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We conducted a review of 20 Federal Housing Administration (FHA) loans underwritten by Pine State Mortgage Corporation (Pine State), an FHA direct endorsement lender. This review was conducted as part of our “Operation Watchdog” initiative to review the underwriting of 15 direct endorsement lenders at the suggestion of the FHA Commissioner. The Commissioner expressed concern regarding the increasing claim rates against the FHA insurance fund for failed loans. The objective of the review was to determine whether the underwriting for the 20 loans complied with U.S. Department of Housing and Urban Development (HUD)/FHA requirements. Pine State officials did not underwrite 14 of 20 loans reviewed in accordance with HUD/FHA regulations. As a result, the FHA insurance fund suffered actual losses of $1,030,786 on 13 loans and a potential loss of $64,416 on one loan for a total of $1,095,202.

We recommend that HUD’s Associate General Counsel for Program Enforcement determine legal sufficiency and if legally sufficient, pursue remedies under the Program Fraud Civil Remedies Act (31 U.S.C Section 3801-3812) and/or, Civil Money Penalties (24 C.F.R. Part 30.35) against Pine State and/or its principals for incorrectly certifying to the integrity of the data or that due diligence was exercised during the underwriting of 14 loans that resulted in actual losses of $1,030,786 on 13 loans and a potential loss of $64,416 on one loan, which could result in affirmative civil enforcement action of approximately $2,295,404. We also recommend that HUD’s Deputy Assistant Secretary for Single Family take appropriate administrative action against Pine State and/or its principals for the material underwriting deficiencies cited in this report once the affirmative civil enforcement action is completed.