We audited Semper Home Loans, Inc. (Semper), a Federal Housing Administration (FHA) lender approved to underwrite and close mortgage loans without prior FHA review or approval. We selected Semper because its early payment default rate was higher than the default rate in the local area in which it does business. Our audit objectives were to determine (1) whether Semper acted in a prudent manner and complied with U.S. Department of Housing and Urban Development (HUD) regulations, procedures, and instructions for the origination, underwriting, and closing of the FHA-insured single-family loans selected for a detailed review and (2) whether Semper’s quality control plan, as implemented, fulfilled HUD’s requirements.
Semper, as a former loan correspondent and current direct endorsement lender, generally met HUD requirements for the origination of FHA-insured single-family loans. However, we identified several underwriting deficiencies that negatively affected the insurability of two loans for which Semper acted as the loan correspondent and for which the underwriting was performed by one of Semper’s sponsors (Fairfield Financial Mortgage Group, Inc.). These deficiencies occurred because the underwriter did not act in a prudent manner when approving the two loans for FHA-insurance. These deficiencies are not directly attributable to Semper but need to be addressed. The underwriting deficiencies for both loans consisted of qualifying ratios that exceeded HUD’s benchmarks without significant compensating factors.
In addition, Semper did not fully implement its quality control plan, although the plan met all of HUD’s requirements. It failed to perform sufficient reviews, which prevented it from ensuring the accuracy, validity, and completeness of its loan origination operations. This deficiency occurred because Semper’s management was not fully aware of HUD’s requirements for following its quality control plan. As a result, Semper may not have identified and corrected potential deficiencies in a timely manner, resulting in an unnecessary risk to the FHA insurance fund.
Semper was also incorrectly listed as the holding lender for 34 active loans and the servicing lender for 11 active loans. These errors occurred because Semper was not aware of HUD requirements for mortgage record changes after it sold loans to investing lenders. Inaccurate or untimely reporting of mortgage record changes directly affects the payment of claims for insurance benefits. HUD will not pay a claim for insurance benefits for which the information on the claim and HUD’s FHA insurance system does not agree.
We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing require the sponsor(s) of the respective loans to (1) reimburse the FHA insurance fund $169,000 in actual losses on one loan and (2) indemnify HUD for a potential loss of $179,400 that may be incurred related to one loan that did not meet FHA insurance requirements.
We also recommend that HUD’s Deputy Assistant Secretary for Single Family Housing direct Semper Home Loans to (1) implement its quality control plan as required and follow up with the lender in 9 months to ensure its compliance and (2) update its remaining mortgage records in HUD’s system to reflect the appropriate mortgage holder and implement procedures to ensure the timely submission of mortgage record changes for future loans sold to investing lenders.