Based on a recommendation from the Department of Housing and Urban Development, the Office of the Inspector General has audited the underwriting of a $45.6 million mortgage loan that was acquired by Deutsche Bank on behalf of Berkshire Mortgage Inc., to rehabilitate the Wingate Towers and Garden Apartments in Washington.
In December 2002, Berkshire Mortgage Finance Limited Partnership allegedly requested a loan that did not follow the department’s requirements. HUD claims the underwriter failed to properly assess the financial wherewithal of the owner and general contractor to do construction on the 717-unit apartment complex. The underwriter also allegedly understated the amount of repairs needed to bring the property back to marketable condition.
Based on the recommendation from the underwriter, HUD approved the project and general contractor in August 2003. The rehabilitation was only supposed to last for 21 months, but was not completed until 2008.
In October 2004, Deutsche Bank Berkshire Mortgage purchased the mortgage banking, brokerage, lending, and servicing business from the underwriter.
The FHA-insured loan then went into default in October 2009 after the lender made seven mortgage payments. In May 2010, HUD paid a $55.3 million insurance claim to the lender based on the final settlement statement. HUD subsequently sold the property in a note sale in September 2010 for $14.5 million resulting in a loss of $29.8 million.
“A February 2009 report by HUD’s Office of Multifamily Development Lender Qualification and Monitoring Division concluded that the lender primarily caused the default by not performing an adequate underwriting analysis by failing to property scrutinize the experience and credit worthiness of the owner and general contractor and failing to ensure the scope of work was adequate,” HUD said in the audit report. “The report also states that the lender permitted the use of unauthorized valuation techniques which inflated the mortgage amount. This misrepresentation was the primary reason for the default and assignment of the loan.”
Deutsche said it is upset by HUD’s findings because BMF was a separately licensed FHA-approved mortgagee unrelated to DBBM when it acquired the servicing rights to the Wingate project in 2004. The bank said that since October 2004, the company has closed 118 FHA loans totaling more than $1 billion with only one defaulted loan.
“We urge HUD to provide the report to BMF and afford them an opportunity to respond,” Deutsche said in the audit report. “OIG found shortcomings in underwriting and certification in connection with initial endorsement of Wingate, all of which were undertaken by BMF prior to the legal existence of DBBM. The report in no way found any fault with DBBM s to any activities it performed after the acquisition of the initially endorsed Wingate loan.
“DBBM believes it is totally inappropriate and legally unsupportable to pursue sanctions against DBBM rather than against BMF if OIG decides to finalize its report with such recommendations,” Deutsche said. “The report fails to state any legal basis that justifies the transfer of legal exposure for BMF’s actions from BMF to DBBM.”
