The U.S. Department of Housing and Urban Development (HUD), Office of Inspector General audited Mortgage Now Inc., a Federal Housing Administration (FHA)-approved nonsupervised direct endorsement lender approved to originate, underwrite, and submit mortgages for insurance. We selected Mortgage Now based on its compare ratio of 223 percent for a 2-year FHA performance period. Its average compare ratio for the loans originated in our jurisdiction was 287 percent. The audit was part of the activities in our fiscal year 2012 audit plan. Our audit objective was to determine whether Mortgage Now complied with HUD’s regulations, procedures, and instructions in the underwriting of FHA loans and implementing its quality control plan.

Mortgage Now did not comply with HUD’s regulations, procedures, and instructions in the underwriting of 5 of 20 FHA-insured loans reviewed. Additionally, it did not follow HUD requirements when implementing its quality control program. Specifically, it did not ensure that its routine quality control reviews of FHA-insured loans were performed frequently and in a timely manner as required by HUD, and its written quality control plan did not contain all of the required provisions. As a result, Mortgage Now increased the risk to the FHA Mutual Mortgage Insurance Fund by $555,678, and lacked assurance of the accuracy, validity, and completeness of its loan underwriting activities.

We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing require Mortgage Now to (1) indemnify HUD for the five loans cited in this report, with an estimated loss of $555,678, and (2) implement a quality control program that complies with HUD requirements.