The Department of Housing and Urban Development wants All American Home Mortgage Corp. to indemnify the Federal Housing Administration against future losses on five loans that were endorsed for more than $1 million that violated industry guidelines and reimburse the agency $181,515 for associated fees paid on one loan that had underwriting deficiencies.
HUD's Office of Inspector General decided to audit the Brooklyn, N.Y.-based lender, which has been endorsing FHA-insured loans since 1993, because the company had an 8.8% default rate on 500 single-family loans it originated between September 2008 and August 2010. This rate was more than double the 3.57% state average during this two-year period.
The audit found that 6 out of 20 loans that were reviewed did not comply with HUD-FHA underwriting requirements such as inadequate verification of gift funds, the statutory minimum investment, source of funds, improper calculation of income and inconsistent information not being reconciled.
These deficiencies led to the approval of loans for potentially ineligible borrowers, causing HUD to incur an unnecessary insurance risk. Additionally, lender officials charged borrowers $680 in unallowable fees including wire and courier fees.
“Deficiencies occurred because All American officials did not have adequate controls to document, verify and reconcile the borrowers' information, leading officials to not be able to ensure that all loans were processed in compliance HUD-FHA requirements,” the OIG said in the audit.
The lender was using FHA's Technology Open To All Lenders (TOTAL) scorecard on 32 of the 44 defaulted loans, while the remaining defaulted loans were originated manually. The TOTAL mortgage scorecard is a mathematical equation for use within an automatic underwriting system that evaluates the overall creditworthiness of the borrower to determine if they can repay the loan if it is approved.
Salvatore Cefalu, president of All American Home Mortgage, told this publication that the lender did commit some “minor underwriting infractions,” but it should not be blamed for all of the defaulted loans.
“I think we were one of the first auditees where the FHA's TOTAL scorecard and manual underwriting were on a collision course,” Cefalu said. “When you manually underwrite a loan, you have to ask for much more documentation than you would with FHA scorecard. We feel that the OIG's noticeable discomfort or preconceived opinions towards the deployment of FHA's TOTAL mortgage scorecard has a different interpretation than HUD of the regulatory standards that were in effect for the time period and activities examined.”
Cefalu also told National Mortgage News that the lender originates 70% of its loans to low- and moderate-income level borrowers and these were the people who lost their jobs first when the economy began to struggle when the OIG conducted its audit.
Cefalu said the company has made changes to its quality control programs, including conducting monthly reviews of at least 10% of the lender's loans and 100% of any defaulted loan, even those that are 30- or 60-days delinquent. He added that the lender has also refunded the unallowable fees that were charged against borrowers.
“We are cooperating with HUD during this investigation and if they determine that we need to indemnify the loans, we will do that,” Cefalu said. “We have been in business a long time and want to continue to do the things we do best.”
