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

Shea Mortgage did not follow HUD requirements when it underwrote loans that had executed and recorded agreements between Shea Homes and the FHA borrower, containing prohibited restrictive covenants in connection with FHA-insured properties. This noncompliance occurred because Shea Mortgage did not exercise due diligence and was unaware that the restrictive covenants recorded between Shea Homes and the borrowers violated HUD-FHA requirements. As a result, we found 600 FHA-insured loans (29 claim loans and 571 active loans) with a corresponding prohibited restrictive covenant recorded with the applicable county recording office, and Shea Mortgage placed the FHA insurance fund at unnecessary risk for potential losses.

We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing require Shea Mortgage to (1) reimburse the FHA insurance fund for the $1,467,611 in actual losses resulting from the amount of claims and associated expenses paid on 11 loans that contained prohibited restrictive covenants; (2) support the eligibility of $2,566,837 in claims paid or execute an indemnification agreement requiring any unsupported amounts to be repaid for claims paid on 19 loans, for which HUD has paid claims but has not sold the properties; (3) remove prohibited restrictive language or execute an indemnification agreement that prohibits it from submitting claims on 27 active loans with prohibited restrictive covenants in the amount of $7,715,456, thereby putting $5,092,201 to better use; (4) nullify all active restrictive covenants on FHA loans or execute an indemnification agreement that prohibits it from submitting claims on those loans; and (5) adhere to 24 CFR 203.41 and ensure policies and procedures reflect FHA requirements. In addition, 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 Shea 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.