Final Report-Wells Fargo MH-10-25-06

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Issue DateOctober 25, 2006Audit Report Number2007-KC-1002TO:FROM:Brian D. Montgomery, Assistant Secretary for Housing – Federal HousingCommissioner and Chairman, Mortgagee Review Board, H//signed//Ronald J. Hosking, Regional Inspector General for Audit, 7AGASUBJECT: Manufactured Home Lending by Wells Fargo Home Mortgage,West Des Moines, IowaHIGHLIGHTSWhat We Audited and WhyWe audited Wells Fargo Home Mortgage (Wells Fargo) because it is the largestTitle II manufactured housing lender in the U.S. Department of Housing andUrban Development’s (HUD) Region VII and the second largest in the nation.We focused on Title II manufactured housing loans due to the high risk that theproperties had mortgages insured by the Federal Housing Administration withoutmeeting insurance requirements.Our objectives were to determine whether Wells Fargo originated, sponsored, orpurchased manufactured housing loans that were underwritten in accordance withHUD requirements and whether insured loans met HUD permanent foundationrequirements specific to Title II manufactured housing loans.What We FoundWells Fargo did not comply with HUD regulations, procedures, and instructionswhen underwriting 1 of 11 Federal Housing Administration-insured loansreviewed. The property for the loan was not eligible for insurance because itsfoundation did not meet HUD requirements, and Wells Fargo did not provide1

HUD with all required certifications when submitting the loan for insurance. As aresult, HUD insured one loan that unnecessarily placed the insurance fund at risk,causing HUD to incur a loss of 64,612.What We RecommendWe recommend that the assistant secretary for housing – federal housingcommissioner require Wells Fargo to reimburse HUD for one loan on which HUDincurred a loss of 64,612 (see appendix C).For each recommendation without a management decision, please respond andprovide status reports in accordance with HUD Handbook 2000.06, REV-3.Please furnish us copies of any correspondence or directives issued because of theaudit.Auditee’s ResponseWells Fargo agreed with our conclusions. We provided the draft report to WellsFargo on October 19, 2006, and requested a response by October 23, 2006. WellsFargo provided written comments on October 23, 2006.The complete text of the auditee’s response can be found in appendix B of thisreport.2

TABLE OF CONTENTSBackground and Objectives4Results of AuditFinding 1: Wells Fargo Underwrote One Title II Manufactured Housing Loanfor a Property with an Ineligible FoundationScope and Methodology59AppendixesA. Schedule of Questioned Costs and Funds to Be Put to Better UseB. Auditee CommentsC. Case Studies of Improperly Underwritten Loans3121316

BACKGROUND AND OBJECTIVESWells Fargo Home Mortgage (Wells Fargo) is a wholly owned subsidiary of Wells Fargo andCompany and maintains its headquarters in West Des Moines, Iowa. The U.S. Department ofHousing and Urban Development (HUD) approved Wells Fargo as a supervised directendorsement lender on December 16, 1985. The Federal Housing Administration providesmortgage insurance on (endorses) loans made by approved lenders. The mortgage insuranceprotects lenders such as Wells Fargo against losses when homeowners default on their mortgageloan.According to HUD’s Single Family Data Warehouse system, Wells Fargo originated orsponsored 3,847 Title II manufactured housing loans that closed between July 1, 2004, andDecember 31, 2005. HUD’s system also showed that Wells Fargo purchased 9,339 Title IImanufactured housing loans after endorsement that closed during the same period.HUD has established requirements that lenders must follow when underwriting a loan for it toqualify for Federal Housing Administration insurance. HUD also has specific requirements thatmanufactured housing permanent foundations must meet for the property to be eligible forinsurance.When submitting a manufactured housing loan for Federal Housing Administration insurance,the lender is responsible for ensuring that it Obtains an engineer’s certification confirming that the permanent foundation complieswith HUD requirements,Obtains a property appraisal from an appraiser that it must hire from HUD’s approvedFederal Housing Administration appraiser roster,Provides the engineer’s certification to the appraiser before the property appraisal isconducted,Monitors the work of the appraiser as part of its quality control plan, andObtains a compliance inspection for all new and proposed construction. The lender mayuse its own staff inspector or a fee inspector assigned by HUD.Our objectives were to determine whether Wells Fargo originated, sponsored, or purchasedmanufactured housing loans that were underwritten in accordance with HUD requirements andwhether insured loans met HUD permanent foundation requirements specific to Title IImanufactured housing loans.4

RESULTS OF AUDITFinding 1: Wells Fargo Underwrote One Title II Manufactured HousingLoan for a Property with an Ineligible FoundationWells Fargo insured one Title II manufactured housing loan on a property with a foundation thatdid not meet HUD requirements. The property failed four of five structural areas inspected. Asa result, HUD insured a loan that did not meet HUD requirements, causing an unnecessary lossof 64,612 to the Federal Housing Administration insurance fund.Wells Fargo Underwrote aLoan with an IneligibleFoundationWells Fargo did not ensure that the foundation of one Title II manufacturedhousing unit met HUD requirements before submitting the 103,290 loan to HUDfor endorsement. As a result, HUD insured the loan for a property with anineligible foundation.HUD Handbook 4145.1, chapter 3, paragraph 4, states that manufactured homesfor Title II mortgage insurance must have, with or without a basement, a site-builtpermanent foundation that complies with HUD Handbook 4930.3G, PermanentFoundations Guide for Manufactured Housing. The guide contains specificrequirements for designing and constructing a permanent foundation so that aproperty qualifies for Federal Housing Administration insurance.We inspected the property for compliance with HUD requirements specific to fiveareas: skirting, perimeter, piers, footings, and anchor straps. The property failedfour of the five structural areas inspected. The anchor straps were satisfactory.Appendix C provides a detailed explanation of inspection results and HUDrequirements.SkirtingHUD requires Title II manufactured homes to have skirting that is permanent orattached to a permanent foundation. The property did not have skirting that metHUD requirements. The following inspection photograph shows that the skirtingwas not permanent or attached to a permanent foundation.5

PerimeterHUD requires Title II manufactured homes to have a permanent perimeter wall toexclude entry of water and vermin. The property did not have an adequatepermanent perimeter wall. The wall was thin vinyl siding with holes throughoutthat would allow entry of water and vermin. There were no reinforcement rodspermanently attaching the perimeter wall. The following inspection photographsshow the failed perimeter wall.PiersHUD requires Title II manufactured homes to have piers that have mortared bedand head joints (i.e., dry-stacked piers are not permitted). The property piers didnot have mortared bed and head joints. The following inspection photographshows that the piers were dry stacked.6

FootingsHUD requires Title II manufactured homes to have reinforced concrete footingsunder the piers and perimeter wall. The property did not have reinforced concretefootings under the perimeter wall, as the following photograph shows.Required CertificationsWells Fargo did not provide HUD with all required certifications when submittingthe loan for insurance. HUD requires a professional engineer’s certification of thefoundation for all Title II manufactured homes. The certification is to show thatthe foundation plans and specifications met HUD foundation requirements. WellsFa

Wells Fargo Home Mortgage (Wells Fargo) is a wholly owned subsidiary of Wells Fargo and Company and maintains its headquarters in West Des Moines, Iowa. The U.S. Department of Housing and Urban Development (HUD) approved Wells Fargo as a supervised direct endorsement lender on December 16, 1985. The Federal Housing Administration provides

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