oversight

Countrywide Home Loans, Inc., Buffalo, NY

Published by the Department of Housing and Urban Development, Office of Inspector General on 1998-04-30.

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

                                                                          Issue Date

                                                                               April 30, 1998
                                                                          Audit Case Number

                                                                               98-NY-221-1003




TO:             Art Agnos, Acting Assistant Secretary for Housing-Federal Housing
                              Commissioner, and Chairman, Mortgagee Review Board


FROM:           Alexander C. Malloy, District Inspector General For Audit
                                        New York/New Jersey

SUBJECT:        Countrywide Home Loans, Inc.
                Buffalo Branch Office
                Non-Supervised Mortgagee
                Buffalo, New York


We completed an audit of the books and records of the Buffalo Branch Office of Countrywide Home
Loans, Inc., a non-supervised mortgagee. The objective of the audit was to determine whether
Countrywide originated loans in accordance with regulations and requirements of the U.S.
Department Housing and Urban Development/Federal Housing Administration (HUD/FHA), which
require adherence to prudent lending practices. The review covered the period between July 1, 1995,
and June 30, 1997, and consisted of a review of 20 HUD/FHA loans.

Our review concluded that for six of the 20 loans we reviewed, Countrywide did not adhere to
prudent lending practices when it underwrote the loans. Specifically, we found processing
deficiencies that resulted from insufficient assets to close loans, discrepancies in the amount of earnest
money on deposit, and income ratios that exceeded HUD/FHA standards. We believe these
deficiencies occurred because Countrywide personnel did not assure that those loans were processed
in accordance with HUD/FHA requirements. As a result, mortgages were approved for unqualified
mortgagors causing HUD/FHA to assume unnecessary insurance risk.

If you or your staff have questions, please contact William H. Rooney, Assistant District Inspector
General for Audit, on (212) 264-8000, extension 3976.
Executive Summary
We completed an audit of the books and records of the Buffalo Branch office of Countrywide Home
Loans, Inc., a non-supervised mortgagee. The objective of the audit was to determine whether
Countrywide originated loans in accordance with regulations and requirements of the U.S.
Department of Housing and Urban Development/Federal Housing Administration (HUD/FHA),
which require adherence to prudent lending practices. The review covered the period between July
1, 1995, and June 30, 1997, and consisted of a review of 20 HUD/FHA insured loans. A summary
of the results of our review is provided below:




                                    Our review concluded that for six of the 20 loans we
 Four loans in default
                                    reviewed, Countrywide did not adhere to prudent lending
                                    practices during the underwriting process. Our review
                                    disclosed that each of the six loans had at least one significant
                                    deficiency and that four were in default. Specifically, we
                                    found processing deficiencies that resulted from insufficient
                                    assets to close loans, discrepancies in the amount of earnest
                                    money on deposit, and income ratios that exceeded
                                    HUD/FHA standards. We believe these deficiencies occurred
                                    because Countrywide personnel did not assure that those loans
                                    were processed in accordance to HUD/FHA requirements.
                                    Consequently, mortgages were approved for unqualified
                                    mortgagors causing HUD/FHA to assume unnecessary
                                    insurance risk.

                                    We recommend that the Mortgagee Review Board take
                                    appropriate administrative action against Countrywide and
                                    indemnify HUD/FHA for any future losses on the six loans in
                                    question.

                                    The results of the audit were discussed with representatives of
 Exit conference
                                    Countrywide during the course of the audit and at an exit
                                    conference held on February 4, 1998, attended by:

                                    Countrywide Home Loans, Inc.

                                    Sherri Young, Regional Vice President
                                    Leslie Eberhard, Branch Manager

                                    Buffalo Area Office-HUD

                                    Glenn Ruggles, Director Single Family Housing


                                             Page iii                                   98-NY-221-1003
Executive Summary



                    Lambross Touris, Housing Specialist
                    Joseph Hobot, Housing Specialist
                    Mark Surdi, Production/Real Estate Owned Branch

                    Office of the Inspector General

                    William H. Rooney, Assistant District Inspector General
                                          For Audit
                    Garry Clugston, Senior Auditor
                    Nancy Condren, Auditor

                    Countrywide representatives told us that their written
                    comments would be forwarded to us shortly after the exit
                    conference. On March 12, 1998, we received their written
                    comments. Countrywide acknowledged the lack of
                    documentation to close the HUD/FHA insured loans. We
                    included their written comments as Appendix C to this report.




98-NY-221-1003              Page iv
Table of Contents

Management Memorandum                                                          i


Executive Summary                                                            iii


Introduction                                                                  1


Finding

          Inadequate Loan Origination Practices Resulted
          in Approval of HUD/FHA Insured Loans for
          Unqualified Mortgagors                                              3


Internal Controls                                                             5


Follow Up On Prior Audits                                                     7

      A   Summary of Loan Origination Deficiencies                            9

      B   Narrative Case Presentations                                      10

      C   Auditee's Comments                                                20

      D   Distribution                                                      22


Abbreviations
HUD            U.S. Department of Housing and Urban Development
FHA            Federal Housing Administration




                                       Page v                     98-NY-221-1003
Introduction
Countrywide Home Loans Inc.(Countrywide) is a non-supervised mortgagee with its headquarters
located in Pasadena, California. Countrywide originates loans nationwide with branches in nearly
every state. The Buffalo Branch Office underwrites loans for the Buffalo and Western New York
area and is located at 3061 Sheridan Drive, No. 5, Amherst, New York.

During our audit period, which covered the period between July 1, 1995, and June 30, 1997,
Countrywide’s Buffalo Branch Office originated 283 FHA insured loans under the Direct
Endorsement Program. As of July 23, 1997, the mortgages for 19 of the 283 loans were in default.
Countrywide originates and services FHA insured loans, Veterans Administration insured loans, and
conventional loans. Also, Countrywide services loans that are sold on the secondary market, e.g.,
Government National Mortgage Association pools.




                                     Our audit objective was to determine whether Countrywide
 Audit objective
                                     originated HUD/FHA insured loans in accordance with
                                     HUD/FHA requirements, which require adherence to prudent
                                     lending practices.

                                     To accomplish our objective, we performed a detailed
                                     examination of 20 loans. We reviewed the files of 13 loans
                                     whose mortgages went into default within one year after
                                     origination. The remaining 7 loans were judgmentally
                                     selected.

                                     Our detailed examinations were intended to confirm the
 Audit, Scope and
                                     accuracy of all material information used as a basis for
 Methodology
                                     originating and closing the loans. Thus, we reconfirmed the
                                     mortgagors’ income, assets and employment, and interviewed
                                     mortgagors. Also, we reconfirmed the amounts that were held
                                     in depositories, or by closing agents, employees and others
                                     who were involved in the loan origination and closing process.

                                     For criteria, we used two changes to HUD Handbooks
                                     “Mortgage Credit Analysis for Mortgage Insurance on One-
                                     to-Four Family Properties”: Handbook No. 4155.1 REV-4
                                     and 4155.1 REV-4, CHG-1. The criteria that we used
                                     depended upon the date of the mortgagor’s sales contract.

                                     Our audit pertained to loans originated between July 1, 1995,
                                     and June 30,1997. The audit work was performed at
                                     Countrywide’s Buffalo Branch Office. We performed the


                                              Page 1                                   98-NY-221-1003
Introduction



                 audit field work from July 1997 through January 1998 in
                 accordance with generally accepted government auditing
                 standards.

                 A copy of this report was provided to Countrywide.




98-NY-221-1003           Page 2
                                                                                            Finding




 Inadequate Loan Origination Practices Resulted
   in Approval of HUD/FHA Insured Loans for
            Unqualified Mortgagors

Our review disclosed that Countrywide did not adhere to prudent lending practices when processing
six of the 20 loans that we examined during our audit. The deficiencies occurred because
Countrywide personnel did not assure that the loans were processed in accordance with HUD/FHA
requirements. As a result, mortgages were approved for unqualified mortgagors causing HUD/FHA
to assume unnecessary insurance risk.

Section 5-1 of HUD Handbook 4000.2 REV-1, Mortgagee's Handbook Application Through
Insurance requires mortgagees to develop HUD/FHA insured loans in accordance with accepted
practices of prudent lending institutions. Also, HUD Handbook 4000.4 REV-1, Chapter 2, Section
2-5, provides that the mortgagee must obtain and verify information with at least the same care that
would be exercised in originating the loan in which the mortgagee would be entirely dependent on
the property as security to protect its investment.

In our opinion, the mortgagee did not adhere to the above requirements, as discussed below, when
it underwrote six of the 20 loans we reviewed.



                                      Our examination of 20 loans originated by Countrywide
 Examined 20 loans
                                      between July 1, 1995, and June 30, 1997, disclosed that in six
                                      cases Countrywide either did not follow HUD requirements or
                                      did not exercise the care expected of a prudent lender in
                                      underwriting the loans. Consequently, we found significant
                                      origination deficiencies in six cases, as shown below:


                                                   Deficiency                   No. of Loans
                                   Insufficient Assets to Close                 3 of the 6 loans
                                   Earnest Money Deposit Discrepancy            4 of the 6 loans
                                   Ratios Exceeded HUD/FHA Standards            5 of the 6 loans

                                      Additionally, the mortgages of four of the six cases were in
                                      default as of October 1, 1997, (See Appendix A).



                                               Page 3                                   98-NY-221-1003
Finding



                          Appendix A to this report provides a summary of the loan
                          origination deficiencies noted during our review, while
                          Appendix B-1 through B-6 provide an individual description
                          of the origination deficiencies for each of the six loans that
                          Countrywide did not adhere to prudent lending practices. In
                          our opinion, the deficiencies resulted in the approval of
                          mortgages for unqualified mortgagors, which has caused
                          HUD/FHA to assume unnecessary risk.

                          In addition to the above, we noticed that Countrywide was not
 Countrywide did not
                          complying with HUD/FHA's requirements regarding the
 comply with prepayment
                          prepayment of items by the mortgagee and sellers.
 requirements
                          Specifically, Handbook 4155.1 REV 4, CHG 1 allows the
                          mortgagee and the seller to prepay certain items on behalf of
                          the mortgagor prior to closing. For example, the mortgagee
                          and seller may prepay mortgage insurance, taxes and interim
                          interest on behalf of the mortgagor; however, these items must
                          be identified on the Good Faith Estimate and the HUD-1,
                          Settlement Statement.

                          Our review disclosed 11 instances where just an amount was
                          recorded on the Good Faith Estate and the HUD-1 Settlement
                          Statement, without identifying the items that were prepaid. As
                          a result, the mortgagors may not have had a full and clear
                          understanding of the closing costs. We believe this deficiency
                          occurred because Countrywide's personnel may not have
                          adequately reviewed closing documents or were not
                          adequately familiar with HUD requirements concerning the
                          prepayment of items.




Recommendations           We recommend that the Mortgagee Review Board require
                          Countrywide to:

                          1A.    Indemnify HUD/FHA against future losses on the six
                                 loans in question (FHA Case Nos. 372-2537173, 372-
                                 2515409, 372-2572435, 372-2525724, 372-249-8901
                                 and 372-265-7293).

                          1B.    Assure that all HUD/FHA guidelines regarding
                                 origination including requirements on prepayments of
                                 items are followed.



98-NY-221-1003                     Page 4
Internal Controls
In planning and performing our audit, we considered internal controls of Countrywide Home Loans,
Inc., in order to determine our auditing procedures and not to provide assurance on internal controls.
Internal controls consist of a plan of organization and methods and procedures adopted by
management to ensure that resource use is consistent with laws, regulations, and policies; that
resources are safeguarded against waste, loss, and misuse; and that reliable data is obtained,
maintained, and fairly disclosed in reports.



                                       We determined that the internal controls relative to our audit
 Internal controls assessed
                                       objective were:

                                       •   Procedures for taking mortgage loan applications for
                                           applicants seeking HUD/FHA insured loans.

                                       •   Procedures for verifying information included in
                                           applications for HUD/FHA insured loans.

                                       •   Procedures for conducting underwriter reviews of loans
                                           proposed for HUD/FHA mortgage insurance.

                                       It is a significant weakness if internal controls do not give
 Assessment results
                                       reasonable assurance 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. As
                                       illustrated by the finding, Countrywide needs to strengthen
                                       internal controls in the three areas mentioned above.




                                                Page 5                                   98-NY-221-1003
Follow Up On Prior Audits
Grant Thornton, LLP, Certified Public Accountants, audited Countrywide for the year ended
February 28, 1997. The accounting firm's audit report on Countrywide did not contain any findings
related to the Buffalo Branch Office.




                                              Page 7                                 98-NY-221-1003
APPENDIX A
                                         COUNTRYWIDE HOME LOANS INC.
                                               Buffalo, New York

                                 SUMMARY OF LOAN ORIGINATION DEFICIENCIES


                                                       Earnest       Ratios
                                        Insufficient    money      exceeded
 HUD/FHA       Mortgage    Settlement    Assets to     deposit     HUD/FHA                               Appendix
Case Number    Amount         Date         close     discrepancy   standards   Loan status as of 10/1/97 Reference

 372-2537173     $45,335    12/29/95        X            X            X        In Default                  B-1

 372-2498901     $35,238    7/20/95                      X            X        Loan is current.            B-2

 372-2515409     $34,330    11/30/95        X            X            X        In Default                  B-3

 372-2657293     $43,418     3/7/97                      X            X        Loan is current.            B-4

 372-2572435     $43,316    3/29/96         X                                  In Default                  B-5

 372-2525724     $77,860    9/29/95                                   X        In Default                  B-6

   Totals       $279,497                    3            4            5
                                                                           Appendix B-1
                                                                            Page 1 of 2


                        COUNTRYWIDE HOME LOANS, INC.
                             BUFFALO, NEW YORK


                        NARRATIVE CASE PRESENTATION


FHA Case Number:      372-2537173

Loan Amount:          $45,335

Settlement Date:      12/29/95

Status:               Last payment 1/97


Summary

Countrywide approved the mortgage without verifying that the mortgagor had sufficient cash
assets to obtain the loan, and without resolving a discrepancy that existed between the amount of
earnest money held by the seller/broker and the amount reported on the HUD-1. Furthermore,
the mortgagor’s 38.9 percent ratio of mortgage payment expense to effective income exceeded
HUD/ FHA’s standard of 29 percent. Therefore, HUD/ FHA’s decision to insure the loan was
based on Countrywide’s inaccurate representation that the mortgagor met requirements.

Pertinent Details

A. Insufficient Assets to Close

Countrywide did not verify that the mortgagor had sufficient funds to close the loan as required
by Handbook 4155.1 Rev-4 , Paragraph 2-10. Countrywide verified that the mortgagor’s
daughter donated $710 as a gift to the mortgagor and verified that earnest money of $600 was
held by the seller/broker as a deposit, which resulted in total assets of $1,310. However, the
amount needed to obtain the loan per the Mortgage Credit Analysis Worksheet was $4,193.43.
Also, the worksheet indicated that the mortgagor had zero assets. There was no explanation in the
files indicating where the mortgagor would obtain the assets.

B. Questionable Verification of Earnest Money

In addition to the lack of verification of sufficient assets to close the loan, there was a
discrepancy in the amount of earnest money on deposit. The seller/ broker provided verification
that $600 in earnest money was being held as a deposit from the mortgagor. However, the
HUD-1, Settlement Statement listed only $500 as the amount of earnest money that was on
deposit.
                                                                           Appendix B-1
                                                                            Page 2 of 2



C. Credit Analysis Ratio Exceeded HUD/FHA Standard

Countrywide approved the loan despite the fact that the Mortgage Credit Analysis Worksheet
showed an excessive 38.9 percent ratio of mortgage payment expense to effective income .The
HUD/ FHA standard in effect at the time specified a 29 percent limit on the mortgage payment
expense to effective income ratio ( Handbook 4155.1 REV-4 CHG 1, Paragraph 2-12 ). The
compensating factors used by Countrywide to justify using the higher ratio were that $350 per
month rent from a second unit was not used to qualify the mortgagor, there was no outstanding
debt, and the mortgagor was an inner city minority. However , the Mortgage Credit Analysis
Worksheet also indicated that the mortgagor’s monthly housing expenses would increase from
$300 to $508. In our opinion, the compensating factors did not offset the increase in housing
expenses; therefore, we believe Countrywide did not have adequate justification to use the higher
ratio.
                                                                             Appendix B-2
                                                                              Page 1 of 2

                        COUNTRYWIDE HOME LOANS, INC.
                             BUFFALO, NEW YORK


                         NARRATIVE CASE PRESENTATION


FHA Case Number:       372-2498901

Loan Amount:           $35,238

Settlement Date:       7/20/95

Loan Status:           Current


Summary:

Countrywide approved the mortgage without resolving a discrepancy between the
amount of earnest money held by the seller/broker and the amount reported on the HUD-
1, Settlement Statement. Also, both the mortgagor’s 42.11 percent ratio of mortgage
payment expense to effective income and 42.11 percent ratio of total fixed payment to
effective income exceeded HUD/FHA’s standards. Therefore, HUD/FHA’s decision to
insure the loan was based on Countrywide’s inaccurate representation that the loan met
requirements.

Pertinent Details

A. Questionable Verification of Earnest Money

Our review of the loan files showed that Countrywide verified that the seller/broker held
$1,400 in earnest money as a deposit from the mortgagor. However, the HUD-1
Settlement Statement listed $100 as earnest money on deposit. In our opinion, the
significant discrepancy between the amount of earnest money on deposit with the
seller/broker and the amount stated on the HUD-1, Settlement Statement should have
raised questions. In addition, our review disclosed that at the mortgage closing a check
for $223.90 in loan proceeds was issued to the mortgagor, but was endorsed over to the
seller/broker. There is no explanation in the files as to why that transaction occurred.

B. Credit Analysis Ratios Exceeded HUD/FHA Standards

Countrywide approved the loan despite the fact that the Mortgage Credit Analysis
Worksheet showed an excessive 42.11 percent ratio of mortgage payment expense to
effective income, and an excessive 42.11 percent ratio of total fixed payment to effective
income. HUD/FHA standards in effect at that time (Handbook 4155.1 REV-4 CHG-1)
                                                                         Appendix B-2
                                                                          Page 2 of 2

specified a 29 percent limit on the mortgage payment expense to effective income ratio,
and a 41 percent limit on the total fixed payment to effective income ratio. No
compensating factors were provided on the Mortgage Credit Analysis Worksheet to justify
approving the loan with ratios exceeding the standards.
                                                                             Appendix B-3
                                                                              Page 1 of 2


                        COUNTRYWIDE HOME LOANS, INC.
                             BUFFALO, NEW YORK


                         NARRATIVE CASE PRESENTATION


FHA Case Number:      372-2515409

Loan Amount:          $34,330

Settlement Date:      11/30/95

Status:               Last payment 6/96


Summary

Countrywide approved the mortgage without verifying that the mortgagor had sufficient cash
assets to obtain the loan. Also, the mortgage was approved with a discrepancy between the
amount of earnest money held by the seller/broker and the amount stated on the HUD-1,
Settlement Statement existed. Furthermore, the mortgagor’s 36.75 percent ratio of mortgage
payment expense to effective income exceeded HUD/FHA’s standard. Therefore, HUD/ FHA’s
decision to insure the loan was based on Countrywide’s inaccurate representation that the
mortgagor met requirements.

Pertinent Details

A. Insufficient Assets to Close

Countrywide did not verify that the mortgagor had sufficient funds to close the loan as required
by Handbook 4155.1 Rev-4 , Paragraph 2-10. Countrywide verified that the mortgagor’s wife
donated $1,100 as a gift to the mortgagor and that earnest money of $380 was held by the
seller/broker for total assets of $1,490. The amount needed at mortgage closing, per the
Mortgage Credit Analysis Worksheet, was $3,367.82. This worksheet also indicated that the
mortgagor had zero assets. There was no explanation in the files indicating where the mortgagor
would obtain additional assets.

B. Questionable Verification of Earnest Money

In addition to the lack of verification of sufficient asset to close the loan, was a discrepancy in
the amount of earnest money on deposit. The seller/broker provided verification that it was
holding $380 in earnest money from the mortgagor. However, the HUD-1, Settlement Statement
showed only $100 as the amount of earnest money on deposit.
                                                                         Appendix B-3
                                                                          Page 2 of 2



C. Credit Analysis Ratio Exceeded HUD/FHA Standard

Countrywide approved the loan despite the fact that the Mortgage Credit Analysis Worksheet
showed an excessive 36.75 percent ratio of mortgage payment expense to effective income. The
HUD/ FHA standard in effect at the time specified a 29 percent limit on the mortgage payment
expense to effective income ratio (Handbook 4155.1 REV-4 CHG 1 Paragraph 2-12 ). The
compensating factors used by Countrywide were: “ four years in same line of work and the
mortgagor recently turned full time”. However, we noted that those factors had already been
considered in computing the ratio and did not justify exceeding the HUD/FHA standard. In
addition, the Mortgage Credit Analysis Worksheet showed that the mortgagor’s monthly housing
expenses would increase from $0 to $378. This increase was not included in the mortgage credit
calculations and there was no explanation in the files as to why it was not included.
                                                                           Appendix B-4
                                                                            Page 1 of 1

                       COUNTRYWIDE HOME LOANS, INC.
                            BUFFALO, NEW YORK


                        NARRATIVE CASE PRESENTATION


FHA Case Number:      372-2657293

Loan Amount:          $43,418

Settlement Date:      3/7/97

Loan Status           Current

Summary:

Countrywide approved the loan without verifying that the mortgagor had sufficient cash assets to
close the loan, and without resolving a discrepancy between the amount of earnest money held by
the seller/broker and the amount stated on the HUD-1, Settlement Statement. Also, the
mortgagor’s 34.19 percent ratio of mortgage payment expense to effective income exceeded
HUD/ FHA’s standard. Therefore, HUD/FHA’s decision to insure the loan was based on
Countrywide’s inaccurate representation that the mortgagor met requirements.

Pertinent Details

A. Questionable Verification of Earnest Money

Our review of the loan files showed that Countrywide received documentation from the
seller/broker indicating that $2,400 was being held in earnest money as a deposit.
However, the HUD-1, Settlement Statement had different numbers. It listed $1,612.50
as earnest money on deposit under the Summary of Mortgagor’s Transactions and
$1,700 as earnest money on deposit under the Summary of Sellers Transactions.

B. Credit Analysis Ratio Exceeded HUD/FHA Standard

Countrywide approved the loan despite the fact that Mortgage Credit Analysis Worksheet
showed an excessive 34.19 percent ratio of mortgage payment expense to effective
income. The HUD/FHA standard in effect at that time (Handbook 4155.1 REV-4 CHG-1)
specified a 29 percent limit on the mortgage payment expense to effective income ratio.
The compensating factors stated by Countrywide were “child support collection paid in
full at closing”. However, we noted that the mortgagor’s monthly income had already
been adjusted for the change in the child support payment and did not justify exceeding
the HUD/FHA standard.
                                                                            Appendix B-5
                                                                             Page 1 of 1

                        COUNTRYWIDE HOME LOANS, INC.
                             BUFFALO, NEW YORK


                        NARRATIVE CASE PRESENTATION


FHA Case Number:      372-2572435

Loan Amount:          $43,316

Settlement Date:      3/29/96

Loan Status:          Last Payment 8/96


Summary

Countrywide approved the loan without verifying that the mortgagor had sufficient cash
assets to close the loan. Therefore, HUD/ FHA’s decision to insure the loan was based on
Countrywide’s inaccurate representation that the mortgagor met all requirements.

Pertinent Details

A. Insufficient Assets to Close

Countrywide did not verify that the mortgagor had sufficient funds to close the loan as required
by Handbook 4155.1 Rev-4 , Paragraph 2-10. Countrywide verified assets totaling $2,502.
However, the amount needed to close the loan per the Mortgage Credit Analysis Worksheet was
$3,817.04. This worksheet also indicted that the mortgagor had only $200 of available assets.
There was no explanation in the files indicating where the mortgagor was going to obtain the
additional assets.
                                                                             Appendix B-6
                                                                              Page 1 of 2
                        COUNTRYWIDE HOME LOANS, INC.
                             BUFFALO, NEW YORK


                         NARRATIVE CASE PRESENTATION


FHA Case Number:       372-2525724

Loan Amount:           $77,860

Settlement Date:       9/29/95

Status:                Last payment 5/96


Summary

The mortgagor’s 39.72 percent ratio of mortgage payment expense to effective income and the
45.05 percent ratio of total fixed payment to effective income exceeded HUD/ FHA’s
standards.

Pertinent Details

A. Credit Analysis Ratios Exceeded HUD/FHA Standards

Countrywide approved the loan despite the fact that the Mortgage Credit Analysis Worksheet
showed an excessive 39.72 percent ratio of mortgage payment expense to effective income, and
an excessive 45.05 percent ratio of total fixed payment to effective income. HUD/ FHA’s
standards in effect at the time specified a 29 percent limit on the mortgage payment expense to
effective income ratio and a 41 percent limit on the total fixed payment to effective income ratio
( Handbook 4155.1 REV-4 CHG 1 Paragraph 2-12 ). No compensating factors were provided
on the Mortgage Credit Analysis Worksheet. Also, the Mortgage Credit Analysis Worksheet
indicated that the mortgagor’s monthly housing expenses was going to increase from $0 to
$828.64. This increase was not included in the mortgage credit calculations and there was no
explanation in the files as to why it was not included.

Countrywide’s Comments

Although the mortgage credit analysis did not provide any compensating factors, it
appears that the underwriter approved the loan with high ratios due to the mortgagor’s
marital status, additional income, previous home ownership and excellent credit history.
                                                                            Appendix B-6
                                                                             Page 2 of 2


OIG’s Evaluation of Countrywide’s Comment

At the time of the purchase the mortgagor was in the process of a divorce; therefore, any
additional income resulting from the marital status ( income from spouse) in our opinion,
should not have been a compensating factor to justify exceeding HUD/FHA’s ratios.
                                                                          Appendix D

Distribution
Secretary's Representative, New York/New Jersey, 2AS
Director, Single Family Division, 2CHS, Buffalo Area Office (2)
Buffalo Area Coordinator, 2CS (2)
Field Comptroller, Midwest Field Office, 5AF
Office of Comptroller, Mid-Atlantic Field, 3AFI
Assistant to the Deputy Secretary for Field Policy and
 Management, SDF (Room 7106)
Office of the Housing-FHA Comptroller, HF
  (Attention: Comptroller, (Room 5132) (5)
Acquisitions Librarian, Library, AS (Room 8141)
Chief Financial Officer, F (Room 10164) (2)
Deputy Chief Financial Officer, FF, Room 10166 (2)
(Acting) Assistant to Secretary for Labor Relations, SL, Room 7118
Associate General Counsel, Office of Assisted Housing
 and Community Development, GC (Room 8162)
Director, Participation & Compliance Division, HSLP, Room 9164
Inspector General, G, Room 8256
Counsel to IG, GC, Room 8260
HUD Webmaster, GC, Room 8260
Public Affairs Officer, G, Room 8256
Assistant Inspector General, GA Room 8286
Countrywide Home Loans, Attention Leslie D. Eberhard, Buffalo, New York



Director, Housing & Community Development Issue Area,
U.S. GAO, 441 G Street, NW, Room 2474
Washington, DC 20548
(Attn: Judy England-Joseph)

Subcommitte on General Oversight & Investigations
O'Neill House Office Building, Room 212
Washington, DC
(Attention: Cindy Sprunger)


Honorable Pete Sessions
Government Reform and Oversight Committee
Congress of the United States
House of Representatives
Washington, DC 20515-4305




                                           Page 22                        98-NY-221-1003
Honorable Fred Thompson, Chairman
Committee on Governmental Affairs
United States Senate
Washington, DC 20510-6250

Honorable John Glenn, Ranking Member
Committee on Governmental Affairs,
United States Senate
Washington, DC 20510-6250

Honorable Dan Burton, Chairman
Committee on Government Reform and Oversight
House of Representatives
Washington, DC 20505-6143




                                        Page 23   98-NY-221-1003