We conducted a limited review of Federal Housing Administration (FHA) loans underwritten by CTX Mortgage Company LLC. We selected the lender based on the results of an auditability survey, which determined that CTX Mortgage allowed prohibited restrictive covenants to be filed against Federal Housing Administration (FHA)-insured properties. The objective of our review was to determine the extent to which CTX Mortgage failed to prevent the recording of prohibited restrictive covenants with potential liens in connection with FHA-insured loans closed between January 1, 2008, and December 31, 2011.

CTX Mortgage did not follow HUD requirements regarding free assumability and liens when it underwrote loans that had executed and recorded agreements between sellers and the FHA borrower, containing prohibited restrictive covenants and potential liens in connection with FHA-insured properties. This noncompliance occurred because CTX Mortgage did not exercise due diligence and was unaware that the restrictive covenants recorded between the sellers and the borrowers violated HUD-FHA requirements. As a result, we found 683 FHA-insured loans (128 claim loans and 555 active loans) with a corresponding prohibited restrictive covenant with a potential lien recorded with the applicable county recording office, and CTX Mortgage placed the FHA fund at unnecessary risk for potential losses.

We recommend that HUD’s Associate General Counsel for Program Enforcement determine legal sufficiency and if legally sufficient, pursue civil remedies, civil money penalties, or other administrative action against CTX Mortgage, its principals, or both for incorrectly certifying to the integrity of the data or that due diligence was exercised during the origination of FHA-insured mortgages. We also recommend that HUD’s Deputy Assistant Secretary for Single Family Housing require CTX Mortgage to (1) reimburse the FHA fund for the $5,285,281 in actual losses resulting from the amount of claims and associated expenses paid on 51 loans that contained prohibited restrictive covenants and potential liens; (2) support the eligibility of $7,975,892 in claims paid or execute an indemnification agreement requiring any unsupported amounts to be repaid for claims paid on 77 loans for which HUD has paid claims but has not sold the properties; and (3) analyze all FHA loans originated, including the eight active loans identified in this memorandum, or underwritten beginning January 1, 2008, and nullify all active restrictive covenants or execute indemnification agreements that prohibit it from submitting claims on those loans identified. The eight active loans with prohibited restrictive covenants had a total unpaid mortgage balance of $1,564,969, which carries a potential loss of $892,032 that could be put to better use.