We audited American Property Financial (American), a nonsupervised loan correspondent approved to originate Federal Housing Administration mortgage loans under the U.S. Department of Housing and Urban Development's (HUD) Single Family Direct Endorsement Program. American originated 83 Federal Housing Administration loans between February 1, 2002, and January 31, 2004. As of February 23, 2004, 14 of the 83 loans were in default status. Synergy Mortgage, Inc. had underwritten the 14 loans. We reviewed 39 loans originated by American and underwritten by Synergy Mortgage, Inc. Our audit objectives were to determine whether American: (1) complied with HUD's regulations, procedures, and instructions in the origination of Federal Housing Administration-insured mortgages and (2) implemented a quality control plan according to HUD's requirements.

American failed to originate Federal Housing Administration-insured loans in accordance with HUD requirements. American used gift funds to pay delinquent debts, rolled delinquent debts into mortgage loans, and submitted loans for unqualified applicants. American used inflated or poor appraisals to increase the sales price to accommodate the incentives to purchase. As of February 23, 2004, 14 of the loans totaling $1,368,257 were in default status. The deficiencies resulted from American's failure to follow HUD's requirements, its failure to implement an adequate quality control plan, and its lack of supervision over its loan officers. These deficiencies contributed to the high default rate, putting at risk 34 loans totaling more than $3.3 million in insured loans.

We recommended HUD's Assistant Secretary for Housing-Federal Housing Commissioner and Chairman of the Mortgagee Review Board require Synergy Mortgage, Inc., American's sponsor on the loans, to indemnify HUD against losses on the 34 loans and reduce the loans that received incentives to buy disguised as gift funds. American needs to establish controls to ensure that personnel are knowledgeable of HUD procedures and supervision is adequate to maintain an effective operation. Additionally, HUD should take appropriate administrative action(s) against parties involved.