We audited Federal Housing Administration (FHA)-insured loan processes at two DHI Mortgage Company, LTD (DHI Mortgage), branches in Scottsdale, AZ, to determine whether DHI Mortgage originated, approved, and closed FHA-insured single-family loans in accordance with U.S. Department of Housing and Urban Development (HUD) requirements. We recently conducted an audit of DHI Mortgage’s Tucson and Scottsdale branches and identified significant underwriting deficiencies and improper restrictive addenda/liens to the purchase contracts. Based on the results of our prior audit, we chose to audit the remaining two DHI Mortgage Scottsdale branches.

DHI Mortgage did not follow HUD requirements for originating, approving, or closing FHA-insured loans. Specifically, all 20 of the loans reviewed contained underwriting deficiencies, and 12 of these had significant deficiencies that impacted the insurability of the loan. The significant underwriting deficiencies included improper calculation of income, inadequate documentation of income, inadequate determination of credit and/or debt, and inadequate compensating factors when the debt-to-income ratio exceeded HUD’s benchmark ratio. We also reviewed all of the loans in our audit period that were either “new construction” or “new condo” to determine whether improper restrictive covenants were recorded against the FHA-insured properties. We identified eight loans that had prohibited restrictive addenda to the purchase contracts.

We recommend that the Deputy Assistant Secretary for Single Family Housing require DHI Mortgage to (1) indemnify HUD for more than $2.5 million for loans that did not meet FHA insurance requirements and (2) reimburse HUD $265,420 for the amount of claims and associated fees paid on loans that did not meet FHA insurance requirements.