global Housing was an owner of the company with
which the borrower contracted to perform the rehabilitation work for the 67 Riviera Beach
properties and the 28 Deerfield Beach properties (see Appendix C). The Global Housing
representative had a power of attorney from Global Housing which showed the borrower had a
contract to purchase the 67 properties from FHLMC and that the contract had been assigned to
Global Housing. The Global Housing representative stated that the property transfer was made
through Global Housing because the borrower did not have enough money to buy the properties.
The closing agent stated that the Global Housing representative was not present at the closing of
the loans but signed the HUD-1s a few days later.

The closing agent's files included a document dated September 13, 1993 signed by the Global
Housing representative in which Global Housing agreed that the closing agent would disburse
the sales proceeds due Global Housing to the borrower. This document was not provided to
HUD.

After the loan closings were completed September 7, 1993, the closing agent still had $175,238
in loan proceeds left from the amount due the seller. The closing agent paid the $175,238 to
Waters Mortgage. Based on Waters Mortgage's records and statements of a Waters Mortgage
official, Waters Mortgage used the $175,238 for the following purposes:

      Purpose                                                                     Amount
      Paid to borrower September 22, 1993                                         $ 14,5731
      Paid to borrower September 28, 1993                                           75,000
      Paid for the benefit of borrower January 1994                                 25,493
      Paid to borrower April 4, 1994                                                 6,474
      Borrower's cash downpayment to close 12 203(k) loans in Miami
       May 6, 1994                                                                  31,668
      Paid for security services, Riviera Beach properties                          11,760
      Paid to Global Housing February 1, 1994                                       10,000
      Not accounted for                                                                270
         Total                                                                   $ 175,238


The Uniform Residential Loan Application for each loan showed that source of the borrower's
downpayment would be a gift from a nonprofit organization. A Waters Mortgage official
confirmed that the borrower's downpayment was a gift from Global Housing. The closing




  1
      $45,000 less $30,427 for amounts paid by borrower outside of closing.


                                                    Page 15                          96-AT-221-1004
Appendix B



agent's files included an agreement signed by the Global Housing representative stating that
Global Housing would donate approximately $350,000 to the borrower and a letter from the
agent to Waters Mortgage dated September 9, 1993, requesting Waters Mortgage's approval of
the agreement.

HUD Handbook 4155.1 REV-4, paragraph 2-10, states that (1) the donor of a gift for the
borrower's cash investment may not be a person or entity with an interest in the sale of the
property, such as the seller, builder, or any entity associated with them and (2) gifts or credits
from these sources must be subtracted from the sales price, and may not be considered as assets
to close.

HUD Handbook 4240.4 REV-2, paragraph 7-2, states that HUD will permit a government agency
or non-profit organization:

        "to provide a gift of funds (typically in the form of a credit or a grant) to
        the purchaser who is seeking an insured mortgage. (Transactions in
        which a builder or other party funds the downpayment through the local
        community in order to sell a house are not permitted.) The key
        ingredients in any such program are the involvement of a governmental
        agency or non-profit organization and the methods used to generate the
        funds they provide to the purchaser."

The claimed gift by Global Housing to the borrower fails this test for two reasons. First, the
Global Housing representative was the rehabilitation contractor and was seeking to profit from
the loan originations. Second, and more importantly, was the method used to generate the funds.
The funds were generated by an unnecessary mark-up of the property sales price by $346,530
($596,530 - $250,000).

A Waters Mortgage official stated that inflating the sales price to generate funds for the borrower
was in accordance with HUD guidelines and that HUD's interest was protected because the
properties' appraised value was more than the loan amounts. The official's reasoning was
incorrect and unsound. The sales price mark-up improperly diverted $342,336 to Waters
Mortgage and the borrower, inflated the HUD-insured loans by about $328,000, and greatly
increased HUD's risk on the loans. In addition, the borrower's stated objective was to repair and
sell the properties to benefit lower income families. The mark-up will increase the sales prices
of the units when sold to low income families. Instead of HUD sanctioning such a procedure as
the Waters official implies, HUD would be better off to waive the borrower's downpayment
requirement and include only the lower sales price in the insured loan.

Waters Mortgage improperly originated the 67 loans. Waters Mortgage had sufficient knowledge
that (1) HUD's requirements for the borrower's source of funds for its downpayment and closing
costs were not met and (2) the loans were inflated by an unnecessary mark-up of the property
sales prices.



96-AT-221-1004                                   Page 16
          Appendix B




Page 17   96-AT-221-1004
Appendix B



Excessive fees were paid to Waters Mortgage

Waters Mortgage was paid $15,303 from the mortgage proceeds for excessive fees as follows:

          Type of Fee                                                     Amount
          Building permits                                                 $ 8,945
          Surveys                                                            3,075
          Document preparation                                               3,283
            Total                                                         $ 15,303

HUD Handbook 4155.1 REV-4, paragraph 1-7, states that closing costs must be reasonable and
that document preparation costs are eligible only if the work is performed by a third party not
controlled by the lender.

Waters Mortgage did not have documentation to support its charges of $20,100 for building
permits shown on the HUD-1s. We reviewed records of the City of Riviera Beach and
determined the charges should have totaled only $11,155. The difference of $8,945 was
ineligible.

For surveys, Waters Mortgage charged $350 per property for a total of $23,450. However,
Waters Mortgage's records showed that the survey actually cost $225 per property plus a
proportionate share of the cost for common areas of about $79 per property. The total supported
cost was $20,375. The difference of $3,075 was ineligible.

Waters Mortgage charged a document preparation fee of $49 to each loan for a total of $3,283.
The HUD-1s showed the fees were paid to a third party as required. However, a Waters
Mortgage official stated that no such payments were made because Waters Mortgage prepared
the loan documents. The Waters Mortgage Chief Executive Officer agreed that the document
preparation fees were ineligible. He stated that the fees were charged by mistake.

Rehabilitation was not completed timely

HUD Handbook 4240.4 REV-2, paragraph 5-2.A. provides that rehabilitation take no longer than
6 months from the date of closing. A lender may consider the loan to be in default if work has
not started within 30 days of the closing date; if the work ceases for more than 30 consecutive
days; or if the work has not made reasonable progress during the rehabilitation period.

The borrower did not complete the rehabilitation work in a timely manner as required. Waters
Mortgage closed the loans on September 7, 1993. The rehabilitation work was not timely
completed, and on August 1 and September 1 , 1994, the loans went into default. On February
14, 1995, over 17 months following the loan closings, the borrower sold the 67 properties. The




96-AT-221-1004                              Page 18
                                                                                    Appendix B



buyer assumed 51 of the loans. For the other 16 properties, the original loans were paid off, and
Waters Mortgage issued 16 new 203(k) loans to the buyer at amounts which totaled $45,600
more than the old loans. We inspected the 67 properties on August 10, 1995, 23 months after the
closings. Repairs had not been completed on 18 of the 67 properties. See Appendix I for a graph
of the rehabilitation period.

Although 16 of the initial 67 loans were paid off, HUD's risk was not terminated, but instead
increased, due to the new higher valued 203(k) loans issued by Waters Mortgage.




                                             Page 19                                 96-AT-221-1004
                                                                                   Appendix C

                    Narrative Case Presentation
                      Deerfield Beach Loans
Transaction:     28 HUD-insured loans totaling $768,700 closed July 1, 1993, see Appendix F for
                 individual case numbers and loan amounts

Borrower:        New Day Outreach Centers, Inc.

Location of Properties:     Deerfield Beach, Florida

Status of Loans as of March 8, 1996: All of the loans were paid off and replaced with new
203(k) loans.

Summary

The HUD-1s showed ineligible consulting fees of $15,364 paid to the borrower. Waters
Mortgage also received ineligible fees of $1,372 and unsupported fees of $8,400 at loan closing.
The loans went into default and, without completing the rehabilitation work, the borrower sold
the properties and paid off the loans. Waters Mortgage originated new 203(k) loans at increased
loan amounts totaling $172,900. When we inspected the properties 25 months after closing, the
rehabilitation work for 22 of the properties was still not complete.

Ineligible consultant fees included in the mortgages

The HUD-1s showed charges of $15,364 to the borrower for consultant fees paid to the borrower.
The charges ranged from $518 to $671 per property and were in addition to separate plan review
fees of $100 per loan. The Maximum Mortgage Worksheets completed by Waters Mortgage
showed the consultant fees were included in the mortgages.

The consultant fees were not eligible. Mortgagee Letters 92-33 and 94-11 limit eligible
consultant services to those related to the rehabilitation work. Further, Mortgagee Letter 94-11
limits eligible consultant services to services by an independent party in preparing the
architectural exhibits. The borrower was not an independent party, and, according to the
borrower, the services performed were not related to the rehabilitation work.

The Waters Mortgage Chief Executive Officer thought the fees were eligible based on guidance
he said he received from HUD.

Ineligible fees were paid to Waters Mortgage

Waters Mortgage charged a document preparation fee of $49 to each loan for a total of $1,372.
HUD Handbook 4155.1 REV-4, allowed document preparation fees only if the work was
performed by a vendor not associated with the lender. The HUD-1s showed the fees were paid



96-AT-221-1004                               Page 20
                                                                                     Appendix C



to such a vendor. However, Waters Mortgage had no support for the payments and a Waters
Mortgage official confirmed that no such payments were made because Waters Mortgage
prepared the loan documents itself. The Waters Mortgage Chief Executive Officer agreed that
the document preparation fees were ineligible. He said they were charged by mistake.

Unsupported fees were paid to Waters Mortgage

The HUD-1s for each of the 28 loans showed $300 for building permit fees paid to Waters
Mortgage. Waters Mortgage did not have support for the payments totaling $8,400.

Rehabilitation was not completed timely

The borrower did not complete the rehabilitation work in a timely manner as required. Waters
Mortgage closed the loans on July 1, 1993. The rehabilitation work was not completed and the
loans went into default on September 1, 1994. On January 18, 1995, over 18 months following
the loan closings, the borrower sold the properties and the loans were paid off. Waters Mortgage
issued 28 new 203(k) loans to a new identity-of-interest buyer at amounts totaling $172,900 more
than the old loans. We inspected the properties on August 10, 1995, 25 months after the closings.
We determined that the repairs had not been completed on 22 of the 28 properties. See Appendix
I for a graph of the rehabilitation period.

Although the initial 28 loans were paid off, HUD's risk was not terminated, but instead increased,
due to the new higher valued 203(k) loans issued by Waters Mortgage.




                                              Page 21                                 96-AT-221-1004
                                                                                   Appendix D

                    Narrative Case Presentation
                           Miami Loans
Transaction:     12 HUD-insured loans totaling $887,000 closed May 6, 1994, see Appendix G
                 for individual case numbers and loan amounts

Borrower:        New Day Outreach Centers, Inc.

Location of Properties:     Miami, Florida

Status of loans as of March 8, 1996: 1 current, 11 in default of which 8 were being conveyed to
HUD

Summary

Waters Mortgage submitted a HUD-1, Settlement Statement, to HUD for each of the 12 loans
which included false information about the borrower's cash payment to close the loans. The
HUD-1s showed payments of $31,668, but we determined that the borrower, in fact, made no
cash payments. Also, Waters Mortgage approved the loans when it knew the borrower was
behind schedule in completing the rehabilitation work for the 28 203(k) loans in Deerfield Beach
and the 67 203(k) loans in Riviera Beach.

Assets to close the loans were not verified

HUD Handbook 4155.1 REV-4, paragraph 2-10, requires the lender to verify all funds for the
borrower's investment.

Waters Mortgage did not verify that the borrower had sufficient funds to close the loans. The
Uniform Residential Loan Applications showed the borrower's source of funds for the
downpayments and settlement charges would be the borrower's cash savings of $22,670. Waters
Mortgage obtained bank confirmations for the $22,670. However, the borrower needed $31,668
to close the loans.

False statements regarding the borrower's downpayment

Each HUD-1 showed the borrower made a cash payment to close the loan. The amounts shown
ranged from $245 to $3,481 and totaled $31,668. However, the settlement agent's records
showed the borrower made no cash payments at closing.

HUD Handbook 4155.1 REV-4, paragraph 2-10, and HUD Handbook 4240.4 REV-2, paragraph
4-9, require the borrower's cash investment in the property to equal the difference between the
amount of the insured mortgage and the total cost to acquire the property, including prepaid
expenses.



96-AT-221-1004                                Page 22
                                                                                     Appendix D



A Waters Mortgage official stated that funds for the borrower's downpayments came from the
money retained by Waters Mortgage from the closing of the 67 Riviera Beach 203(k) loans on
September 7, 1993. As discussed in Appendix B, Waters Mortgage improperly kept $175,238
from the closing of the Riviera Beach loans. The money should not have been used to close the
Miami loans. The result of the transaction was that the borrower made no downpayment for the
Miami loans.

Decision to approve the loans was not prudent

Waters Mortgage approved the 12 loans even though the borrower had failed to make adequate
progress in completing the rehabilitation work on the 28 Deerfield Beach and the 67 Riviera
Beach loans.

HUD Handbook 4240.4 REV-4, paragraph 1-17, states that a 203(k) loan must be an acceptable
risk as defined by HUD. For each loan, Waters Mortgage obtained from the borrower a
Rehabilitation Loan Rider which permitted Waters Mortgage to declare the loan in default if the
rehabilitation work was not timely started or completed. Handbook 4240.4 REV-2, paragraph
5-2.A. provides that rehabilitation should take no longer than 6 months from the date of closing.
HUD Handbook 4155.1 REV-4, paragraph 3-2, states that HUD expects the application package
to contain sufficient documentation to support the lender's decision to approve the loan.

Waters Mortgage closed the Miami loans on May 6, 1994. At that time, the borrower had
surpassed the required 6 month completion period for the 28 Deerfield Beach loans by 4 months
and for the 67 Riviera Beach loans by 2 months. Waters Mortgage's rehabilitation escrow records
showed that, at best, the rehabilitation of the 95 properties would not be completed for several
more months. All of the 95 loans subsequently went into default. When we inspected the
properties in August 1995, the rehabilitation on 40 of the properties was still not completed. See
Appendix I for a graph of the rehabilitation period.

Waters Mortgage was fully aware of the delays in the rehabilitation work for the first 95 loans
and should not have approved the 12 Miami loans given the borrower's poor performance. The
Waters Mortgage Chief Executive Officer stated that they thought the slow progress on the
Deerfield Beach and Riviera Beach loans was the fault of the contractor instead of the borrower.
This reasoning was unsound because it was the borrower's responsibility to ensure the contractor
performed on schedule and delays in completing the rehabilitation work increased the risk of
default by the borrower.

In the loan application packages it gave HUD for the 12 loans, Waters Mortgage did not include:
(1) information on the borrower's poor performance in completing the earlier 95 loans, and (2)
justification for approving the loans given that poor performance.

All of the Miami loans went into default after only 3 or 4 payments. As of March 8, 1996, 11
loans totaling $810,000 were in default. The properties for 8 loans totaling $572,550 were in the
process of being conveyed to HUD.


                                              Page 23                                 96-AT-221-1004
Appendix D




96-AT-221-1004   Page 24
                                         Appendix E

Loans Reviewed, Riviera Beach, Florida
  Loan Number    Loan Amount       Status

  092-5813752     $ 37,950         Current
  092-5813769       37,950         Current
  092-5813775       37,950         Current
  092-5813781       37,950         Current
  092-5813798       27,950         Current
  092-5813802       27,950         Current
  092-5813819       40,250         Current
  092-5813825       40,250         Current
  092-5813831       37,950         Current
  092-5813848       37,950         Current
  092-5813854       27,950         Current
  092-5813860       27,950         Current
  092-5813877       37,950         Current
  092-5813883       37,950         Current
  092-5813892       37,950         Current
  092-5813904       37,950         Current
  092-5813910       27,950         Current
  092-5807162       27,950         Paid off
  092-5807179       27,950         Paid off
  092-5807185       27,950         Paid off
  092-5807191       27,950         Paid off
  092-5807206       27,950         Paid off
  092-5807212       27,950         Paid off
  092-5807372       27,950         Paid off
  092-5813299       27,950         Paid off
  092-5813303       27,950         Paid off
  092-5813311       27,950         Paid off
  092-5813326       27,950         Paid off
  092-5813332       27,950         Paid off
  092-5813349       27,950         Paid off
  092-5813355       27,950         Paid off
  092-5813361       27,950         Paid off
  092-5813378       27,950         Paid off
  092-5804563       27,950         Current
  092-5804577       27,950         Current
  092-5804586       27,950         Current
  092-5804592       27,950         Current
  092-5804607       27,950         Current
  092-5804613       27,950         Current
  092-5804625       27,950         Current



                       Page 25              96-AT-221-1004
Appendix E



     Loan Number   Loan Amount      Status
     092-5804636       27,950       Current
     092-5804642       27,950       Current
     092-5807097       27,950       Current
     092-5807104       27,950       Current
     092-5807110       27,950       Current
     092-5807127       27,950       Current
     092-5807133       27,950       Current
     092-5807145       27,950       Current
     092-5807156       27,950       Current
     092-5813594       27,950       Current
     092-5813609       27,950       Current
     092-5813615       27,950       Current
     092-5813621       27,950       Current
     092-5813638       27,950       Current
     092-5813644       27,950       Current
     092-5813650       27,950       Current
     092-5813667       27,950       Current
     092-5813673       27,950       Current
     092-5813689       27,950       Current
     092-5813696       27,950       Current
     092-5813700       27,950       Current
     092-5813717       27,950       Current
     092-5813723       27,950       Current
     092-5813737       27,950       Current
     092-5813746       27,950       Current
     092-5804540       29,950       Current
     092-5804557       29,950       Current

         Total     $ 2,001,250




96-AT-221-1004            Page 26
                                         Appendix F

Loans Reviewed, Deerfield Beach, Florida

  Loan Number    Loan Amount       Status

  092-5776570      $ 26,950        Paid off
  092-5776587        26,500        Paid off
  092-5776593        26,500        Paid off
  092-5776608        27,350        Paid off
  092-5776013        31,550        Paid off
  092-5777104        26,500        Paid off
  092-5776007        26,500        Paid off
  092-5775076        31,550        Paid off
  092-5774800        31,550        Paid off
  092-5776535        26,500        Paid off
  092-5776529        26,500        Paid off
  092-5776564        31,550        Paid off
  092-5775053        27,350        Paid off
  092-5775047        26,500        Paid off
  092-5775030        26,500        Paid off
  092-5775024        26,950        Paid off
  092-5774977        26,950        Paid off
  092-5774960        26,500        Paid off
  092-5774823        26,500        Paid off
  092-5774817        27,350        Paid off
  092-5775018        26,950        Paid off
  092-5775001        26,500        Paid off
  092-5774993        26,500        Paid off
  092-5774983        27,350        Paid off
  092-5775062        27,350        Paid off
  092-5776512        26,500        Paid off
  092-5776036        26,500        Paid off
  092-5776021        26,950        Paid off

   Total          $ 768,700




                       Page 27              96-AT-221-1004
Appendix F




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96-AT-221-1004                 Page 28
                                      Appendix G

Loans Reviewed, Miami, Florida

 Loan Number    Loan Amount      Status

 092-6174564      $ 68,250       Default
 092-6174570        67,950       Default
 092-6174587        73,800       Default
 092-6174608        75,950       Default
 092-6174818        77,000       Current
 092-6174824        78,050       Default
 092-6174830        81,300       Default
 092-6174853        84,500       Default
 092-6174876        58,850       Default
 092-6174882        68,400       Default
 092-6174899        78,300       Default
 092-6174918        74,650       Default

  Total          $ 887,000




                      Page 29             96-AT-221-1004
Appendix G




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96-AT-221-1004                 Page 30
                                                                           Appendix H

Sequence of Documents, Riviera Beach Loans
    Date of                                                  Date
   Document                                                 Document     Recorded

Loan Application, Borrower to Waters Mortgage                 7/23/93      NA

Sales Agreement, FHLMC to sell properties to Borrower         7/28/93      NA
   for $250,000

Sales Agreement, Global to sell properties to Borrower          none       NA
   for $596,530
HUD-1 Settlement Statement, Global sells properties           9/7/93       NA
   to Borrower

Agreement, Global to donate approximately $350,000            9/7/93       NA
  to Borrower

Letter, settlement agent to Waters Mortgage discussing        9/9/93       NA
   Global's gift to Borrower and excess loan proceeds
   to be kept by Waters Mortgage

Warranty Deed, Global to Borrower                             9/13/93    10/1/93

Letter, settlement agent to Waters Mortgage confirming         9/14/93     NA
   Global's agreement to receive no sales proceeds and
   requesting instructions for disbursing excess loan proceeds

HUD-1 Settlement Statement, FHLMC sells properties            9/17/93      NA
  to Global

Power of Attorney, Global to representative                   9/18/93    9/27/93

Assignment of FHLMC and Borrower's Sales Agreement            9/21/93      NA
  to Global

Warranty Deed, FHLMC to Global                                9/21/93    9/27/93




                                              Page 31                       96-AT-221-1004
Appendix H




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96-AT-221-1004                 Page 32
          Appendix I




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Appendix I




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96-AT-221-1004                 Page 34