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We audited Mortgage Services III, LLC, a Federal Housing Administration (FHA)-approved direct endorsement lender, as part of the activities in our fiscal year 2016 annual audit plan.  We selected Mortgage Services for review based on an analysis of data in the U.S. Department of Housing and Urban Development’s (HUD) Single Family Data Warehouse system  for single-family lenders with home offices in Region 5’s jurisdiction.   Our objective was to determine whether Mortgage Services complied with HUD’s regulations, procedures, and instructions for underwriting FHA-insured loans.

With a few exceptions, Mortgage Services generally complied with HUD’s underwriting and quality control requirements.  For the 12 loans reviewed, Mortgage Services did not ensure that a borrower met HUD’s minimum required investment for one loan.  Additionally, it did not (1) perform a quality control review for one loan in accordance with HUD’s requirements and (2) ensure that its quality control plan contained necessary provisions.  By not performing required quality control reviews and without the necessary provisions in its quality control plan, Mortgage Services could increase the risk to the FHA insurance fund.

We recommend that HUD’s Acting Deputy Assistant Secretary for Single Family Housing require Mortgage Services to pay down the unpaid principal balance by $5,343 for one loan.

1HUD’s Single Family Data Warehouse is a collection of database tables structured to provide HUD users easy and efficient access to single-family housing case-level data on properties and associated loans, insurance, claims, defaults, and demographics.

2Region 5 includes the States of Illinois, Indiana, Michigan, Minnesota, Ohio, and Wisconsin.