oversight

January 21, 1998                                            Audit-Related Memorandum
                                                            98-NY-221-1801


Memorandum For: Glenn Ruggles, Director, Single Family Division
                                 Buffalo Area Office

From: Alexander C. Malloy, District Inspector General for Audit
                             New York/New Jersey

Subject: Real Estate Brokers/Sellers circumventing the FHA requirement regarding
         gifts to Borrowers


The Office of Inspector General performed audit work at Countrywide Home Loans Inc.,
Buffalo, New York, a mortgagee approved by the Federal Housing Administration (FHA)
to originate FHA-insured mortgages on single family properties. Our audit work covered
the period between July 1, 1995 and June 30, 1997. While performing audit work at the
mortgagee, we observed that real estate brokers/sellers circumvented the intent of the
HUD/FHA requirement stated below by providing funds to relatives/fiancee of
Borrowers1, who, in turn, gave the same amounts of money, in the form of gifts, to
Borrowers to assist them in meeting the financial requirements needed to qualify for FHA-
insured mortgages. We recommend that you take immediate action against these
brokers/sellers so that the practice does not continue.

HUD Handbook 4155.1 REV 4 Paragraph 2-10 provides that the donor of a gift may not
be a person or entity with an interest in the sale of the property such as the seller, real
estate agent or real estate broker.

Our review of 20 loans at Countrywide Home Loans Inc., disclosed four cases where
Franklin Enterprises Inc., and/or Erie Development Inc., (real estate brokers/sellers)2
provided funds to relatives/fiancee of Borrowers. In turn, those individuals gave the same
amount of money as gifts to Borrowers, who used them to financially qualify for FHA-
insured mortgages. It is important to note that three of those four mortgages are in
default and that 23 percent of the 53 loans where Franklin Enterprise, Inc. and Erie
Development, Inc. were the real estate brokers/sellers are in default. Because the real
estate brokers/sellers provided relatives/fiancee of Borrowers with the same amount of
funds that relatives/fiancee gave Borrowers in the form of gifts, we believe that the real
estate brokers/sellers circumvented the FHA requirement that prohibits real estate
1
    Homebuyers who applied for FHA-insured mortgages.
2
    The same individuals are officers in both entities.
brokers/sellers from being donors of gifts to Borrowers applying for FHA-insured
mortgages. As a result, ineligible Borrowers may have qualified and received FHA-
insured mortgages that are now in default.

Specific details pertaining to the four cases where the real estate brokers/sellers provided
funds to relatives/fiancee of the Borrowers (hereafter referred to as Mortgagors) are as
follows :

FHA Case Number:      372-2537173
Loan Amount:          $45,335
Settlement Date:      12/29/95
Seller:               Erie Development Inc.
Real Estate Broker:   Erie Development Inc.
Property address:     128 Freund Street
                      Buffalo, New York 14215
Mortgage status:      Default

Discussions with the Mortgagor’s daughter revealed that the President of Erie
Development, Inc., gave her a check for $710. She cashed the check and gave the funds
as a gift to her father ( the Mortgagor). He used the funds ($710) to assist in meeting the
financial requirements needed to qualify for a FHA-insured mortgage. According to the
mortgagor’s daughter, the President of Erie Development Inc., gave her the money for
painting she performed prior to her father’s purchase of the property. To verify the
accuracy of the daughter’s statement, we obtained the bank records of Erie Development
Inc., and observed that a check dated December 20, 1995, for $710 was written from the
Erie Development Inc., account to the Mortgagor’s daughter.

FHA Case Number:      372-2498901
Loan Amount:          $35,238
Settlement Date       7/20/95
Seller:               Erie Development Inc.
Real Estate Broker:   Erie Development Inc.
Property address:     105 Roebling Street
                      Buffalo, New York 14215
Mortgage status:      Current

Discussions with the Mortgagor’s wife revealed that the President of Erie Development
Inc. gave her thirteen 100 dollar bills. She gave the funds as a gift to her husband (the
Mortgagor). He used the $1,300 to assist in meeting the financial requirements needed to
qualify for the FHA-insured mortgage. According to the Mortgagor’s wife, the President
of Erie Development Inc. gave her the money for work that she performed at the property
prior to the sale.

FHA Case Number:      372-2480289
Loan Amount:          $39,378


                                             2
Settlement Date:      6/7/95
Seller:               Franklin Enterprise Inc.
Real Estate Broker:   Franklin Enterprise Inc.
Property address:     361 Hewitt Avenue
                      Buffalo, New York 14215
Mortgage status:      Default

The Mortgagor’s fiancee provided a $1,700 cashier’s check dated May 8, 1995, as a gift
to the Mortgagor. The Mortgagor used the funds to assist in meeting the financial
requirements needed to qualify for the FHA-insured mortgage. Although we did not
speak with the Mortgagor’s fiancee, we observed a check written to the Mortgagor’s
fiancee, dated May 4, 1995, for $1,700 from Franklin Enterprise Inc. In addition, we
observed a check written to the mortgagor dated May 4, 1995, for $1,003 from Franklin
Enterprise Inc. On the same day the Mortgagor provided a $1,000 money order to
Franklin Enterprises Inc. which was to be available at the loan closing.

FHA Case Number:      372-2515409
Loan Amount:          $34,330
Settlement date:      11/30/95
Seller:               Erie Development Inc.
Real Estate Broker:   Erie Development Inc.
Property address:     103 Grimes Avenue
                      Buffalo, NY 14212
Mortgage status:      Default

The Mortgagor’s wife gave a $1,100 cashier’s check dated November 17, 1995, as a gift
to her husband (the Mortgagor). The Mortgagor used the proceeds to assist in meeting
the financial requirements needed to qualify for a FHA-insured mortgage. Although we
did not speak with the Mortgagor’s wife, we observed a check written to the Mortgagor’s
wife dated November 15, 1995, for $1,100 from Erie Development Inc.

We are recommend that your office take immediate action against these real estate
brokers/sellers (Franklin Enterprises Inc. and Erie Development Inc.) to prevent them
from circumventing FHA requirements. Also, we recommend that you attempt to recover
any losses that may have occurred as a result of mortgages going into default and
subsequent foreclosures.

Within 60 days please give us a status report on: (1) the corrective action taken; (2) the
proposed corrective action taken and the date to be completed; or (3) why corrective
action is considered unnecessary. Also, please furnish us copies of any correspondence or
directives issued because of this review.

Should you have any questions, please call me or William H. Rooney, Assistant District
Inspector General for Audit, at 212-264-8000, extension 3976.




                                            3
Distribution

Secretary’s Representative, New York/New Jersey, 2AS
Director, Single Family Division, 2CHS, Buffalo Area Office (2)
Field Comptroller, Midwest Field Office, 5AF
Buffalo Area Coordinator, 2CS (2)
Assistant to the Deputy Secretary for Field Management, SDF (Room 7106)
Office of the Housing-FHA Comptroller, HF (Attention: Comptroller, Room 5132) (5)
Acquisition Librarian, Library, AS (Room 8141)
Acting Chief Financial Officer, F (Room 10164) (2)
Associate General Counsel, Office of Assisted Housing and Community Development, GC
(Room 8162)
Director, Housing and Community Development Issue Area, U.S. GAO, 441 G Street,
NW, Room 274, Washington, DC 20548 (2)
Inspector General, G, Room 8256
Counsel to IG, GC, Room 8260
Director, Participation & Compliance Division, HSLP, Room 9164




                                        4