We audited New England Regional Mortgage Corporation (Corporation), a Federal Housing Administration (FHA) lender approved to underwrite and close mortgage loans without prior FHA review or approval. We selected the Corporation because its early payment default rate for insured single-family loans originated between January 1, 2008, and December 31, 2009, was significantly higher than the default rate in the local area in which it does business. Our audit objectives were to determine whether (1) the Corporation acted in a prudent manner and complied with U.S. Department of Housing and Urban Development (HUD) regulations, procedures, and instructions for the origination, underwriting, and closing of the FHA-insured single-family loans selected for a detailed review and (2) its quality control plan, as implemented, fulfilled HUD’s requirements.
The Corporation generally complied with HUD requirements in the origination of FHA-insured single-family loans. In addition, the Corporation’s quality control plan, as implemented, fulfilled HUD’s requirements. However, one loan had significant underwriting deficiencies that negatively affected the insurability of the loan. The underwriting deficiencies included improperly documented borrower income, an omitted liability, undervalued debt-to-income ratios, and failure to notify HUD of an employee loan transaction. These deficiencies occurred because the lender did not act in a prudent manner when it approved this loan. The loan was not eligible for FHA mortgage insurance and placed the FHA insurance fund at risk for a potential loss of more than $221,000.
The Corporation was also incorrectly listed as the holding lender for 43 active loans and the servicing lender for 8 active loans. These errors occurred because the Corporation was not aware of HUD requirements regarding mortgage record changes after it sold loans to investing lenders. Inaccurate or untimely reporting of mortgage record changes directly affects the payment of claims for insurance benefits. HUD will not pay a claim for insurance benefits for which the information on the claim and HUD’s FHA insurance system do not agree.
We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing require the Corporation to indemnify HUD for a loss that may be incurred related to the loan that did not meet FHA insurance requirements. The projected loss to HUD of $221,590 is based on an actuarial review of FHA’s insurance fund prepared for HUD; a loss rate of 60 percent of the unpaid principal balance of the loan (see appendix C). We also recommend that the Corporation update its remaining mortgage records in HUD’s system to reflect the appropriate mortgage holder and implement procedures to ensure the timely submission of mortgage record changes for future loans sold to investing lenders.