We audited Mortgage Lending Direct, Inc. (MLD), a nonsupervised lender (see footnote -1)located in Florham Park, NJ, in support of the U.S. Department of Housing and Urban Development (HUD), Office of the Inspector General’s (OIG) goal of improving the integrity of the single-family insurance program. We selected MLD for audit because its 8.88 percent default rate for Federal Housing Administration (FHA)-insured single-family loans with beginning amortization dates between February 1, 2009, and January 31, 2011, was nearly double the New Jersey State average of 4.45 percent for the same period. The audit objective was to determine whether MLD officials originated FHA-insured loans and implemented a quality control plan in accordance with HUD-FHA requirements.
MLD officials did not always originate FHA-insured loans in accordance with HUD-FHA requirements. Specifically, 14 of the 25 loans reviewed exhibited material underwriting deficiencies. As a result, the FHA insurance fund incurred an actual loss of $176,988 on one loan and was put at risk for potential losses of more than $2.7 million on the remaining 13 loans. In addition, MLD officials charged borrowers unsupported fees of $15,611 and lacked adequate documentation for $8,996 in mortgage payoffs. While MLD officials did establish a quality control plan that complied with HUD-FHA requirements, they did not ensure that the plan was implemented as established. Specifically, loans that defaulted within the first 6 months were not reviewed, and deficiencies identified in rejected loans were not reported to management. As a result, MLD officials may have missed the opportunity to address systemic deficiencies in MLD’s origination processes and, thus, reduce unnecessary risk to the FHA insurance fund.
We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing require MLD officials to (1) indemnify HUD against potential losses of $2.7 million related to the 13 loans with material underwriting deficiencies; (2) reimburse the FHA insurance fund for the $176,988 claim paid; (3) obtain adequate documentation for unsupported fees of $15,611 and mortgage payoffs of $8,996 and if such documentation cannot be provided, refund or collect the applicable amounts due to or from the borrowers; and (4) strengthen controls to ensure that future FHA-insured loans are approved and the quality control plan is implemented in accordance with HUD-FHA requirements.
Footnote 1 - A nonsupervised lender is an FHA-approved lending institution, the principal activity of which involves lending or investing funds in real estate mortgages.