We audited Weststar Mortgage Corporation, a Federal Housing Administration (FHA) nonsupervised direct endorsement lender located in Albuquerque, NM. We selected Weststar for review based on a risk assessment of lenders in New Mexico. Our objective was to determine whether Weststar complied with U. S. Department of Housing and Urban Development (HUD) and FHA loan origination requirements for loans on which the borrowers defaulted and FHA paid claims between 2009 and 2011.

We found that Weststar violated HUD FHA underwriting requirements for 10 loan originations reviewed. Six of the loans had significant violations and did not qualify for FHA insurance. Further, Weststar entered erroneous data into HUD’s Neighborhood Watch system. This noncompliance occurred because Weststar misunderstood some requirements and ignored other requirements. As a result, HUD FHA incurred losses of $554,130 for six loans that were ineligible for FHA insurance, and the Neighborhood Watch system contained erroneous data. Further, Weststar allowed employees to sign documents for an underwriter and a loan officer. Weststar had updated its policies and procedures as of May 2010. If followed, the updated policies and procedures should address the underwriting deficiencies identified in our review.

We recommend that the Deputy Assistant Secretary for Housing require Weststar to (1) reimburse the FHA insurance fund $554,130 for losses incurred on six loans that were ineligible for FHA insurance; (2) correct the data in Neighborhood Watch for two loans; (3) implement procedures to ensure that it enters correct information into Neighborhood Watch; and (4) discontinue the practice of allowing employees to sign documents for underwriters and loan officers.