We audited the underwriting of a $45.6 million mortgage loan that was acquired by Deutsche Bank Berkshire Mortgage, Inc. (the Lender) to rehabilitate Wingate Towers and Garden Apartments. The audit was performed based on a request from the U.S. Department of Housing and Urban Development’s (HUD) Office of Multifamily Development. The Lender acquired and became responsible for the loan origination activities, personnel, books and records related to this loan from Berkshire Mortgage Finance Limited Partnership (the Underwriter) in October 2004. The Federal Housing Administration (FHA)-insured loan went into default in October 2009 and in May 2010, HUD paid a $44.3 million insurance claim to the Lender. HUD subsequently sold the property in a note sale in September 2010 for $14.5 million resulting in a loss of $29.8 million to the taxpayer. The audit objective addressed in this report was to determine whether the $45.6 million FHA-insured loan acquired by the Lender was underwritten in accordance with HUD requirements.
The loan was not underwritten in accordance with HUD requirements. The Underwriter failed to properly assess, as required, the financial wherewithal of the owner and general contractor, or the construction capabilities of the general contractor. The Underwriter also significantly understated the amount of repairs needed to bring the property up to marketable condition. Based on the Underwriter’s recommendation, HUD approved the project and the general contractor. The project failed, resulting in a loss of $29.8 million to the taxpayer. We recommend that HUD’s Associate General Counsel for Program Enforcement perform a legal review of applicable documents to determine the responsible party that is liable for incorrectly certifying to the integrity of the data or that due diligence was exercised by the underwriting of the loan that resulted in a loss to HUD totaling $29.8 million which could result in affirmative civil enforcement action of more than $118 million, and to pursue remedies under the False Claims Act against the responsible party if it is determined legally sufficient to do so. Additionally, we recommend that the Director, Departmental Enforcement Center, take appropriate administrative action against the responsible party for the material underwriting deficiencies cited in this report.