Federal housing officials have completed reviews of 13 of 15 FHA direct-endorsement lenders subpoenaed in January because of high claim rates on their loans, finding proper underwriting procedures were not followed on nearly half of the loans reviewed.

Lenders targeted by "Operation Watchdog" endorsed 183,278 loans valued at $31.3 billion from January 2005 to December 2009, submitting $794.3 million in Federal Housing Administration insurance claims on 6,560 loans from November 2007 through December 2009.

Federal housing officials have completed reviews of 13 of 15 FHA direct-endorsement lenders subpoenaed in January because of high claim rates on their loans, finding proper underwriting procedures were not followed on nearly half of the loans reviewed.

Lenders targeted by "Operation Watchdog" endorsed 183,278 loans valued at $31.3 billion from January 2005 to December 2009, submitting $794.3 million in Federal Housing Administration insurance claims on 6,560 loans from November 2007 through December 2009.

The goal of the reviews is to determine whether those lenders underwrote loans in accordance with standards issued by the Department of Housing and Urban Development (HUD) and Federal Housing Administration (FHA), which insured the loans. If not, the question is whether the underwriting practices reflect systemic problems.

Among the 244 loans reviewed to date, auditors from HUD’s Office of the Inspector General have concluded lenders failed to follow proper underwriting procedures 47 percent of the time.

In the most recent review, published Sept. 29, HUD auditors examined loans originated by Atlanta, Ga.-based Pine State Mortgage Corp.

In the five-year period under review, Pine State endorsed 6,054 FHA-guaranteed loans valued at more than $946 million and submitted $99.4 million in claims to the FHA insurance fund, HUD said.

In reviewing 20 of Pine State’s failed loans, HUD found five had "significant credit-related deficiencies," including one application in which the borrower’s credit history wasn’t adequately assessed.

Four loans were approved without verifying the borrower’s income, and 13 borrowers’ loans involved gift funds whose transfers hadn’t been adequately verified, the review said.

HUD’s review of Pine State concluded that the company’s loan originators had failed to follow HUD/FHA underwriting procedures on 14 of the 20 loans reviewed, leading to $1.03 million in actual and potential losses to the FHA insurance fund.

HUD’s OIG recommended that HUD’s associate general counsel for program enforcement determine whether HUD had sufficient legal standing to pursue a potential $2.29 million recovery through a civil enforcement action.

Pine State did not respond to the review — HUD’s OIG said a copy that was mailed to the company was returned as undeliverable, and that officials did not return their calls.

But another lender, D&R Mortgage Corp. of Farmington, Mich., complained that the "Operation Watchdog" reviews did not follow HUD’s usual procedures.

In DRMC’s case, HUD’s OIG examined "an adverse sample of 15 loans in which the borrowers had defaulted and the lender had made a claim" rather than a statistically random sample of loans originated by DRMC, President David Glass said in a letter to HUD’s Office of the Inspector General.

By announcing the names of the companies when it issued its subpoenas in January, HUD helped put some, including DRMC, out of business, Glass said, as many "lost their investors, warehouse lines and customer base" because of the publicity surrounding the event.

HUD auditors reviewing D and R determined that underwriting on nine of the 15 loans reviewed was not in accordance with HUD/FHA regulations, resulting in $936,000 in actual losses to the FHA insurance fund and a potential $1.94 million recovery in a civil enforcement action.

The other reviews completed to date include similar findings and recommendations for 11 other FHA direct endorsement lenders:

First Tennessee Bank N.A., Memphis, Tenn.: HUD auditors reviewing First Tennessee concluded that underwriting on five of 18 loans reviewed was not in accordance with HUD/FHA regulations, resulting in $435,574 in actual losses to the FHA insurance fund and the potential for a $908,648 recovery in a civil enforcement action.

Security Atlantic Mortgage Co., Edison, N.J.: HUD’s review of Security Atlantic determined that underwriting on six of 20 loans reviewed was not in accordance with HUD/FHA regulations, resulting in $553,730 in actual and potential losses to the FHA insurance fund and the potential for $1.15 million recovery in a civil enforcement action.

Birmingham Bancorp Mortgage Corp., West Bloomfield, Mich.: HUD’s review of Birmingham Bancorp concluded that underwriting on nine of 20 loans reviewed was not in accordance with HUD/FHA regulations, resulting in $643,340 in actual losses to the FHA insurance fund and a potential $1.35 million recovery in a civil enforcement action.

Alacrity Financial Services LLC, Southlake, Texas: HUD auditors reviewing Alacrity determined that underwriting on 19 of 20 loans reviewed was not in accordance with HUD/FHA regulations, resulting in $1.6 million in actual and potential losses to the FHA insurance fund and a potential $3.34 million recovery in a civil enforcement action.

Assurity Financial Services LLC, Englewood, Colo.: HUD’s review of Assurity concluded that underwriting on eight of 20 loans reviewed was not in accordance with HUD/FHA regulations, resulting in $1.18 million in actual and potential losses to the FHA insurance fund and the potential for a $2.42 million recovery in civil enforcement action.

Webster Bank, Cheshire, Conn.: HUD’s review of Webster Bank concluded that underwriting on six of 20 loans reviewed was not in accordance with HUD/FHA regulations, resulting in $516,990 in actual and potential losses to the FHA insurance fund and a potential $1.08 million recovery in a civil enforcement action.

Mac-Clair Mortgage Corp., Flint, Mich.: HUD auditors reviewing Mac-Clair determined that underwriting on seven of 20 loans reviewed was not in accordance with HUD/FHA regulations, resulting in $562,551 in actual losses to the FHA insurance fund and a potential for a $1.17 million recovery in a civil enforcement action.

Americare Investment Group Inc., Arlington, Texas: HUD’s review of Americare Investment concluded that underwriting on 12 of 19 loans reviewed was not in accordance with HUD/FHA regulations, resulting in $741,498 in actual losses to the FHA insurance fund and a potential $1.57 million recovery in a civil enforcement action.

1st Advantage Mortgage, Lombard, Ill.: HUD auditors reviewing 1st Advantage determined underwriting on eight of 20 loans reviewed was not in accordance with HUD/FHA regulations, resulting in $325,452 in actual losses to the FHA insurance fund and a potential $710,904 million recovery in a civil enforcement action.

American Sterling Bank, Independence, Mo.: HUD’s review of American Sterling Bank concluded that underwriting on nine of 12 loans reviewed was not in accordance with HUD/FHA regulations, resulting in $492,239 in actual and potential losses to the FHA insurance fund and a potential for a $1.05 million recovery in a civil enforcement action.

Dell Franklin Financial LLC, Columbia, Md.: HUD auditors reviewing Dell Franklin determined that underwriting on three of 20 loans reviewed was not in accordance with HUD/FHA regulations, resulting in $542,330 in actual losses to the FHA insurance fund and a potential $1.1 million recovery in a civil enforcement action.

HUD’s Office of the Inspector General has not yet released audits of two of the 15 lenders subpoenaed in January: Alethes LLC, of Lakeway, Texas; and Sterling National Mortgage Company Inc., of Great Neck, N.Y.

"Operation Watchdog" is one of several steps taken to stem losses to FHA’s Mutual Mortgage Insurance Fund — the steps have reduced the fund’s capital ratio below congressionally mandated minimums.

In addition to stepping up oversight of lenders, HUD has banned seller-financed downpayment assistance, tightened underwriting guidelines for streamline and cash-out refinance products, revised appraisal standards, and raised minimum FICO scores.

FHA is scheduled to restructure the premiums it collects for providing mortgage insurance on Oct. 4, rolling upfront premiums back from 2.25 percent to 1 percent while increasing annual premiums for borrowers making minimum downpayments from 0.55 percent to 0.9 percent.

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