We conducted a review of Federal Housing Administration (FHA) loans underwritten by Security Atlantic Mortgage Company, Inc. (Security Atlantic), an FHA direct endorsement lender. This review was conducted as part of the Office of Inspector General’s (OIG) Operation Watchdog initiative to review the underwriting of 15 direct endorsement lenders at the suggestion of the FHA Commissioner. The Commissioner expressed concern regarding the increasing claim rates against the FHA insurance fund for failed loans. The objective of the review was to determine whether Security Atlantic underwrote 20 loans in accordance with U.S. Department of Housing and Urban Development (HUD)/FHA requirements. Security Atlantic officials did not underwrite 6 of 20 loans reviewed in accordance with HUD/ FHA regulations. As a result, the FHA insurance fund suffered actual losses of $452,217 on five loans and faces a potential loss of $101,513 on one loan for a total of $553,730.

We recommend that HUD’s Associate General Counsel for Program Enforcement determine legal sufficiency and if legally sufficient, pursue remedies under the Program Fraud Civil Remedies Act (31 U.S.C 3801-3812) and/or civil money penalties (24 CFR 30.35) against Security Atlantic and/or its principals for incorrectly certifying to the integrity of the data or that due diligence was exercised during the underwriting of six loans that resulted in actual losses of $452,217 on five loans and the potential loss of $101,513 on one loan, which could result in affirmative civil enforcement action of approximately $1,152,460. We also recommend that HUD’s Deputy Assistant Secretary for Single Family take appropriate administrative action against Security Atlantic and/or its principals for the material underwriting deficiencies cited in this report once the affirmative civil enforcement action is completed.