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We conducted a limited review of Federal Housing Administration (FHA) loans underwritten by Standard Pacific Mortgage, Inc. We selected the lender based on the results of an auditability survey, which determined that Standard Pacific Mortgage allowed prohibited restrictive covenants to be filed against FHA-insured properties. The objective of our review was to determine the extent to which Standard Pacific 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.

Standard Pacific Mortgage did not follow HUD requirements regarding free assumability and liens when it underwrote loans that had executed and recorded agreements between Standard Pacific Homes and the FHA borrower, containing prohibited restrictive covenants and liens in connection with FHA-insured properties. This noncompliance occurred because Standard Pacific Mortgage did not exercise due diligence and was unaware that the restrictive covenants recorded between Standard Pacific Homes and the borrowers violated HUD-FHA requirements. As a result, we found 90 FHA-insured loans (28 claim loans and 62 active loans) with a corresponding prohibited restrictive covenant and lien recorded with the applicable county recording office, and Standard Pacific 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 Standard Pacific 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 Standard Pacific Mortgage to (1) reimburse the FHA fund for the $1,535,189 in actual losses resulting from the amount of claims and associated expenses paid on 15 loans that contained prohibited restrictive covenants and liens; (2) support the eligibility of $1,390,235 in claims paid or execute an indemnification agreement requiring any unsupported amounts to be repaid for claims paid on 13 loans for which HUD has paid claims but has not sold the properties; (3) analyze all FHA loans originated, including the five 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 five active loans with prohibited restrictive covenants carries a potential loss of $544,967 that could be put to better use; and (4) follow 24 CFR 203.32 and 203.41 by excluding restrictive language and prohibited liens for all new FHA-insured loan originations and ensure that policies and procedures reflect FHA requirements.