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First Horizon to Indemnify FHA for Improperly Submitted Loans

Audit by HUD Inspector General uncovered mistakes

September 4, 2003


A Texas mortgage lender has agreed to indemnify the Federal Housing Administration (FHA) for not following guidelines when submitting delinquent single-family loans for federal mortgage insurance.

An audit by the Inspector General of the Department of Housing and Development (HUD) found that over a two-year period First Horizon Home Loans of Irving, Texas, improperly submitted 438 loans totaling more than $48 million, according to a statement posted on HUD's Internet web site.

"While we strive for perfection obviously mistakes happen," First Horizon President and CEO Jerry Baker said Wednesday. "We don't expect losses or additional reserves to be used as part of this audit."

In a written statement First Horizon said during the two-year audit period the company originated more than 37,000 endorsed or government-insured loans.

"During the review process with the (Inspector General) we found loans submitted that did not correctly meet HUD guidelines," the company said. "The number of loans initially questioned were 438 (approximately $48 million) or a little over 1 percent of the loans originated during this period. Since the loans were initially originated many have already been paid off."

Baker said a final agreement on the indemnification has not been reached but he expects the final number of loans to be "some number less" than 438.

"Losses for these loans, if any, occur over time and will be handled in the normal reimbursement process with HUD," the company said.

According to HUD First Horizon was selected "for audit because of its high number of late endorsements."

"Our audit objective was to determine if First Horizon requested late endorsements for loans that had late payments prior to submission," HUD said.

First Horizon "improperly submitted 438 loans totaling over $48 million for endorsement more than 60 days after closing when the borrowers had delinquent payments prior to submission," HUD found.

"Although First Horizon incorporated HUD's late submission requirements into its procedures, it did not ensure that its employees always followed them," the agency said. "Since these loans are insured by (FHA), they increase the risk to its insurance fund."

HUD paid claims on 15 of the loans and lost $83,050 on three properties that have been sold.

The agency recommended that First Horizon cover any losses on the 423 active loans.

Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: [email protected]

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