Single Family Direct Endorsement Program

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					                       Single Family Direct Endorsement Program


Directive Number: 4000.4



SINGLE FAMILY DIRECT ENDORSEMENT PROGRAM ................................................................. 1
CHAPTER 1. GENERAL PROGRAM INFORMATION .....................................................................14
  1-1 PURPOSE...........................................................................................................................................14
  1-2 BASIC PROGRAM OUTLINE ..........................................................................................................14
  1-3 ASSURANCES OF ENDORSEMENT ..........................................................................................17
  1-4 ELIGIBLE MORTGAGE INSURANCE PROGRAMS .................................................................17
  1-5    MARGINAL CASES .....................................................................................................................18
  1-6    MINIMUM PROPERTY STANDARDS.......................................................................................18
  1-7 ELIGIBILITY OF CONDOMINIUM PROJECTS AND PUDS ........................................................19
  1-8 MORTGAGE AMOUNT IN PURCHASE TRANSACTIONS ..........................................................19
  1-9 REFINANCE TRANSACTIONS ......................................................................................................19
  1-10 INTEREST RATE ............................................................................................................................20
  1-11 FEES AND CHARGES ....................................................................................................................20
  1-12 AUTHORIZED TECHNICAL PERSONNEL .................................................................................20
  1-13 BUSINESS RELATIONSHIPS WITH BUILDER, SELLER, OR REAL ESTATE FIRM ..............20
  1-14 LOANS INVOLVING EMPLOYEES OF THE MORTGAGEE .....................................................20
  1-15 CONVERSIONS AND SUBMISSION FOR HUD COMMITMENT PROCESSING .....................21
  1-16 TRANSFERRING CASES ............................................................................................................22
  1-17 CONSTRUCTION COMPLAINTS .................................................................................................24
  1-18 WAIVER OF TITLE OBJECTIONS ................................................................................................25
  1-19 CODE OF FEDERAL REGULATIONS ..........................................................................................25
  1-20 CASE NUMBER SYSTEM..............................................................................................................25
CHAPTER 2. MORTGAGEE APPROVAL ............................................................................................26
  2-1 ROLE OF MORTGAGEE .................................................................................................................26
  2-2 ELIGIBILITY REQUIREMENTS ....................................................................................................26
  2-3 REQUIRED DOCUMENTS..............................................................................................................27
  2-4 UNDERWRITER ...............................................................................................................................28
  2-5 UNDERWRITING PROCEDURES...................................................................................................30
  2-6 QUALITY CONTROL PLAN ............................................................................................................31
  2-7 USE OF MORTGAGEE STAFF TECHNICIANS ............................................................................32
  2-8 HUD DOCUMENT REVIEW ...........................................................................................................35
  2-9 TRAINING .....................................................................................................................................37
  2-10 MORTGAGEE APPROVAL STATUS............................................................................................39
  2-11 CHANGES IN ELIGIBILITY CRITERIA ....................................................................................42
  2-12 AUTHORIZED AGENTS .............................................................................................................42
  2-13 LOAN CORRESPONDENTS ..........................................................................................................43
  2-14 APPROVAL RESTRICTED TO PROPOSED CONSTRUCTION ..................................................43
  2-15 FIELD OFFICE FILE ON DIRECT ENDORSEMENT MORTGAGEES .......................................44
CHAPTER 3. MORTGAGEE UNDERWRITING .................................................................................44
  3-1   PURPOSE ..........................................................................................................................................44
  3-2   INELIGIBLE PARTICIPANTS AND CREDIT ALERT ..................................................................44
  3-3   PROPERTY VALUATION PROCEDURES ....................................................................................45
  3-4     EXPIRATION OF THE APPRAISAL ...........................................................................................48
  3-5   EXTENDING APPRAISALS ............................................................................................................49
  3-6   MASTER APPRAISAL REPORT (MAR) ........................................................................................49
  3-7   COMPLIANCE INSPECTIONS .......................................................................................................49
  3-8 SATISFYING REPAIR REQUIREMENTS ......................................................................................50
  3-9 MONTHLY EXPENSE ESTIMATES AND CLOSING COSTS ......................................................50
  3-10 FLOOD HAZARD AREAS ..........................................................................................................51
  3-11 SECTION 223(E) ...........................................................................................................................51
  3-12 MODIFIED COST APPROACH...................................................................................................51
  3-13 HOMEBUYER'S STATEMENT OF APPRAISED VALUE ........................................................51
  3-14 LEAD-BASED PAINT HAZARD ................................................................................................52
  3-15 MORTGAGE CREDIT ANALYSIS PROCEDURES ..................................................................52
  3-16 UNDERWRITER/MORTGAGEE CERTIFICATION .................................................................53
  3-17 INVESTOR APPLICATIONS ......................................................................................................55
  3-18* CONDOMINIUMS ......................................................................................................................55
  3-19 ADJUSTABLE RATE MORTGAGES .........................................................................................55
  3-20* SALE OF HUD-OWNED PROPERTIES ....................................................................................56
  3-21 ESCROW PROCEDURE FOR DEFERRED IMPROVEMENTS ...............................................57
  3-22 MORTGAGE ENDORSEMENT SUBMISSION ............................................................................57
  3-23 PRE-CLOSING REVIEW SUBMISSIONS .....................................................................................61
  3-24 CANCELLING CASES ...................................................................................................................62
  3-25 MORTGAGES WITHOUT EXECUTED UNDERWRITER/MORTGAGE CERTIFICATIONS ..62
CHAPTER 4. HUD PROCESSING PROCEDURES .............................................................................63
  4-1 PURPOSE ..........................................................................................................................................63
  4-2 REQUEST FOR CASE NUMBER AND APPRAISER.....................................................................63
  4-3 SENDING THE APPRAISAL PACKAGE TO APPRAISER ...........................................................64
  4-4 RETURN OF APPRAISAL PACKAGE TO MORTGAGEE ............................................................64
  4-5 HUD RECEIPT OF THE APPRAISAL COPY..................................................................................65
  4-6 HUD RECEIPT OF MORTGAGE SUBMISSION ............................................................................65
  4-7 PRE-ENDORSEMENT REVIEW .....................................................................................................65
  4-8 PROCESSING RECONSIDERATIONS ...........................................................................................67
  4-9 POST-ENDORSEMENT TECHNICAL REVIEW ............................................................................67
  4-10 PROCESSING PROPOSED CONSTRUCTION CASES WITH HUD CONDITIONAL
  COMMITMENTS AND VA CRVS ..........................................................................................................77
  4-11 PROCESSING CONVERSIONS .....................................................................................................78
  4-12 PROCESSING PRE-CLOSING CASES ..........................................................................................79
  4-13 PROCESSING GOALS ....................................................................................................................80
  4-14 ACTIVITY AND INVENTORY TRACKING .................................................................................80
CHAPTER 5. PROGRAM MANAGEMENT..........................................................................................81
  5-1 PURPOSE...........................................................................................................................................81
  5-2 FIELD OFFICE MONITORING ........................................................................................................82
  5-3 TYPES OF DEFICIENCIES...............................................................................................................83
  5-4 APPLICATION OF SANCTIONS .....................................................................................................85
  5-5 PROBATION .....................................................................................................................................86
  5-6 WITHDRAWAL OF DIRECT ENDORSEMENT STATUS .............................................................86
  5-7 EFFECT OF DIRECT ENDORSEMENT SANCTIONS ...................................................................87
  5-8 INDEMNIFICATION AGREEMENTS .............................................................................................87
  5-9 WITHDRAWAL OF HUD APPROVAL ...........................................................................................88
  5-10 CIVIL MONEY PENALTIES ...........................................................................................................88
  5-11 EFFECT OF SANCTIONS ON CASES IN PROCESS .....................................................................90
  5-12 SANCTIONS AGAINST INDIVIDUALS ........................................................................................90
  APPENDIX 1 ............................................................................................................................................92
  APPENDIX 2 ............................................................................................................................................92
  APPENDIX 3 ............................................................................................................................................93
  APPENDIX 4 ............................................................................................................................................94
  APPENDIX 5 ............................................................................................................................................98
  APPENDIX 6 ............................................................................................................................................98
  APPENDIX 7 ............................................................................................................................................98
     APPENDIX 8 ............................................................................................................................................98
     APPENDIX 9 ................................................................................................................................................99
     APPENDIX 10 ............................................................................................................................................100
     APPENDIX 11 ............................................................................................................................................101
     APPENDIX 12 ............................................................................................................................................102
     APPENDIX 13 ............................................................................................................................................102
     APPENDIX 14 ............................................................................................................................................103
     APPENDIX 15 ........................................................................................................................................104
     APPENDIX 16 ........................................................................................................................................104
     APPENDIX 17 ........................................................................................................................................104

                           U.S. Department of Housing and Urban Development
                                        HOUSING


Special Attention of:       Transmittal Handbook No.: 4000.4
 Directors of Housing                         REV-1
 Directors, Housing Development Issued: 9/2/88
 Divisions
 Field Office Managers
 Field Office Chiefs
 Direct Endorsement Underwriters


1.      This Transmits

       Handbook 4000.4 REV-1, Single Family Direct Endorsement Program,
       dated 9/88

2.      Explanation of Changes:

       Previously, separate handbooks were issued to mortgagees and HUD
       staff. This handbook combines those separate instructions and
       includes changes that have occurred since May 1983.

3.      Cancellations:

       A.      4000.4 - Mortgagees' Guide to the Direct Endorsement
              Program, dated May 1983.

       B.     4000.5 - Single Family Direct Endorsement Program, dated
              May 1983.

       C.      Mortgagee Direct Endorsement Program Updates 87-1 and 88-1.
              Field Office D.E. Update memoranda 1 through 15.

4.      Filing Instructions:

         Remove                                       Insert

         Handbook 4000.4                                   Handbook 4000.4 REV-1
         dated May 1983                                   dated September 1988
    Handbook 4000.5
    dated May 1983

                        _______________________________________
                        Assistant Secretary for
                         Housing - Federal Housing Commissioner


W-3-1, W-2(H)(P)(OGC)(Z), W-3(A)(H)(ZAS)

(ZAOO), W-4 (H), R-1, R-2, R-3, R-3-1(H),

R-3-2, R-3-3, R-6, R-6-1, R-6-2, R-7, R-7-1, R-7-2, R-8, R-8-1

R-7-2, R-8, R-8-1

HUD-23 (9-81)
W-3-1 Directives Management Officers--Headquarters and Regions,
     library, ACIR (Advisory Commission on Intergovermental
     Relations)
W-4     Branch Chiefs, multiple copies for staff
R-1    Regional Administrators, Deputy Regional Administrators
R-2    Office Directors, Principal Assistants in Regional
     Administrators' offices
R-3    Bulk shipment to Regional Offices
R-3-1 Bulk shipment to Regional Offices for selective
     distribution by program area
R-3-2 Directors, Administrative Services Divisions and
     Administrative and Management Services Divisions, and
     Administrative staffs
R-3-3 Category D offices - bulk
R-6    Category A offices - Office Managers and Deputy Office
     Managers
R-6-1 Category A offices - bulk
R-6-2 Category A offices - Division Directors
R-7    Category B offices - Office Managers and Deputy Office
     Managers
R-7-1 Category B offices - bulk
R-7-2 Category B offices - Division Directors
R-8    Category C offices - Office Managers and Deputy Office
     Managers
R-8-1 Category C offices - bulk
R-7-2 Category B offices - Division Directors
R-8    Category C offices - Office Managers and Deputy Office
     Managers
R-8-1 Category C offices - bulk

                    U.S. Department of Housing and Urban Development

Special Attention of:
                         Transmittal for Handbook No.: 4000.4 REV-1
Directors of Housing                               CHG-2
Directors, Housing            Issued: July 13, 1994
 Development Division
Field Office Managers
Field Office Chiefs
All Approved Mortgagees

1.   This Transmits:

     Page changes to Handbook 4000.4 REV-1, Single Family Direct
     Endorsement Program, dated September 1988. This handbook change is
     CHANGE-2.
     CHANGE-1 was issued on December 11, 1992.

2.   Explanation of Material Transmitted:

     These handbook changes incorporate policy and procedure changes
     adopted since December 1, 1992.

     Highlights:

     o   Removes references in Chapter 1 to subdivision approval.

     o   Revises guidelines in Chapter 2 for underwriter approval.

     o   Implements use of Direct Endorsement Post-Endorsement Technical
         Review Checklist in Chapter 4 and in Appendix 16 designed to
         assist technical reviewers in evaluating and assigning ratings
         of underwriters.

     o    Implements an improved supervisory review process in Chapter 4
         which requires review of a sample from each post-endorsement
         review rating category.

     o    Strengthens program management by revising guidelines in Chapter
         5 concerning available sanctions and the manner in which they are
         to be applied.

     o    Incorporates a new mortgagee certification in Appendix 4
         regarding legal restrictions on conveyance.

     o    Implements use of Pre-Endorsement Review Checklist by HUD staff
         in Chapter 1 and Appendix 17.

3.   File Instructions:

     Remove:                            Insert:

     Pages i to iv                    i to iv
     Pages 1-1 to 1-4                    1-1 to 1-4
     Page 1-6a (CHG-1)                      Page 1-6a
     Pages 2-3 to 2-4 (CHG-1), 2-5 to 2-6       Pages 2-3 to 2-6a
     Pages 4-5 to 4-8                    Pages 4-5 to 4-8b
     Pages 5-1 to 5-10                    Pages 5-1 to 5-14
     Appendix 4 (CHG-1)                     Appendix 4
                                 Appendix 16
                                 Appendix 17

                           __________________________________
                           Nicolas P. Retsinas
                           Assistant Secretary for Housing
                            - Federal Housing Commissioner

W-3-1
W-3-1 Directives Management Officers--Headquarters and Regions,
     library, ACIR (Advisory Commission on Intergovermental
     Relations)

                   U.S. Department of Housing and Urban Development


Special Attention of:     Transmittal for Handbook No.: 4000.4 REV-1
   Directors of Housing                        CHG-1
   Directors, Housing     Issued: December 11, 1992
    Development Division
   Field Office Managers
   Field Office Chiefs
   All Approved Mortgagees

   1. This Transmits:

     Page changes to Handbook 4000.4 REV-1, Single Family Direct
     Endorsement Program, dated 9/88.

   2. Explanation of Material Transmitted:

     These handbook changes incorporate policy and procedure
     changes adopted since September 1988. Further changes will
     be made in the near future.

     Highlights:

     o   Includes an updated list of FHA mortgage insurance
         programs which are eligible for Direct Endorsement
         processing based on additions under the mortgagee
         Approval and Direct Endorsement Expansion Rule.

     o   Clarifies HUD policy on review and approval of
         subdivisions, condominiums, or PUDs when the
         community has received approval from the Veteran's
         Administration (now Department of Veteran's Affairs).

     o    Provides new instructions to mortgagees concerning
         applicants who are HUD employees or members of an
         employee's household. As a result of a recent
         investigation, the IG recommended that HUD instruct
         Direct Endorsement lenders that these applications
         must be referred to HUD for processing. Similar
       instructions were provided to HUD employees on
       June 26, 1990.

  o    Clarifies HUD policy on lender approval in additional
       Field office jurisdictions as outlined in Mortgagee
       Letter 92-15.

  o     In accordance with Mortgagee Letter 92-24,
       incorporates requirements concerning notice to the
       buyer on Lead-Based Paint hazards.

  o    Clarifies the resources to be used by HUD personnel
       when reviewing the eligibility of mortgagee staff
       personnel to participate in the Direct Endorsement
       program.

  o     Clarifies for HUD personnel how to treat nominations
       for mortgagee staff personnel to provide for
       nationwide consistency in accordance with Mortgagee
       Letter 92-15, dated May 12, 1992.

  o     Modifies handbook instructions concerning comments or
       corrections to appraisal reports by Direct
       Endorsement underwriters. These changes are based on
       the new instructions contained in Mortgagee Letter
       91-43, dated September 16, 1991.

  o     Corrects references to the application forms required
       for FHA insured loans to reflect new instructions
       provided in Mortgagee Letters 91-24 and 92-7.

  o     Incorporates changes in certifications required by
       the mortgagee and underwriter under the Mortgagee
       Approval and Direct Endorsement Expansion Rule.

  o    Incorporates a reference to simultaneous appraisal
       and mortgage credit review by the underwriter as
       provided in Handbook 4155.1, Rev. 4.

  o    Incorporates changes in HUD policy regarding investor
       applications as a result of the HUD Reform Act of
       1989.

3. File Instructions:

  Remove:                   Insert:

  Pages   iii to vi        Pages iii to vi
  Pages   1-5 to 1-6         Pages 1-5 to 1-6a
  Pages   1-9 to 1-10         Pages 1-9 to 1-10a
  Pages   2-3 to 2-4         Pages 2-3 to 2-4
  Pages   2-11 to 2-12        Pages 2-11 to 2-12a
  Pages   2-15 to 2-16        Pages 2-15 to 2-16a
      Pages 3-3 to 3-4          Pages 3-3 to 3-4a
      Pages 3-7 to 3-12          Pages 3-7 to 3-12b
      Appendices 2 to 4          Appendices 2 to 4
                            Appendix 15

                    ________________________________
                    Assistant Secretary for Housing
                     -Federal Housing Commissioner


                  Program Participant

                  and Departmental

                  Staff

December 1992             Single Family Direct

                  Endorsement

                  Program


W-3-1, W-2(H)(P)(OGC)(Z), W-3(A)(H)(ZAS)(ZAOO), W-4(H),

R-1, R-2, R-3, R-3-1(H), R-3-21 R-3-3, R-6, R-6-2, R-7,

R-7-1, R-7-2, R-8, R-8-1
W-3-1 Directives Management Officers--Headquarters and Regions,
      library, ACIR (Advisory Commission on Intergovermental
      Relations)
W-4      Branch Chiefs, multiple copies for staff
R-1     Regional Administrators, Deputy Regional Administrators
R-2     Office Directors, Principal Assistants in Regional
      Administrators' offices
R-3     Bulk shipment to Regional Offices
R-3-1 Bulk shipment to Regional Offices for selective
      distribution by program area
R-3-3 Category D offices - bulk
R-6     Category A offices - Office Managers and Deputy Office
      Managers
R-6-2 Category A offices - Division Directors
R-7     Category B offices - Office Managers and Deputy Office
      Managers
R-7-1 Category B offices - bulk
R-7-2 Category B offices - Division Directors
R-8     Category C offices - Office Managers and Deputy Office
      Managers
R-8-1 Category C offices - bulk


                    FOREWORD
   This Handbook describes HUD's Direct Endorsement program and
provides instructions for HUD staff and participating mortgagees.
   Questions not addressed in the text should be directed to the
Director, Single Family Development Division, Office of Single Family
Housing, HUD Headquarters, Washington.

References:

1)     4000.2     Mortgagees Handbook - Application Through
                Insurance (Single Family)

2)     4020.1     HUD-FHA Underwriting Analysis

3)     4060.1     Mortgagee Approval Handbook

4)     4060.2     Mortgagee Review Board Handbook

5)     4070.1     Construction Complaints and Section 518(a)
                and (b)

6)     4080.1     Compliance Handbook

7)     4115.1     Administrative Instructions and Procedures for
                Home Mortgage Insurance

8)     4115.3     Master Conditional Commitment Procedure

9)     4125.1    Underwriting-Technical Directions for Home
                Mortgage Insurance

10)    4135.1     Procedures for Approval of Single Family Proposed
                Construction Applications in New Subdivisions

11)    4145.1     Architectural Processing and Inspections for
                Home Mortgage Insurance

12)    4150.1     Valuation Analysis for Home Mortgage Insurance

13)    4155.1     Mortgage Credit Analysis for Mortgage Insurance
                on One- to Four-Family Properties

14)    4190.1     Single Family Underwriting Reports and Forms
                Catalog

15)    4240.1     Home Mortgage Insurance--203(h) Disaster Victims;
                203(i) Outlying Area Properties

16)    4240.2     Graduated Payment Mortgage Program, Section 245

17)    4240.4     Rehabilitation Home Mortgage Insurance, Section
                203(k)

18)    4245.1     Section 220(d)(3)(A) and Section
                 220(h) -- Rehabilitation and Neighborhood
                 Conservation and Housing Insurance Program

19)     4255.1     Home Mortgage Insurance for Servicemen, Section
                 222

20)     4265.1     Home Mortgage Insurance - Condominium Units
                 Section 234(c)

21)     4270.1      Processing Instructions for Home Mortgage
                 Insurance Under Section 240, Purchase of Fee
                 Simple Title for Lessors

22)     4905.1     Requirements for Existing Housing,
                 One- to Four-Family Living Units

23)     4910.1     Minimum Property Standards for Housing

24)     24 CFR Part 24 - Debarment, Suspension and Ineligibility of
                   Contractors and Grantees;
                   Administrative Sanctions

25)     24 CFR 200.926 - Minimum Property Standard for One- and
                  Two-Family Dwellings

26)     24 CFR 3280.8 - Federal Manufactured Home Construction and
                   Safety Standards


                      TABLE OF CONTENTS

Paragraph                                        Page

            CHAPTER 1. GENERAL PROGRAM INFORMATION

 1-1      Purpose                                 1-1
 1-2      Basic Program Outline                        1-1
 1-3      Assurance of Endorsement                       1-5
 1-4      Eligible Mortgage Insurance Programs               1-5
 1-5      Marginal Cases                             1-6
 1-6      Minimum Property Standards                       1-6
 1-7      Eligibility of Condominium Projects,
          Subdivisions and PUDs                       1-6a
 1-8      Mortgage Amount in Purchase Transactions             1-6a
 1-9      Refinance Transactions                       1-7
 1-10     Interest Rate                             1-7
 1-11     Fees and Charges                             1-7
 1-12     Authorized Technical Personnel                   1-7
 1-13     Business Relationships with Builder, Seller
          or Real Estate Firm                       1-8
 1-14     Loans Involving Employees of the Mortgagee            1-8
 1-15     Conversions and Submission for HUD
          Commitment Processing                         1-8
 1-16       Transferring Cases                      1-10
 1-17       Construction Complaints                   1-11
 1-18       Waiver of Title Objections               1-12
 1-19       Code of Federal Regulations                1-12
 1-20       Case Number System                         1-12


Paragraph                                      Page

               CHAPTER 2. MORTGAGEE APPROVAL

 2-1    Role of Mortgagee                         2-1
 2-2    Eligibility Requirements                  2-1
 2-3    Required Documents                          2-2
 2-4    Underwriter                            2-3
 2-5    Underwriting Procedures                     2-5
 2-6    Quality Control Plan                     2-6
 2-7    Use of Mortgagee Staff Technicians             2-7
 2-8    HUD Document Review                           2-10
 2-9    Training                              2-12
 2-10   Mortgagee Approval Status                     2-13
 2-11   Changes In Eligibility Criteria             2-16
 2-12   Authorized Agents                          2-16a
 2-13   Loan Correspondents                         2-17
 2-14   Approval Restricted to Proposed Construction       2-17
 2-15   Field Office File on DE Mortgagees             2-18

               CHAPTER 3. MORTGAGEE UNDERWRITING

 3-1    Purpose                                  3-1
 3-2    Ineligible Participants and Credit Alert        3-1
 3-3    Property Valuation Procedures                   3-1
 3-4    Expiration of the appraisal                  3-4a
 3-5    Extending Appraisals                         3-5
 3-6    Master Appraisal Report (MAR)                    3-5
 3-7    Compliance Inspections                        3-5
 3-8    Satisfying Repair Requirements                   3-6
 3-9    Monthly Expense Estimates and Closing Costs           3-6
 3-10    Flood Hazard Areas                          3-7
 3-11    Section 223(e)                            3-7
 3-12    Modified Cost Approach                        3-7
 3-13    Homebuyer's Statement of Appraised Value              3-8
 3-14    Lead-Based Paint Hazard                        3-8
 3-15    Mortgage Credit Analysis Procedures               3-8
 3-16    Underwriter/Mortgagee Certification              3-10
 3-17    Investor Applications                       3-11
 3-18    Condominiums                                3-12
 3-19    Adjustable Rate Mortgages                      3-12
 3-20    Sale of HUD-Owned Properties                     3-12
 3-21    Escrow Procedures for Deferred Improvements            3-12b
 3-22    Mortgage Endorsement Submission                     3-13
 3-23    Pre-Closing Review Submissions                   3-17
 3-24    Canceling Cases                            3-18
 3-25    Mortgages Without Executed
         Underwriter/Mortgagee Certifications          3-18

             CHAPTER 4. HUD PROCESSING PROCEDURES

 4-1     Purpose                                4-1
 4-2     Request for Case Number and Appraiser             4-1
 4-3     Sending Appraisal Package to Appraiser           4-2
 4-4     Return of Appraisal Package to Mortgagee          4-2
 4-5     HUD Receipt of Appraisal Copy                 4-3
 4-6     HUD Receipt of Mortgage Submission               4-3
 4-7     Pre-Endorsement Review                       4-3
 4-8     Processing Reconsiderations                  4-5
 4-9     Post-Endorsement Technical Review                4-5
 4-10    Processing Proposed Construction Cases with
         HUD Conditional Commitments and VA CRVs             4-14
 4-11    Processing Conversions                      4-16
 4-12    Processing Pre-Closing Cases                  4-16
 4-13    Processing Goals                          4-17
 4-14    Activity and Inventory Tracking               4-18

             CHAPTER 5. PROGRAM MANAGEMENT

 5-1     Purpose                               5-1
 5-2     Field Office Monitoring                  5-1
 5-3     Types of Deficiencies                    5-3
 5-4     Application of Sanctions                  5-5
 5-5     Probation                             5-6
 5-6     Withdrawal of Direct Endorsement Status          5-7

Paragraph                                       Page

 5-7     Effect of Direct Endorsement Sanctions          5-8
 5-8     Indemnification Agreements                    5-8
 5-9     Withdrawal of HUD Approval                    5-9
 5-10     Civil Money Penalties                     5-9
 5-11     Effect of Sanctions on Cases in Process        5-12
 5-12     Sanctions Against Individuals               5-12

Appendices

1.  Form HUD-54112 - Application for Approval as Direct Endorsement
                Mortgagee and Nomination of Underwriting Personnel
 2. Form HUD-54113 - Underwriter/Mortgagee Certification
 3. Underwriter Certifications
 4. Mortgagee's Certifications
 5. Form HUD-54110 - Pre-Closing Submission Log
 6. Form HUD-54111 - Request for Insurance Endorsement
 7. Form HUD-54118 - Underwriting Report
 8. Format - Mortgagee Approval Letter - Pre-Closing Review Status
 9. Format - Mortgagee Approval Letter - Unconditional Approval
10. Format - Mortgagee Disapproval Letter
11. Format - Return of Quality Control Plan Letter
12.   Format - Mortgagee Probation Letter
13.   Format - Withdrawal of Mortgagee Approval Letter
14.   Format - Limited Denial of Participation Letter
15.   Form HUD-54114 - Direct Endorsement Underwriter/HUD Reviewer Analysis
                  of Appraisal Report
16.   Form HUD-54118-MCR - Direct Endorsement/Post-Endorsement Technical
                     Review Checklist
17.   Pre-Endorsement Review Checklist

Forms Required by this Handbook:                       OMB
                                        Approval #

  FHA 2016F     Supplementary Mortgage Credit Report

  HUD 1        Settlement Statement                #2502-0265

  HUD 9548      Standard Retail Sales Contract         #2502-0306

  HUD 54110      Pre-Closing Submission Log

  HUD 54111   Request for Insurance Endorsement           #2502-0365
           Under the Direct Endorsement Program

  HUD 54112   Application for Approval as Direct       #2502-0274
           Endorsement Mortgagee and
           Nomination of Underwriting Personnel

  HUD 54113      Underwriter/Mortgagee Certification    #2502-0274

  HUD 54118      Underwriting Report

  HUD 59100      Mortgage Insurance Certificate

  HUD 91322   Master Conditional Commitment              #2502-0111
           - Master Appraisal Report

  HUD 92051      Compliance Inspection Report           #2502-0189

  HUD 92300      Mortgagee's Assurance of Completion         #2502-0189

  HUD 92544    Warranty of Completion of Construction        #2502-0111
           in Substantial Conformity with
           Approved Plans and Specifications

  HUD 92561   Mortgagor's Contract with Respect to       #2502-0059
           Hotel and Transient Use of Property

  HUD 92573   Health Authority Approval - Individual    #2502-0111
           Water-Supply and Sewerage-Disposal
           System

  HUD 92577   Request for Acceptance of Changes in       #2502-0117
           Approved Plans and Specifications
                                              OMB
Forms Required by this Handbook:                         Approval #

   HUD 92800   HUD Application for Property Appraisal #2502-0111
            and Commitment

   HUD 92800.5A Addendum to Conditional Commitment                #2502-0111

   HUD 92800.5B Conditional Commitment - Statement               #2502-0111
            of Appraised Value

   HUD 92900   Application for HUD/FHA Insured                #2502-0059
            Mortgage

   HUD 92900WS          Mortgage Credit Worksheet             #2502-0059

   FNMA/FHLMC          Uniform Residential Appraisal Report


                    CHAPTER 1. GENERAL PROGRAM INFORMATION

1-1 PURPOSE. <TOP> This Handbook states the policies and procedures of the
   Direct Endorsement program. The purpose of this program is to
   simplify and expedite the process by which mortgagees can obtain
   mortgage insurance endorsements from HUD. Under Direct Endorsement,
   the mortgagee underwrites and closes the mortgage loan without prior
   HUD review or approval.

1-2 BASIC PROGRAM OUTLINE. <TOP> The Direct Endorsement underwriting
and endorsement process is as follows:

   A.    Property Analysis. The mortgagee is responsible for underwriting
        the property and determining that the property is acceptable for
        mortgage insurance. If the property is acceptable for mortgage
        insurance the mortgagee will issue to the applicant Form
        HUD-92800.5B Conditional Commitment/Direct Endorsement Statement
        of Appraised Value. The process for underwriting the property
        will differ depending on whether it is proposed or existing
        construction.

        1)    Proposed Construction. A mortgagee may qualify a proposed
             dwelling for financing in excess of a 90% loan-to-value
             ratio (high ratio financing) by using one of the following
             processes before the start of construction of the dwelling:

             a.    Underwriting the plans and specifications and appraisal
                  for an individual property to determine its eligibility
                  and maximum mortgage amount.

             b.   Underwriting the plans and specifications and a Master
                  Appraisal Report (MAR) for a group of two or more
                  properties to determine their eligibility and the
          maximum mortgage amounts.

     c.   Using a Certificate of Reasonable Value (CRV) or a
          master Certificate of Reasonable Value (MCRV) issued
          by the Department of Veterans Affairs to determine
          eligibility and maximum mortgage amount.

     d.   Using a HUD Conditional Commitment or HUD Master
          Conditional Commitment. The mortgagee must obtain
          prior approval from the local HUD Office to obtain HUD
          processed conditional commitments.

     e.    Using certified plans and specifications. Each HUD
          Field Office has a list of builders who are approved to
          certify that their plans and specifications comply with
          HUD's Minimum Property Standards (MPS). If the builder
          makes the certification prior to the start of
          construction, the property will be eligible for a high
          ratio loan (i.e., financing in excess of a 90%
          loan-to-value ratio).

          Chapter 3 of HUD Handbook 4145.1 explains the
          certification process, including how builders are added
          to the Field Office list and how to handle cases
          involving builders who are not on the list.

          The mortgagee's underwriter reviews the completed
          appraisal report to determine eligibility and the
          maximum mortgage amount. The underwriter is also
          responsible for reviewing compliance inspection reports
          by fee or staff inspectors.

2)    90% Ratio Properties. When the mortgage involves a property
     which was less than one year old at the time the appraisal
     was approved by the mortgagee's underwriter, and was neither
     approved by HUD, the VA or the mortgagee prior to the start
     of construction, nor covered by an acceptable warranty plan
     (see paragraph 4, below), the mortgagee must perform the
     property analysis. The mortgagee cannot use a HUD
     conditional commitment or a VA CRV.

     The mortgagee's underwriter reviews the completed appraisal
     report to determine eligibility and the maximum mortgage
     amount. Mortgage loans in this category are limited to 90
     percent of appraised value.


3)    Existing Construction. When the mortgage involves a
     property which is at least one year old at the time the
     appraisal was approved by the mortgagee's underwriter or a
     property which has been occupied, the mortgagee must perform
     the property analysis. The mortgagee cannot use a HUD
     conditional commitment. The mortgagee may use a VA CRV.
            The mortgagee's underwriter reviews the completed appraisal
            report to determine eligibility and the maximum mortgage
            amount.

            There are two kinds of transactions involving existing
            construction where the mortgagee does not perform the
            property analysis: a streamline refinance of a HUD-insured
            mortgage that does not require an appraisal, and sales of
            properties acquired by HUD through foreclosure. See HUD
            Handbook 4155.1.

       4)    Warranty Plan. When the mortgage involves a property that
            is under construction or less than one year old and the
            plans and specifications were not approved by the mortgagee
            or HUD, or certified by the builder prior to the start of
            construction, the mortgagee may obtain high ratio financing
            if the property is covered by a ten year warranty plan.

            Chapter 6 of HUD Handbook 4145.1 describes the construction
            exhibits, warranty documents, and certifications required
            when using a warranty plan to qualify for high loan-to-value
            financing.

  B.    Mortgage Credit Analysis. The mortgagee is responsible for the
       mortgage credit analysis on all Direct Endorsement submissions.
       The analysis is to be done by the mortgagee's underwriter.

(1-2)
   C. Underwriter Review. The underwriter reviews the appraisal report
      and the mortgage credit analysis to determine the acceptability
      of the conclusions reached by the appraiser and the mortgage
      credit examiner.

       If the conclusions are found to be acceptable, the underwriter
       determines whether or not the application complies with the
       specific provisions of the HUD program.

  D.    Underwriter Certification. The underwriter executes the
       underwriter certification on the Underwriter/Mortgagee
       Certification, Form HUD-54113 (see Appendix 2).

  E.   Mortgage Loan Closing. Mortgage proceeds are completely
       disbursed to the mortgagor, or to the mortgagor's creditors for
       his account. The appropriate mortgage documents are executed.
       Where applicable, the One-Time Mortgage Insurance Premium is
       paid to HUD.

  F.   Mortgagee Certification. An authorized representative of the
       mortgagee, who may be the underwriter, executes the mortgagee's
       certification on Form HUD-54113 (see Appendix 2).

  G.   Mortgage Endorsement Submission. The mortgagee sends the
       mortgage loan package to the HUD Field Office in a HUD-prescribed
       case binder.
    H. HUD Pre-endorsement Review. HUD staff conducts a pre-endorsement
       review of the case binder using the Pre-Endorsement Review
       Checklist (see appendix 17).

    I.   Endorsement. If the pre-endorsement review provisions have been
         met, HUD will endorse the mortgage for insurance, print a
         Mortgage Insurance Certificate, Form HUD-59100, and send it to
         the mortgagee. If the pre-endorsement review provisions were not
         met, HUD will return the file to the mortgagee for correction.

    J.   HUD Post-Endorsement Review. After insurance endorsement, HUD
         reviews the property and mortgage credit analyses. The
         percentage of cases reviewed depends upon the quality of past
         underwriting and servicing problems on earlier loans.

(1-2)     K. Underwriting Report. Should the post-endorsement
            review reveal underwriting deficiencies, an
            underwriting report is sent to the mortgagee.

1-3        ASSURANCES OF ENDORSEMENT. <TOP> The Direct Endorsement
         program has been designed to give the mortgagee
         sufficient certainty of HUD endorsement requirements to
         justify the assumption of the responsibilities involved
         in originating and closing mortgage loans without prior
         HUD review. Mortgagees are responsible for complying
         with all applicable HUD regulations and handbook
         instructions. If the mortgage loan meets the
         pre-endorsement review criteria, HUD will endorse the
         mortgage for insurance. The resulting insurance
         contract is incontestable except in cases of fraud or
         misrepresentation by the mortgagee. If, at the time
         the case is submitted for endorsement, HUD has evidence
         that there is fraud or misrepresentation on the part of
         the originating mortgagee, HUD will consider the
         certifications as fraudulent and will not endorse the
         mortgage for insurance.

1-4       ELIGIBLE MORTGAGE INSURANCE PROGRAMS: <TOP>

*         Mortgages to be insured under or pursuant to the
         following sections of the National Housing Act are
         eligible for Direct Endorsement processing:

         SECTION OF ACT         DESCRIPTION              REGULATIONS

         203(b)        Basic 1-4 family mortgage Part 203, Subpart A
                    insurance
         203(h)        Housing for Disaster     203.18(e)
                    Victims
         203(i)       Housing in Outlying Areas 203.18(d)
         203(k)        Rehabilitation loans    203.50 & 203.51
        220(d)       Urban Renewal Mortgage        Part 220, Subpart A
                  Insurance
        220(h)       Urban Renewal/Home           Part 220, Subpart A
                  Improvement Loans
        221(d)(2)     Low Cost and Moderate        Part 221, Subpart A
                  Income
        222         Serviceperson's Mortgages Part 222, Subpart A
        234         Condominium               Part 234, Subpart A
        235(r)       Refinance of Section 235    Part 235, Subpart H
                  Mortgages
        240         Fee Title Purchases       Part 240, Subpart A
        223(a)(1-6)    Miscellaneous           203.43(b)
         & (8)
        223(a)(7)     Refinancing Insured        203.43 and 234.52
                  Mortgages
        223(c)       Properties Sold by HUD      203.43(k)
        223(e)       Properties in Older      Part 203.43a and
                  Declining Areas           234.68
        238(c)       Federally Impacted Area     203.43e and 234.69
        245         Graduated Payments (GPM)       203.45 and 234.75
        245         Growing Equity Mortgages      203.47 and 234.77
                  (GEM)
        247         Hawaiian Home Lands          203.43i
        248         Indian Home Lands           203.43h
        251         Adjustable Rate Mortgages 3.49 and 234.79

(1-4)         Under all HUD programs, the term of the mortgage
            must be 30 years or less.
                                                    *
1-5       MARGINAL CASES. <TOP> The Department's mortgage insurance
        programs are designed to serve the credit needs of
        those homebuyers not adequately served by the private
        sector. Processing cases under the Direct Endorsement
        program should not result in lesser consideration of
        applications involving marginal locations, properties
        or credit risks. The program provides mortgagees the
        necessary assurance of endorsement since subjective
        underwriting determinations are reviewed only after the
        mortgage has been endorsed.

1-6      MINIMUM PROPERTY STANDARDS <TOP> vary by construction status
        (or age of the property) and the construction type
        (on-site construction or manufactured housing).

        A.    Proposed Construction. The standards for
             dwellings constructed on-site and classified as
             proposed construction are in Appendix K of HUD
             Handbook 4910.1, Minimum Property Standards for
             Housing.

        B.    Existing Construction. The standards for all
             existing construction, which is defined as
             construction completed more than one-year at the
             time of the appraisal or a previously occupied
             dwelling, are in HUD Handbook 4905.1, Requirements
             for Existing Housing, One- to Four-Family Living
             Units.

        C.    Condominiums. The standards for units built
             side-by-side are the same as for detached,
             semi-detached or row houses. The standards for units
             built over and under one another are in HUD
             Handbook 4910.1.

        D.    Rehabilitation Construction. When, at the time of
             the appraisal, the dwelling needs rehabilitation
             construction in excess of $5000, the applicable
             standards are contained in HUD Handbook 4240.4,
             Rehabilitation Home Mortgage Insurance, Section
             203(k).

        E.    Manufactured Housing. General eligibility
             criteria are in HUD Handbook 4145.1, paragraph
             3-4.

1-7 ELIGIBILITY OF CONDOMINIUM PROJECTS AND PUDS. <TOP> Prior to
   underwriting a mortgage application, the mortgagee is to determine
   that a condominium or PUD has been approved by HUD. Refer to Handbook
   4150.1 for information about approvals of condominium projects and
   PUDs.

1-8 MORTGAGE AMOUNT IN PURCHASE TRANSACTIONS. <TOP> The loan-
to-value
    ratio depends on the construction type and status, the age of the
   property, whether the applicant intends to occupy the dwelling as a
   primary or secondary residence, and if the buyer is affiliated with
   the seller.

(1-8)

   Except for manufactured housing, in order to qualify for the
   maximum loan-to-value ratio, the dwelling must be: (1)
   proposed construction as defined in paragraph 1-2; (2) at
   least one year old; or (3) covered by a ten-year warranty plan
   accepted by HUD. See Chapter 2 of HUD Handbook 4155.1.

   For manufactured housing to qualify for the maximum
   loan-to-value ratio, the home (1) must not have been installed
   or occupied at any other site or location and (2) either: (a)
   the present site was approved prior to the beginning of on-site
   work, (b) the home has been installed for at least one year, or
   (c) the home is covered by a ten-year warranty plan accepted by
   HUD.

1-9 REFINANCE TRANSACTIONS. <TOP> With a refinance, the maximum
mortgage
   amount depends on the applicant's intended use of the real
   estate (occupancy or investment), and the proposed use of the
   mortgage loan proceeds. In most instances, Section 245(a)
   cannot be used for refinancing. See Chapter 4 of HUD Handbook
   4155.1.

1-10 INTEREST RATE. <TOP> Under all of the mortgage insurance programs
   eligible for Direct Endorsement processing, the interest rate
   and discount points are freely negotiable between the mortgagee
   and the applicant. The mortgagee may charge a lock-in fee if
   the terms are guaranteed for a specific period of time, in
   writing.

1-11 FEES AND CHARGES. <TOP> No extra fees and charges may be collected
   from the borrower on the basis of Direct Endorsement
   processing. Only those fees normally charged the borrower in
   HUD/FHA transactions lock-in fee, origination fee, appraisal
   fee, inspection fees (for repairs or improvements to existing
   dwellings), costs of a credit report, any charges for verifying
   deposits, and discount points may be charged the borrower in a
   Direct Endorsement case. No underwriting fee or mortgage
   credit fee may be charged to the borrower.

   The appraisal fee schedule established by the HUD Field Office
   will apply to Direct Endorsement appraisals. A mortgagee using
   a staff appraiser or inspector may collect the appraisal and
   inspection fee.

1-12 AUTHORIZED TECHNICAL PERSONNEL. <TOP> For property appraisals,
   inspections and mortgage credit analyses, mortgagees may use
   their own staff if approved by HUD, or they may use fee
   appraisers, fee inspectors and fee mortgage credit examiners
   assigned from HUD-approved panels. All Direct Endorsement
   mortgagees must employ a full-time underwriter approved by HUD.

1-13 BUSINESS RELATIONSHIPS WITH BUILDER, SELLER, OR REAL ESTATE
FIRM. <TOP> A mortgagee which provided the construction loan or has
   a financial interest in, owns, is owned by, or is affiliated
   with the building or selling entity or the real estate firm may
   originate mortgages under this program, provided the appraisal
   is done by a fee appraiser assigned by HUD rather than an
   appraiser on the staff of the mortgagee. If inspections are
   involved, they must be done by fee inspectors assigned by HUD.
   Mortgagee personnel may perform the mortgage credit analysis.

1-14 LOANS INVOLVING EMPLOYEES OF THE MORTGAGEE. <TOP> If an
employee of
   the mortgagee will be the mortgagor or seller, that employee
   cannot be involved in processing the application. The
   appraisal and any inspections that are required must be done by
   fee personnel assigned by HUD.

   If possible, the application should be processed by a different
   branch or the mortgagee's main office. The case must be
   clearly identified in the remarks section of the Mortgage
   Credit Worksheet and beneath Box F, "Employment," on the front
   of the case binder.

1-15 CONVERSIONS AND SUBMISSION FOR HUD COMMITMENT
PROCESSING <TOP>

   A. Choice of Processing. Direct Endorsement mortgagees should
      process all cases that they are eligible to process and
      should reject applicants that clearly do not meet HUD
      underwriting requirements. A Direct Endorsement approved
      mortgagee cannot order cases for prior approval processing,
      unless the HUD Field Office gives its permission. Requests
      for that permission must be by letter from the underwriter
      explaining why the case should not be processed under
      Direct Endorsement.

      Of course, this requirement does not apply to cases that
      are not eligible for Direct Endorsement processing and only
      applies to the mortgage credit portion of the processing
      where the mortgagee wishes to obtain individual or master
      HUD conditional commitments for proposed construction.

   B. Converting Cases to HUD Processing. Cases which mortgagees
      begin to process under Direct Endorsement may be submitted
      to HUD for conversion to prior approval processing only
      under certain circumstances. The conversion must be
      requested in a letter from the main office of the
      mortgagee, co-signed by the underwriter, stating a
      legitimate reason for conversion.

      Mortgagees which abuse the conversion option may be
      sanctioned accordingly. Once a case has been converted
      from Direct Endorsement to prior approval processing, the
      prior approval processing must be maintained.

(1-15B.)      Cases may be converted for the following
           reasons only:

           1)    Veteran Borrower Chooses to use VA Guarantee
                Program. The mortgagee may submit the
                appraisal and related documents to the HUD
                Field Office for issuance of a conditional
                commitment for submission to the VA.

           2)    Applicant who Defaulted on an Earlier
                Mortgage. An applicant who was a mortgagor
                on a mortgage that went into default or
                foreclosure may be eligible for another
                insured mortgage. One of several conditions
                that must be met is that the default or
                foreclosure was due to well-defined,
                  extenuating circumstances beyond the
                  applicant's control. If the underwriter is
                  unable to decide whether the extenuating
                  circumstances are sufficient to make the
                  applicant eligible, the underwriter may
                  request that the case be converted to HUD
                  prior approval processing.

                  If the mortgage had been insured by HUD and
                  the property was sold by the applicant to a
                  buyer who took title subject to the mortgage
                  or who assumed it prior to the delinquency of
                  payment of a claim, the application may be
                  converted for HUD prior approval processing.

*            3)    Applicant may be Eligible for Special Credit
                  Risk Program. If the applicant is ineligible
                  under the regular programs because he is
                  unable to meet the credit requirements, but
                  appears to qualify under Section 237, the
                  application must be converted for prior
                  approval processing. In many areas of the
                  country, Section 237 may not be a feasible
                  alternative, as the maximum mortgage amount,
                  $18,000 ($21,000 in high cost areas), may not
                  be sufficient.

(1-15B.)          4) Applicant is an Employee of the Mortgagee.
                  The mortgagee may submit the application to
                  HUD for prior approval processing.

             5)    Applicant is an Employee of HUD or a Member
                  of the Employee's Household (Spouse, Parent,
                  or Child). The mortgagee must submit the
                  application to HUD for prior approval
                  processing.

             6)   HUD Requests or Authorizes the Conversion in
                  Writing.                           *

       C.     Converting Cases to Coinsurance Processing. Cases
             which mortgagees begin to process under Direct
             Endorsement may be converted to Coinsurance if the
             mortgagee is approved for Coinsurance processing.

       D.     Converting Cases from Coinsurance to Direct
             Endorsement. Cases which mortgagees begin to
             process under Coinsurance may be converted to
             Direct Endorsement, but not if the coinsuring
*            lender selected the appraiser used on the case       *
             and the appraisal has been completed.

1-16        TRANSFERRING CASES. <TOP> An applicant or the seller may
      have a personal preference or other reasons to request
      that the application be transferred from one mortgagee
      to another. In such cases, Direct Endorsement
      mortgagees are expected to cooperate on a reciprocal
      basis and complete the transfer of the underwriting
      package (appraisal report and/or mortgage credit
      package) upon written request from the applicant or the
      seller, if an applicant is not involved. Failure to
      cooperate in the transfer of cases jeopardizes the
      mortgagee's HUD approval as well as its Direct
      Endorsement approval.

      A.   Receiving Mortgagee

           1)    If approved for Direct Endorsement,
                processing may continue under Direct
                Endorsement, provided that the application is
                eligible for Direct Endorsement. The
                receiving mortgagee assumes full
                responsibility for the quality of the
                underwriting.

(1-16A.)           Current credit reports need not be updated,
                but the mortgagee must interview the
                applicant(s) either in person or by telephone
                to ensure that the application (HUD Form
                92900) remains an accurate reflection of the
                applicant's circumstances. Verifications of
                employment and deposit need not be reordered
                where the mortgagee contacts the employer and
                financial institution(s) by telephone and so
                annotates the forms.

                The mortgagee's underwriter must review the
                Appraisal and Mortgage Credit Worksheet and
                execute the Underwriter Certification on Form
                HUD-54113 after reviewing the application.
                (Refer to 3-3G for guidance when the
                underwriter concludes that the appraisal
                report findings are inconsistent or
                unacceptable.)

                If the original mortgagee had rejected the
                application, it must include a copy of the
                underwriter's worksheet reflecting the
                analysis and reason for rejecting the
                borrower or property. If the receiving
                mortgagee approves the application and
                submits the case for endorsement, the case
                file must include a copy of the original
                mortgagee's worksheet with explanatory
                comments from the receiving mortgagee's
                underwriter.
(1-16A.)

     2)     If not approved for Direct Endorsement, the receiving
           mortgagee must submit the case to HUD for prior
           approval processing. The Field Office would review
           the case and issue a conditional commitment or firm
           commitment, as appropriate, if the application is
           eligible.

   B. Compensation to Original Mortgagee. For the transfer of a
      single case, the original mortgagee may request that the
      applicant pay a pro-rata portion of the origination fee for
      the reasonable costs incurred in relation to the work
      performed, but no more than one-half percent if the
      underwriter has reviewed and signed the appraisal and one
      percent if the underwriter has reviewed and signed both the
      appraisal and Mortgage Credit Worksheet. The mortgagor can
      pay a maximum origination fee of one percent in obtaining
      an insured mortgage. The mortgagee transferring the case
      may also retain any lock-in fee collected from the
      applicant at the time of application as well as reimburse
      itself for any out-of-pocket expenses, such as the
      appraisal, surveys, credit reports, etc.

     For the transfer of multiple cases, such as a Master
     Appraisal Report, Master Conditional Commitment or other
     groups of properties, the original mortgagee may request
     that the applicant pay a fee for the reasonable costs
     incurred in relation to the work performed. For each model
     or base case transferred, the transfer fee will be the same
     as stated above for single cases, while the fee for the
     remaining repeat cases should be a much smaller amount.
     Local HUD Field Offices may establish the transfer fee for
     the repeat cases or allow this fee to be negotiated between
     the mortgagees.

     If the applicants (including sellers) do not agree to pay
     the above fees to effect the transfer, the new mortgagee
     must start processing from the beginning by requesting a
     new case number and appraiser assignment. This request for
     a new case number/appraiser assignment must be made in
     writing to the HUD Field Office by the new mortgagee.

1-17 CONSTRUCTION COMPLAINTS. <TOP> Construction complaints made to a
   mortgagee involving cases processed under Direct Endorsement
   are to be initially investigated by the mortgagee. See HUD
   Handbook 4070.1 for details.

   If the defect involves proposed construction and the mortgagee
   is unable to resolve the matter or if the defect is a
   structural one which might involve Section 518(a) assistance,
   the mortgagee is to refer the complaint to HUD for further
   processing. HUD will determine whether the homeowner is
   eligible for assistance pursuant to Section 518(a).

(1-17)

   If the complaint involves existing construction, the mortgagee
   is to resolve the matter to the extent possible. If the
   complaint involves an item which the mortgagee certified as
   repaired, it is the responsibility of the mortgagee to
   satisfactorily resolve the matter. If the complaint involves a
   serious deficiency overlooked by the appraiser at the time of
   the original appraisal, the mortgagee is to report such finding
   to HUD.

   When existing construction is involved, the mortgagee is to
   inform the mortgagor that HUD has no funds or authority to
   repair the defect or compensate the mortgagor. If the
   mortgagee is unable to satisfy the mortgagor, the complaint may
   be referred to HUD. The number and legitimacy of the
   complaints will be a factor in HUD's monitoring of a
   mortgagee's Direct Endorsement performance.

1-18 WAIVER OF TITLE OBJECTIONS. <TOP> Section 203.389 of Title 24 of
the
    Code of Federal Regulations states that HUD will not object to
    title because of common and customary easements, restrictions
    and encroachments, or to several specific title objections
    listed in the Regulations. Mortgagees are not to request
    waivers for exceptions specifically noted in this provision of
    the Regulations. These include: customary easements for
    public utilities, party walls, driveways and enchroachments on
    adjoining property by hedges, wooden or wire fences belonging
    to the subject property. Refer to the Code of Federal
    Regulations for the complete list.

   When the mortgagee becomes aware of a title exception not
   waived by the Regulations, a waiver request letter should be
   sent to the HUD Field Office.

1-19 CODE OF FEDERAL REGULATIONS. <TOP> Regulations governing the
   provisions of the Direct Endorsement program are contained in
   Chapter II of Title 24 of the Code of Federal Regulations under
   Sections 200.163, 200.164 and 200.164a.

1-20 CASE NUMBER SYSTEM. <TOP> The "700" series is used to identify the
   insurance program instead of the "200" and "500" series for
   HUD-processed cases. If a Direct Endorsement case involves a
   CRV, the fact that the case is a Direct Endorsement case
   supersedes the association with VA. Since the mortgagee does
   not have the authority to determine whether a case is eligible
   for Section 223(e) consideration, no adjustment for the "300"
   series is necessary. In the event a case is converted to HUD
   for prior approval processing, the applicable "200," "300," or
      "500" code should be used. For proposed construction cases
      involving HUD conditional commitments which are processed under
      this program, the cases are insured under the appropriate
      Direct Endorsement code. See Form HUD-428, Home Mortgage ADP
      Code Chart.

                           CHAPTER 2. MORTGAGEE APPROVAL

2-1    ROLE OF MORTGAGEE. <TOP> The authority to participate in the Direct
      Endorsement program is a privilege, granted on the basis of
      demonstrated qualifications, experience and expertise. The
      privilege is maintained by recommending for mortgage insurance
      endorsement only those mortgages which meet HUD guidelines. A
      Direct Endorsement mortgagee must conduct its business
      operations in accordance with accepted sound mortgage lending
      practices, ethics and standards.

2-2     ELIGIBILITY REQUIREMENTS. <TOP> Each office of a mortgagee (main
      office and branches) must be approved by the HUD Field
      Office(s) to which it intends to submit mortgages for
      insurance. There is one exception to this general rule. A
      mortgagee which has been approved for Direct Endorsement in at
      least one HUD Field Office, may process and submit streamline
      refinance cases to any HUD Field Office after notifying the
      office of its intentions. Streamline refinances are described
      in Chapter 4 of HUD Handbook 4155.1.

      To be approved as a Direct Endorsement mortgagee, an applicant
      must meet and maintain the following requirements:

      A. Must be a HUD-approved mortgagee. This includes supervised
         mortgagees, non-supervised mortgagees and governmental
         institutions. Mortgagees approved by HUD only as loan
         correspondents are not eligible to be Direct Endorsement
         mortgagees; but, may participate to the limited extent
         described in paragraph 2-13 .

      B. Non-supervised mortgagees must have a net worth in assets
         acceptable to HUD of at least $250,000.

      C. Have five years experience in the origination of single
        family mortgages, or have a principal officer with a
        minimum of five years managerial experience in the
         origination of single family mortgages.

      D. Have on staff an underwriter who meets the qualifications
        stated in paragraph 2-4 of this chapter and has
        successfully completed a Direct Endorsement training
        program.

      E. Have developed and implemented a Quality Control Plan which
         accommodates the objectives stated in paragraph 2-6 of this
         chapter.
   F. Have satisfactorily completed the pre-closing case review
      phase of Direct Endorsement.

2-3 REQUIRED DOCUMENTS. <TOP> Any office of a mortgagee (main or
branch)
    which intends to submit mortgages for insurance endorsement
    must apply for approval to the HUD Field Office(s) in the
    jurisdictions where they do business (see exception noted in
    paragraph 2-2). The following documents, as applicable, must
    be submitted.

   A. Application for Approval. The mortgagee is to complete
      Form HUD-54112, Application for Approval As Direct
      Endorsement Mortgagee and Nomination of Underwriting
      Personnel (Appendix 1). The first part concerns basic
      mortgagee eligibility, including qualifying status and
      single family origination experience. If the mortgagee
      (not necessarily the particular branch) has not had five
      years single family origination experience, the application
      must be completed to show such experience by principal
      officers.

   B. Quality Control Plan. A copy of the Quality Control Plan.

   C. Nomination and Resume of Underwriter. Each application for
     mortgagee approval is to include a nomination of the
     individual(s) to serve as the mortgagee's underwriter(s).

     The nomination includes a verification by the President or
     Vice President (or other authorized corporate officer) that
     the nominee has the authority to bind the corporation and
     the nominee has been found to meet the qualifications of
     paragraph 2-4 of this Chapter.

     A resume must be submitted for each underwriter nominated.
     Form HUD-92563, Application for Fee Personnel Designation,
     may be used in lieu of a resume. Whether the resume or HUD
     form is used, information provided must clearly show that
     the nominee meets the qualifications of paragraph 2-4 of
     this Chapter.

   D. Nominations and Resumes of Technical Personnel. As part of
     the application, the mortgagee is to advise HUD whether or
     not mortgagee staff will be used to perform appraisals,
     inspections and mortgage credit analyses. As with the
     underwriter, a resume or Form HUD-92563 is to be submitted
     for each nominee. The resume or the Form HUD-92563 must
     clearly show that the technician meets the applicable
     qualifications of paragraph 2-7 of this Chapter. When
     using a resume, include the information required on Form
     HUD-92563. That form is appended to HUD Handbook 4020.1.
   E. Use of Form HUD-92563, Application for Fee Personnel
      Designation. When using Form HUD-92563 to qualify
      personnel, the form may be modified. Items 14, 15, 22 and
      24 may be deleted. In item 23, certifications a, b and c
      may be deleted. If being used for the approval of an
      underwriter, the top of the form should be so noted.

(2-3)
   F.    Evidence of Prior HUD Approval. Once one office of a mortgagee
        has been approved by a HUD Field Office, evidence of that
        approval will facilitate subsequent approval to do business in
        other HUD offices. Similarly, if mortgagee technical staff
        intend to qualify with more than one HUD Field Office, once the
        first approval has been obtained, evidence of the approval will
        facilitate subsequent approvals. If a Direct Endorsement
        underwriter has already been approved by one HUD Field Office,
        the Department will grant automatic approval of the underwriter
        in any HUD Field Office where the lender is approved to do
        business.

        1)    Mortgagee Approval. Each subsequent application must
             include an executed application form (Appendix 1) in
             addition to a copy of the approval letter from another HUD
             Field Office.

        2)    Underwriter Approval. CHUMS will recognize any
             underwriter's approval in all HUD offices. Once an
             underwriter has obtained approval and a CHUMS identification
             number, it will be automatically recognized in each Field
             Office where a lender has been approved to do business.

        3)    Technician Approval. A copy of another office's letter
             approving the appraiser or inspector should be submitted
             with the application form.

2-4 UNDERWRITER. <TOP> The mortgagee must have on staff a full-time
employee to
   serve as underwriter. The underwriter must be a corporate officer
   with signatory authority or otherwise authorized to bind the mortgagee
   in matters involving the origination of mortgage loans. The
   underwriter may be employed by only one mortgagee, and this function
   may not be contracted out by the originating mortgagee. The
   underwriter must meet the qualifications and assume the
   responsibilities which follow.

   A.     Qualifications.

        1)    General. The underwriter must be a reliable and responsible
             professional skilled in mortgage evaluation. The
             underwriter must be able to demonstrate his or her knowledge
             and experience regarding the principles of mortgage
             underwriting.
(2-4A.)
        2)    Location of Underwriter. HUD has no requirement regarding
             the location of the underwriter (i.e. main office or branch
             office).

        3)    Experience. The underwriter must have a minimum of three
             years full-time recent experience (or equivalent experience)
             reviewing both credit applications and property appraisals.
             Experience related solely to mortgage credit or appraisal
             review counts for one-half of the total requirement.

        This experience should have been with an institutional investor
        originating for its own portfolio or purchasing these types of
        mortgage loans, or with an originator selling these types of
        mortgage loans to investors. Experience may also include quality
        control reviews for investors, etc.

             The Mortgage Bankers Association of America (MBA) course
             "Appraisal Techniques for Direct Endorsement Underwriters"
             may be substituted for one full year of full-time experience
             reviewing appraisals.

             The nominee's resume must give detailed descriptions of job
             experiences that demonstrate knowledge of principles,
             practices, and techniques of mortgage underwriting,
             including: (1) real estate appraisal, (2) mortgage credit
             evaluations, (3) factors affecting property values and real
             estate trends.

   B.    Field Office Review of Underwriter Qualifications. Each
        underwriter's credentials must be analyzed and the underwriter
        approved in at least one HUD Field Office where the lender is
        approved to do business with the Department. The Field Office
        must determine that the underwriter has the experience and other
        qualifications as required above. The Field Office must contact
        references, former employers, etc., to determine the validity of
        the underwriter's experience claims. If the underwriter's
        experience includes advanced education, including college-level
        courses or specialized training from providers such as the
        Mortgage Bankers Association or other HUD Field Offices, the
        approving Field Office may require verification that the
        underwriter successfully completed the course(s). The Field
        Office may also request a pre-approval meeting with the
        underwriter, especially if there is any uncertainty regarding
        experience or expertise.

(2-4B.)
       In addition, the HUD Field Office reviewer must check to make
       sure that the underwriter has not had sanctions taken against him
       or her or otherwise be listed on HUD's Suspended and Debarment
       list, Limited Denial of Participation List, or appear on HUD'
       Credit Alert Interactive Voice Response System.

   C.   Responsibilities. HUD looks to the underwriter as the focal
      point of the Direct Endorsement program. The underwriter must
      assume the following responsibilities.

      1)    Compliance with HUD instructions, the coordination of all
           phases of underwriting, and the quality of decisions made
           under the program.

      2)    The review of appraisal reports, compliance inspections and
           credit analyses performed by fee and staff personnel to
           ensure reasonable conclusions, sound reports and compliance
           with HUD requirements.

      3)    The decisions relating to the acceptability of the
           appraisal, the inspections, the buyers capacity to repay the
           mortgage and the overall acceptability of the mortgage loan
           for HUD insurance.

      4)    The monitoring and evaluation of the performance of fee and
           staff personnel used for the Direct Endorsement program.

      5)    Awareness of the warning signs that may indicate
           irregularities, and an ability to detect fraud, as well as
           the responsibility that underwriting decisions are performed
           with due diligence in a prudent manner.

2-5 UNDERWRITING PROCEDURES. <TOP> The underwriter's role and
responsibility
   are critical elements of the Direct Endorsement program.

   The underwriter executes the Underwriter Certification which enables
   HUD to endorse the mortgage loan without a detailed technical
   underwriting review. The underwriter certifies that he has personally
   reviewed the application documents and finds compliance with the
   applicable requirements. One of the underwriter's responsibilities,
   as stated in the previous paragraph, is the coordination of all phases
   of the underwriting of the mortgage loan. This role enables the
   underwriter to ensure that prudent underwriting procedures are
   followed.

(2-5)
   The underwriter is to be familiar with the underwriting procedures
   contained in Chapter 5 of HUD Handbook 4000.2, Mortgagees' Handbook
   - Application through Insurance. The underwriter must also be
   familiar with the procedures discussed in the Department's principal
   underwriting handbooks, 4145.1, 4150.1, and 4155.1, referenced in the
   Foreword.

   Mortgagees are to obtain and verify information with at least the same
   care that would be exercised if originating a mortgage when the
   mortgagee would be entirely dependent on the property as security to
   protect its investment.

   The mortgagee must review all closing statements, certifications on
   the closing statements, legal instruments and other documents executed
   at closing, and certify to HUD that the transaction and loan meet
   statutory and regulatory requirements of the National Housing Act and
   HUD, and that the loan has been closed in accordance with the terms
   and sales price as specified in the sales contract.

2-6 QUALITY CONTROL PLAN. <TOP> In order to qualify for basic HUD
approval, a
   mortgagee must implement a written quality control plan which ensures
   compliance with the rules, regulations and other HUD issuances
   regarding mortgage loan origination and servicing. Primary objectives
   to be achieved by the plan, and suggested underwriting and servicing
   guidelines, are contained in Chapter 6 of the Mortgagee Approval
   Handbook (HUD Handbook 4060.1).

   A mortgagee which seeks Direct Endorsement status must review and,
   when necessary, modify the existing quality control plan to ensure
   that the mortgagee can effectively evaluate and monitor the overall
   quality of mortgage loans submitted for Direct Endorsement. The
   quality control plan does not have to name HUD or the Direct
   Endorsement program. For Direct Endorsement purposes, the elements of
   a quality control system should include the following:

   A.    Underwriting Policies. Each office of the mortgagee shall
        maintain copies of all available HUD underwriting guidelines.
        This includes handbooks, regulations, mortgagee letters and other
        instructions relevant to the mortgagee's origination of Direct
        Endorsement mortgages.

   B.    Corrective Measures. The system should ensure that effective
        corrective measures are taken promptly when deficiencies in
        mortgage loan originations are identified.

(2-6B.)
       Certain deficiencies will be reported to the mortgagee by way of
       an Underwriting Report prepared by HUD during post-endorsement
       reviews of mortgages submitted for Direct Endorsement. On-site
       mortgagee reviews by HUD may also result in reported
       deficiencies.

   C.    System Integrity. The quality control system should be
        independent of the mortgage loan production function.

   D.    Desk and Field Reviews. The system would require a desk and
        field review of a sample of mortgage loans underwritten for
        Direct Endorsement submission.

        The desk review of the property appraisal would include the value
        conclusion, the appraisal data, the validity of comparables, any
        changes made by the underwriter and the overall quality of the
        appraisal. Ten percent of appraisals done by the mortgagee staff
        appraisers and a sample of appraisals done by fee personnel must
        be field reviewed. Field reviews may be performed by the
     underwriter or by appraisers employed on a contract basis.

     Five percent of compliance inspections done by mortgagee staff
     inspectors and a sample of compliance inspections done by fee
     personnel must be field reviewed.

(2-6D.)

     The desk review of the mortgage credit analysis would
     include the preliminary credit application, the agency
     application, the credit report, the verifications of
     employment and deposit and other sources of funds.

     To monitor the quality of data provided by the credit
     reporting agency used by the mortgagee, back-up credit
     reports must be ordered from a different agency on a
     minimum of five percent of all applications or one case per
     month, whichever is greater.

     The review of the underwriting decisions and certifications
     would include compliance with HUD underwriting
     requirements, sufficiency of documentation and the
     soundness of underwriting judgments.

2-7 USE OF MORTGAGEE STAFF TECHNICIANS. <TOP> Mortgagees may use
their
    own staff to perform appraisals and inspections (except as
    noted in Chapter 1, paragraphs 13 and 14), and mortgage credit
    analyses. To do so, mortgagees must nominate these individuals
    as part of the mortgagee approval process (see paragraph 2-3).
    The qualifications for the various disciplines are cited below.
    The nominees must attend training sessions conducted by HUD,
    except that it is not necessary for an appraiser currently on
    HUD's fee panel to attend any training session prior to
    approval as a staff appraiser.

   A. Appraiser.

     1)    Status of Employment. All staff appraisers employed
          by Direct Endorsement mortgagees must be salaried
          full-time employees (except in the case of a retiree,
          as stated below). The activities of the staff
          appraiser must be confined to the business of the
          mortgagee during normal working hours.

          If permitted by his employer, the staff appraiser may
          accept assignments to appraise properties for
          conventional loan transactions from sources other than
          his employer for completion in the evenings, on
          weekends or other leisure time.

          Mortgagee staff appraisers may be placed on the HUD
          panel of fee appraisers, at the discretion of the HUD
           Field Office. Fee assignments to mortgagee staff
           appraisers should be limited to cases that cannot be
           handled by other fee appraisers due to the large
           number of requests, illness, vacations, distance to
           the property, etc.

(2-7A.)

           If the mortgagee employs a staff appraiser, requests
           for assignments to fee appraisers should be limited to
           properties in remote locations, or to times when staff
           appraisers are unavailable because of illness, jury
           duty, or similar circumstances. At the discretion of
           the HUD Field Office, the mortgagee may also request
           assignments to fee appraisers for cases in excess of
           the volume which can be handled by its staff
           appraisers.

           The one exception to HUD's requirement for full-time
           status is when a qualified appraiser, such as a
           retiree, wishes to work for only a limited number of
           hours per week. In this case, that employee may be
           hired to work for less than the standard work week,
           provided he receives the same benefits as a full-time
           employee and does not accept assignments from any
           source other than the employer.

      2)    Compensation. The staff appraiser must receive all
           benefits available to other full-time employees and
           the mortgagee must withhold taxes, social security,
           pension, health benefits and other deductions from his
           compensation as it does for other full-time employees.

           The staff appraiser cannot be paid on a fee only basis
           nor a minimal base salary and commission nor a draw
           against commission. The staff appraiser should
           receive a reasonable base salary commensurate with
           average production and normal duties, which may then
           be supplemented by incentive or bonus features.

      3)    Experience. Except for the substitution of education
           provided below, an appraiser must have a total of five
           years experience.

           a.    Specialized. This experience must include at
                least two years specialized experience in
                valuation of property that demonstrates a
                knowledge of, and the ability to apply,
                principles, practices, methods and techniques of
                appraising.

           b.   General. The remaining experience may be general
                experience that demonstrates knowledge of general
                realty practices and principles as they relate to
                the value of real property, skill in collecting
                and assembling data, and the ability to prepare
                clear and concise reports. Such general
                experience may have been gained in types of work
                such as the sale or management of real estate and
                mortgage financing.

(2-7A.)

           c.   Education. Courses successfully completed in an
                accredited college or university may be
                substituted at the rate of 30 semester hours (or
                equivalent) for nine months of general
                experience.

                Graduate education in a related field (real
                estate, appraising, engineering, architecture,
                property management, business administration,
                economics) may be substituted at the rate of 30
                semester hours (or equivalent) for one-year of
                specialized experience. Completion of all
                requirements for a master's degree in one of
                these related fields may be substituted for two
                years of specialized experience.

   B. Inspector. The requirements regarding status of employment
      and compensation that apply to staff appraisers also apply
      to staff inspectors. A compliance inspector must have a
      total of five years experience.

      1)    Specialized. This experience must consist of at least
           two years experience in one of the following
           occupations:

           (a) A construction inspector of real properties for
              the purpose of determining compliance with
              construction requirements established by law.

           (b) A construction engineer.

           (c) An architect.

           (d) A superintendent of construction for a builder of
              residential or commercial properties.

      2)    General. The remaining experience may be general
           experience that demonstrates knowledge of
           construction, including material estimating, cost
           estimating, work planning, construction work methods,
           inspection, quality control on materials and
           workmanship, and safety procedures.
      C. Mortgage Credit Examiner. A mortgage credit examiner must
        have three years experience in examination and analysis of
        financial and credit risk factors involved in the granting
         of loans. Such experience can be in the field of consumer
        financing, commercial financing or mortgage credit.

(2-7)

      D. Dual Roles of Underwriter. The underwriter may perform the
        actual mortgage credit analysis provided the underwriter
        was nominated and approved as a mortgage credit examiner in
        addition to underwriter. If the underwriter wishes to
        perform appraisals, the underwriter must be nominated and
        approved as an appraiser. On the same mortgage, an
        individual may serve as both mortgage credit examiner and
        underwriter, but may not perform both the appraisal and the
        underwriter's review of that appraisal.

2-8     HUD DOCUMENT REVIEW. <TOP> The Field Office is to review all
      applications and make the final determination of eligibility.
      The Mortgagee Approval Specialist (MAS) is to consult with
      other Field Office personnel, as well as the Single Family
      Development Division in Headquarters, as needed.

      HUD's review should be considered and performed in two parts:
      first, the analysis of the mortgagee as an eligible
      organization; and second, analysis of the mortgagee's staf f.

      A. Eligible Organization. The history of the applicant is to
         be reviewed to determine if the mortgagee, or a principal
         officer, has at least five years experience in the
         origination of single family mortgages. Applicant must
         qualify as either a supervised, non-supervised or
         governmental institution mortgagee.

        1)    Supervised Mortgagee. If applicant cites supervised
             status, Field Office staff can verify this
             information, if necessary, by consulting Report Number
             F51FTCR, IMF Report of Mortgagees Approved to
             Participate in the Single Family Mortgage Programs in
             the Field Office or the CHUMS National Lender File.

        2)    Governmental Institution Mortgagee. If applicant
             cites this status of eligibility, Field Office staff
             can verify this, if necessary, by consulting report
             number F51FTCR or CHUMS.

        3)    Non-Supervised Mortgagee. A non-supervised mortgagee
             must qualify on the basis of adequate net worth. A
             minimum of $250,000 is required for approval. Upon
             receiving an application from a non-supervised
             mortgagee, the Field Office is to contact the Lender
             Recertification Division in Headquarters.
           Headquarters staff will verify the applicant's net
           worth.

      4)    Quality Control Plan. The quality control plan is to
           be reviewed to determine if the four elements listed
           in paragraph 2-6 of this Chapter are included.
           Deficiencies are to be noted on the approval
           worksheet.

(2-8A.)            A quality control plan which does not contain
                the four Direct Endorsement elements is to be
                returned to the mortgagee for correction.
                When a quality control plan is returned, it
                must be emphasized that the review was made
                only for the four Direct Endorsement
                elements. Appendix 11 contains a suggested
                letter for this purpose. A mortgagee may not
                be approved for Direct Endorsement until a
                quality control plan has been submitted which
                contains the four required elements.

*          5)     Prior HUD Approval. Once a lender has
                successfully completed the pre-closing review
                stage and has been granted unconditional
                approval, the lender need not submit
                pre-closing test cases to additional HUD
                Field Offices. Pre-closing reviews are only
                required for lenders new to the Direct
                Endorsement program or those that have been
                subject to administrative sanctions. The
                lender requesting approval in additional
                Field office jurisdictions must only provide
                the application form in Appendix 1,
                satisfactory evidence of its unconditional
                approval status, and a certification that no
                administrative sanctions (debarment or
                limited denial of participation) have been
                taken or are pending against the lender by
                any HUD Field Office.

                The HUD Field Office should limit its review
                to the documents submitted and the
                certification concerning current
                administrative sanctions.

                If administrative sanctions have been taken
                or are pending against the lender, the Field
                Office may require pre-closing test cases.

      B.    Eligible Staff Personnel. Each application for
           approval as underwriter, appraiser and inspector
           is to include the nomination and a resume or Form
           HUD-92563. Resumes or Forms HUD-92563 are to be
           reviewed to determine if the qualifications of
           Paragraphs 2-4 and 2-7 are met. References should
           be checked.

(2-8B.)       If a Direct Endorsement underwriter has already
           been approved by one HUD Field Office, the
           Department will now grant automatic approval of
           the underwriter in any HUD Field Office where the
           lender is approved to do business.

           To request approval from any additional HUD Field
           Offices where the lender is approved (or is
           requesting approval) to do business, the DE
           underwriter's approval request must include a copy
           of his or her previous approval, CHUMS
           identification number, social security number, and
           a statement that the underwriter has not had
           administrative sanctions taken or that any are
           pending against him or her in any HUD Field
           Office. The underwriter is not required to
           provide documentation showing familiarity with
           market conditions in the geographic area. A Field
           Office may require up to 100 percent
           post-endorsement reviews on any underwriter granted
           approval by another Field Office.

           To be eligible, the underwriter, appraiser or
           inspector must not be on HUD's Suspension and
           Debarment List, the Government-wide List of
           Parties Excluded from Federal Procurement or
           Non-procurement Programs, HUD's Limited Denial of
           Participation List, or on HUD's Credit Alert
           Interactive Voice Response System (CAIVRS). The
           HUD Field Office must check these sources to
           assure that the DE lender's staff are eligible. *

2-9     TRAINING. <TOP> There is a mortgagee training requirement as
      part of the approval process. The training consists of
      three components: property valuation, mortgage credit
      analysis and Direct Endorsement underwriting
      procedures.

      A.    Scheduling Training. HUD Regional Office should
           schedule a training session at least once every
           three months somewhere in the Region. HUD staff
           from either the Regional Office or Field Offices
           may conduct the training.

           Where demand justifies, individual Field Offices
           may schedule and conduct training sessions. The
           Field Office must advise the Regional Office of

(2-9A.)      its plans. The Regional Office will notify all
           other Field Offices in the Region so that
           mortgagees are given the opportunity to attend the
           session.

      B.    Content. Offices may take one of two approaches
           to the training. The first approach is to schedule
           three separate sessions; one for property
           valuation to be attended by the mortgagee's staff
           appraisers; one for mortgage credit analysis to be
           attended by the mortgagee's credit examiners; and
           one for Direct Endorsement underwriting procedures
           to be attended by the mortgagee's underwriters.

           The second approach is to schedule two separate
           sessions, one for property valuation and one for
           mortgage credit analysis, both of which would
           incorporate appropriate underwriting components.
           The underwriter would attend both the property
           valuation and the mortgage credit sessions.

           If requested by a number of mortgagees, the
           session should include training in HUD
           administrative procedures, such as completing HUD
           forms.

           1)    Property Valuation. The property valuation
                components are to include the following:

                a.   Use of the Uniform Residential Appraisal
                     Report (URAR).

                b. HUD valuation and architectural
                   analysis.
                c. Local conditions.

                d.   Appropriate schedules (taxes,
                     maintenance, utilities, closing costs,
                     etc.).

                e.   Inspections.

                f.   Complaint handling.

(2-9B.)

      2)    Mortgage Credit Analysis. The mortgage credit
           analysis components are to include the following:

           a.   HUD mortgage credit analysis and guidelines.

           b.   Appropriate schedules (dollar mortgage limits,
                etc.).
      3)    Direct Endorsement Procedures. The Direct Endorsement
           procedures for the underwriters are to include the
           following:

           a.   The underwriter's responsibilities.

           b.   The Direct Endorsement origination, endorsement
                and review process.

           c.   Use of the underwriter/mortgagee certification.

   C. Training by Multiple Field Offices. Once an underwriter
     has successfully completed the training session and been
     unconditionally approved by one Field Office, other Field
      Offices are to initially approve the underwriter without
     additional training, provided the underwriter has
     documented appropriate familiarity with market conditions
     in the geographic areas where mortgage loans will be
      originated.

      These subsequent Field Offices may condition the initial
      approval on the underwriter attending a future training
      session if there are particular underwriting situations
      which must be discussed with the underwriters. In lieu of
      additional training, Field Offices may prepare information
      packages describing underwriting particulars.

      If a mortgagee applies to several offices in quick
      succession, the underwriter will be trained by one office,
      but the mortgagee's technical staff might need to be
      trained by another office. In such circumstances, Field
      Offices are to accept nominated staff for training, even
      though the mortgagee's application will not be complete
      until evidence is submitted that the nominated underwriter
      has been approved by another Field Office.

2-10 MORTGAGEE APPROVAL STATUS. <TOP> There are two categories of
   mortgagee approval: the pre-closing status and unconditional
   approval.

   A. Pre-closing Review Status. Upon approval of the
      application and successful completion of the training
      requirement by the mortgagee's staff, the mortgagee is
      approved to participate in the pre-closing review status.

(2-10A.)

      An approval letter is sent to the mortgagee (Appendix 8).
      A copy of the letter is sent to the Office of Lender
      Activities and Land Sales Registration, in Headquarters.
      The only other time that office should be notified occurs
      when a mortgagee is removed from the program.
      While in pre-closing status, the application package
      (property and borrower) is to be submitted to HUD for
      review prior to closing. If the loan was closed prior to
      HUD's review, the mortgagee is responsible for making
      necessary changes prior to insurance endorsement. When
      corrections cannot be made, HUD is under no obligation to
      insure mortgages processed in this manner.

      1)    Underwriter/Mortgagee Certification. Because the
           application package is submitted prior to closing the
           mortgage loan, the Underwriter/Mortgagee Certification
           form cannot be fully executed. The underwriter should
           complete all the information on the form with the
           exception of the closing date. However, the
           underwriter should not sign the certification.

           Since the loan has not been closed, the mortgagee
           cannot make the closing certifications contained on
           the form. Therefore, the mortgagee's representative
           should not sign the Certification for cases submitted
           for firm commitments during the pre-closing review.
           The documents required in blocks 7 and 8 of the
           Underwriter Certification may be submitted with the
           firm commitment application, or they may be submitted
           after closing with the submission for endorsement.
           The documents required in blocks 9 through 12 must be
           submitted with the firm commitment application.

      2)    HUD Review. While the mortgagee is in this approval
           status, every submission is reviewed in detail. This
           review includes the property appraisal, value
           determination, mortgage credit analysis and
           requirements specific to the mortgage insurance
           program.

           If the application is eligible, a firm commitment to
           insure the mortgage is issued to the mortgagee.
           Should the submission contain deficiencies, HUD will
           send the mortgagee an Underwriting Report noting such
           deficiencies, regardless of whether a firm commitment
           is issued.

      3)    Fifteen Cases. Each office of the mortgagee seeking
           Direct Endorsement status is to participate in the
           pre-closing review. The review is to consist of not
           less than 15 cases.

(2-10A.)      If acceptable underwriting is demonstrated with 15
           submissions, unconditional approval may be
           granted. If 15 cases do not demonstrate
           acceptable performance, or should the first 15
           cases not represent expected underwriting
           situations, the review may be extended for
           additional cases. Paragraph 5-3 describes
           underwriting deficiencies.

*           The pre-closing review requirement is applied to
           the mortgagee, not to the underwriter. The 15
           case requirement is applied by the Department as a
           whole, not by each Field Office.

           Once a mortgagee has successfully completed the
           pre-closing review stage in one HUD Office,
           subsequent Field Offices should accept that
           approval. Field Offices should rely on the
           experience of other Field Offices in determining
           mortgagee eligibility.

           Field Offices should call and verify that the
           mortgagee is performing acceptably with at least
           one Field Office that has granted the mortgagee
           unconditional approval.                       *

           Since streamlined refinance transactions involve
           little in the way of underwriting, these cases do
           not count toward the 15 case requirement.

      B.    Unconditional Approval. Upon satisfactory
           completion of the pre-closing case review period,
           the office of the mortgagee receives unconditional
           approval. A letter of unconditional approval
           (Appendix 9) is sent to the mortgagee.

           1)    Addition of New Underwriter. When an
                unconditionally approved Direct Endorsement
                mortgagee adds a new underwriter to an
                existing underwriting staff, the new
                underwriter does not need to go through any
                pre-closing review. The existing
                underwriters are responsible for making
                certain that the new underwriter's work is
                acceptable.

(2-10B.)           The new underwriter does have to meet the
*                same basic eligibility requirements. The new   *
                underwriter must also attend a training
                session given by the local HUD Office or any
                other HUD Office.

                If serious errors are uncovered in the new
                underwriter's work, immediate action would be
                justified against both the mortgagee and the
                underwriter.

           2)   Changes in Technical Staff. The mortgagee
                must nominate new staff as described in
               paragraph 2-3E.

2-11      CHANGES IN ELIGIBILITY CRITERIA. <TOP> Mortgagees are to
       notify HUD whenever there is a change which would
       affect the Direct Endorsement approval status (for
       example, change in supervisory status, net worth or
       loss of approved underwriter).

       A.    Loss of Underwriters. If a mortgagee loses all of
            its underwriters, it automatically loses Direct
            Endorsement approval and therefore will be
            required to go through the 15 cases pre-closing
            review upon hiring an acceptable underwriter.

            The mortgagee must nominate its new underwriter
            (and any new technical staff) using Form HUD-54112,
            Application for Approval as Direct Endorsement
            Mortgagee and Nomination of Underwriting
            Personnel. A resume or Form HUD-92563,
            Application for Fee Personnel Designation must
            also be submitted. The underwriter (and any
            nominated technical staff), must successfully
            complete the appropriate training program, if this
            was not completed while with a previous employer.

       B.    Hiring an Approved Underwriter. If a mortgagee
            which has not participated in Direct Endorsement
            hires an underwriter who was unconditionally
            approved with another mortgagee, the 15 case
            pre-closing review is required.


2-12     AUTHORIZED AGENTS. <TOP> Supervised mortgagees may, upon
       approval from HUD, designate another HUD-approved
       mortgagee as an authorized agent for the purpose of
       submitting applications for mortgage insurance in the
       supervised mortgagee's name and on its behalf to HUD.

       The authorized agent, if approved as a Direct
       Endorsement mortgagee, may underwrite applications for
       Direct Endorsement, regardless of whether or not the
       supervised mortgagee has received Direct Endorsement
       approval. The appraisal may be done by a HUD-approved
       staff appraiser employed by the authorized agent or the
       supervised mortgagee (except as noted in Chapter 1,
       paragraphs 13 and 14).

(2-12)

   Either the agent or the principal mortgagee must be approved to
   originate loans in the Field Office jurisdiction. If the
   mortgagee which has Direct Endorsement approval has not been
   approved through the local Field Office, the mortgagee must
   write to the local office requesting Direct Endorsement
   approval.

   This letter must explain the agency relationship and the
   underwriter's familiarity with the geographic area. The letter
   must be accompanied by an application for approval, HUD-54112,
   a copy of its Quality Control Plan, its underwriter's resume,
   and copy of a letter granting unconditional approval through
   another HUD Field Office.

2-13 LOAN CORRESPONDENTS. <TOP> A loan correspondent may participate in
   Direct Endorsement in a limited manner within the Field Office
   jurisdiction where it is approved to originate loans, provided
   its sponsor is approved for Direct Endorsement. Under this
   arrangement, the loan correspondent will take the initial
   application, handle the appraisal assignment with HUD, procure
   verifications of deposit and employment and the credit report,
   close the loan after it has been underwritten and submit the
   loan package to HUD for insurance endorsement.

   The Direct Endorsement approved sponsor must perform the
   underwriting of the property and borrower and complete the
   Underwriter Certification part of Form HUD-54113. The
   appraisal may be performed by a HUD-approved staff appraiser
   employed by the sponsor (except as noted in Chapter 1,
   paragraphs 13 and 14). If all of its sponsors are approved for
   Direct Endorsement, the loan correspondent cannot order cases
   for prior approval processing, unless the HUD Field Office
   gives its approval.

   If the principal mortgagee's Direct Endorsement approval is
   through another HUD Field Office, the mortgagee must write to
   the local office requesting Direct Endorsement approval. This
   letter must identify the loan correspondent relationship and
   the underwriter's familiarity with the geographic area. The
   letter must be accompanied by an application for approval,
   HUD-54112, a copy of its Quality Control Plan, its
   underwriter's resume, and a copy of a letter granting
   unconditional approval through another HUD Field Office.

   The correspondent must complete the Mortgagee Certification
   part of Form HUD-54113. Since loan correspondents cannot
   perform any underwriting function (i.e., review of the
   appraisal, mortgage credit examination or underwriting), no
   specific Direct Endorsement training is required for the
   correspondent.

2-14 APPROVAL RESTRICTED TO PROPOSED CONSTRUCTION. <TOP> A
mortgagee may
   be approved to underwrite only proposed construction cases
   utilizing HUD conditional commitments or VA Certificates of
   Reasonable Value.
      In such a case, the nominated underwriter need not have the
      property appraisal review experience, nor should the
      underwriter be required to attend the valuation component of
      the Direct Endorsement training.

2-15 FIELD OFFICE FILE ON DIRECT ENDORSEMENT MORTGAGEES. <TOP>
A file is
     to be established for each mortgagee office which applies for
     Direct Endorsement approval. The file is to contain the
     following:

      A. Mortgagee Application. The Application for Approval as
         Direct Endorsement Mortgagee and Nomination of Underwriting
         Personnel (Form HUD-54112), the resumes (or Form HUD-92563)
         for underwriters and other technical staff, and the Quality
         Control Plan. The mortgagee approval worksheet should also
         be included.

      B. Decision Letters. The approval letters, or the rejection
         letter, if applicable.

      C. Underwriting Reports. Individual case Underwriting Reports
        which are prepared by the technical branches during
        pre-closing and post-endorsement reviews.

                        CHAPTER 3. MORTGAGEE UNDERWRITING

3-1     PURPOSE. <TOP> The purpose of this chapter is to describe the
      underwriting process and responsibilites of the mortgagee under
      the Direct Endorsement program. This chapter also establishes
      the guidelines for Direct Endorsement underwriting as required
      by Section 200.163(b)(2) of Title 24 of the Code of Federal
      Regulations.

      For technical underwriting guidance, mortgagees are to follow
      HUD Handbooks 4145.1, Architectural Processing and Inspections
      for Home Mortgage Insurance, 4150.1, Valuation Analysis for
      Home Mortgage Insurance and 4155.1, Mortgage Credit Analysis,
      as well as mortgagee letters and instructions from the HUD
      Field Office.

3-2    INELIGIBLE PARTICIPANTS AND CREDIT ALERT. <TOP>

      A.    Ineligible Participants. Direct Endorsement mortgagees
           are to check loan applicants against the Consolidated list
           of parties debarred or suspended by HUD and against the
           combined list of parties denied participation in specific
           programs and geographic areas (see Chapter 5). If the
           applicant is listed, the application must not be
           processed. If the mortgagee wishes to obtain permission
           to process such an application, all original documents
           must be forwarded to the HUD Field Office. Approval to
           continue processing will not be given unless HUD
           determines it to be in the best interest of the
           Government.

      B.    Credit Alert. If HUD's Credit Alert Interactive Voice
           Response System indicates that the applicant was the
           mortgagor on another HUD-insured mortgage that is
           delinquent or went to claim (or if the Credit Report shows
           a delinquency or foreclosure on a conventional mortgage),
           the underwriter will have to judge whether extenuating
           circumstances were involved before continuing to process
           the application. See HUD Handbook 4155.1.

3-3    PROPERTY VALUATION PROCEDURES. <TOP> With properties classified
as
      proposed construction and properties covered by a construction
      warranty plan accepted by HUD, the mortgagee has the option of
      using a HUD conditional commitment or a VA CRV. For those
      cases not involving a HUD commitment or a VA CRV, the mortgagee
      is responsible for the property eligibility determination.

      For all cases, the mortgagee must calculate the maximum
      mortgage amount, as explained in this chapter. With the
      exceptions noted, the mortgagee's property underwriting process
      is as follows:

      A.    Approval of Plans and Specifications. For proposed
           construction cases, the plans and specifications must be
           approved prior to the start of construction, or the
           mortgage must be limited to 90 percent of value plus
           closing costs.

           Certain builders are authorized to certify that their
           plans and specifications comply with HUD's Minimum
           Property Standards (MPS). See Chapter 3 of HUD Handbook
           4145.1 for details.

      B.    Request for Case Number and Appraiser. Mortgagees obtain
           case numbers and appraisal assignments by using the CHUMS
           Lender Access System (CLAS), or calling or writing the HUD
           Field Office. In lieu of requesting assignment,
           mortgagees using staff appraisers should provide the CHUMS
           identification number of the appraiser they have assigned.
           Compliance inspectors, if needed, should be requested with
           the case number. CLAS users must call for compliance
           inspectors.

           The mortgagee should identify the case as Direct
           Endorsement (unless requesting a conditional commitment on
           proposed construction) and provide the property address,
           type of construction, number of units and other
           information necessary for the assignment process. If a
           condominium, the project name must be given. If proposed
           construction, the name of the subdivision or PUD must be
        given.

   C.    Application Form. The mortgagee completes the Form
        HUD-92800, Application for Property Appraisal and
        Conditional Commitment, and retains the Requestor's
        Copy 2.

        When requesting a case number, the mortgagee may be
        advised (1) that HUD had previously rejected the property
        or (2) that the property had previously been sold by HUD,
        the sales price, sales date, and whether it was judged as
        ineligible for mortgage insurance at that time. In such
        cases, the mortgagee notes this in the address box of Form
        HUD-92800.

   D.    Sending Appraisal Package to Appraiser. The mortgagee
        sends to the assigned appraiser a Uniform Residential
        Appraisal Report (URAR) and the Form HUD-92800 (three
        parts: Original HUD File Copy 1, Appraiser Copy 3, and
        HUD CHUMS Copy 4). When using HUD fee appraisers, the
        package must be clearly identified as a Direct Endorsement
        case to ensure that the appraiser returns the appraisal to
        the lender rather than sending it to HUD.

   E.    Performing the Appraisal. The appraiser is to complete
        the appraisal in accordance with HUD instructions.

(3-3)        F. Returning Appraisal to Mortgagee (and Copy to
              HUD). After the appraisal report is completed,
              the appraiser returns the appraisal package
              (including pictures of the subject property and
              the comparables) and Copy 1 of Form HUD-92800 to
              the mortgagee. The appraiser sends a photocopy of
              the URAR and Copy 4 of Form HUD-92800 to the HUD
              Field Office. The appraiser keeps Copy 3.

             This procedure applies to appraisals performed by
             mortgagee staff appraisers as well as those
             performed by HUD fee panel members. HUD fee panel
             members are expected to return completed
             appraisals to the mortgagee within five workdays
             from the day they received the package.
             Mortgagees must ensure that their staff appraisers
             submit the HUD copies of the appraisals to HUD at
             the same time the appraisers forward the originals
             to the mortgagee.

        G.    Underwriter's Review of Appraisal. The
             mortgagee's underwriter is to review the appraisal
             to determine whether or not the appraiser's
             conclusions are acceptable. If found to be
             acceptable, the property is eligible for HUD
             mortgage insurance. The review consists
           essentially of the following:

           1)    Verification (as possible from available
                data) that the factual information submitted
                is correctly reported.

           2)    Determination of the plausibility and
                consistency of the conclusions based upon
                data presented in the report.

           3)    Determination of the consistency of the
                reported conclusions by comparison with other
                data conclusions reported in similar cases
                recently processed.

           4)    Compliance with underwriting instructions
                in HUD Handbooks 4145.1 and 4150.1.

           If the underwriter concludes that the appraisal
           report findings are inconsistent, or are otherwise
           unacceptable, he may contact the appraiser or
           return the case to the appraiser for
           reconsideration.

(3-3G.)       The underwriter may also add comments or
           corrections to modify or amend the report by using
           the "Direct Endorsement Underwriter/HUD Reviewer
           Analysis of Appraisal" form (see Appendix 15).
           Comments or corrections must be supported by HUD     *
           valuation policy and adequately documented. This
           includes the adjusting of value, the removal or
           addition of repair requirements, and the overall
           determinations of property approval and rejection.
           However, it does not include using the Chief
           Underwriter's prerogative described in HUD
*           Handbook 4125.1; this is only available to HUD
           staff. The appraisal report itself should not be
           "marked up" or changed in any way by the DE
           underwriter.

           Upon completion of the review, if the underwriter
           has no comments or corrections to make to the
           appraisal, then the form in Appendix 15 need not
           be completed. The DE underwriter's execution of
           the Form HUD 54113 will be sufficient evidence of
           the underwriter's review of the appraisal report.
           If the dwelling was previously sold by HUD's
           Property Disposition (PD) Branch and the appraised
           value exceeds the PD sales price by ten percent or
           more, the underwriter must have the property field
           reviewed before approving the appraisal report.

      H.   Reconsideration Actions. Except when using a HUD
           conditional commitment or a VA certificate of
           reasonable value, mortgagees are to process all
           requests to reconsider appraisal determinations.
           All reconsideration actions must be documented.
           Adequate documentation is determined by the type
           of reconsideration action involved.

           1)    A reconsideration of value on existing
                construction must be supported by evidence of
                comparable sales. The underwriter or
                appraiser is to document the existing
                appraisal report or, if necessary, complete
                the appropriate sections of a new appraisal
                report.

(3-3H.)         2) With the reconsideration of repair
                 requirements, it is the responsibility of the
                 appraiser and the mortgagee's underwriter to
                 ensure that the Department's requirements for
                 existing housing are applied in accordance
                 with outstanding guidelines.

                In situations where the appropriateness of
                the repair requirement is questioned, the
                mortgagee may either request the appraiser to
                reconsider the requirement or the mortgagee's
                underwriter may take the action to remove the
                requirement. When the mortgagee's
                underwriter removes a repair requirement, the
                justification for the action must be
                adequately documented. Such documentation
                will normally include inspection of the
                property.

           3)    Other reconsideration actions or changes to
                the original appraisal may be necessitated by
                changes in the legal description or
                boundaries. A change in the legal
                description or boundaries will dictate a
                rework of the appraisal only to the extent
                that value is affected. Any such changes
                made to the original appraisal are to be
                documented by the appraiser or the
                mortgagee's underwriter.

*     I.    Simultaneous Appraisal and Mortgage Credit Review.
           Simultaneous appraisal and mortgage credit review
           is permissible as provided in Handbook 4155.1,
           paragraph 3-9.                             *

3-4     EXPIRATION OF THE APPRAISAL. <TOP> The appraisal is valid
      for a specific number of months from the date on which
      the appraiser performed the appraisal and signed the
           Uniform Residential Appraisal Report (URAR).

      The appraisal has a life of six months for existing
      construction and, depending on the location of the property, up
      to 12 months for proposed construction and substantial
      rehabilitation. The HUD Field Office will advise the
      underwriter about soft market conditions and the life of
      proposed construction and substantial rehabilitation
      appraisals.

      For the purpose of submitting the appraisal as part of a
      request for mortgage insurance endorsement, the mortgagee must
      have approved the mortgagor or a valid sales contract must have
      been executed prior to the expiration of the appraisal.
      Approval of the mortgagor occurs when the underwriter signs the
      mortgage credit analysis worksheet.

3-5     EXTENDING APPRAISALS. <TOP> Appraisals on proposed construction or
      substantial rehabilitation may be extended up to 12 months
      provided that construction or rehabilitation started before the
      original appraisal expired. A fee or staff appraiser must
      inspect the property and update the appraisal previously done.
      Appraisals on existing properties may not be extended.

3-6    MASTER APPRAISAL REPORT (MAR). <TOP> This procedure eliminates
the
      need for an individual Form HUD-92800, Application for Property
      Appraisal and Commitment, and an individual appraisal report
      for each case in a group of applications. It is not suitable
      for individually designed non-repeat cases. Detailed
      instructions are in HUD Handbook 4115.3.

3-7    COMPLIANCE INSPECTIONS. <TOP> When processing a proposed
      construction case without a HUD conditional commitment or a VA
      CRV, and when processing a property under construction, the
      mortgagee is responsible for the compliance inspections. See
      Chapter 3 of HUD Handbook 4145.1 for instructions on the number
      and timing of inspections.

      A.    Staff or Fee Inspector. The mortgagee may use its own
           staff inspector (except as provided in paragraphs 1-13 and
           1-14) or a fee inspector assigned by HUD. The mortgagee
           is to notify the inspector that a Direct Endorsement case
           is involved to ensure that the Compliance Inspection
           Report is sent to the mortgagee and not to HUD. Upon
           receipt of the Report, the underwriter is to review and,
           if satisfied, sign the Report.

      B.    Copy of Compliance Inspection to HUD. Staff and fee
           inspectors must send a copy of all compliance inspection
           reports to the HUD Field Office. The copy must show the
           inspector's signature and must be legible. These copies
           may be used by HUD to perform field reviews of compliance
           inspections.

3-8     SATISFYING REPAIR REQUIREMENTS. <TOP> Repair requirements
      outstanding on the appraisal report must be satisfied when the
      mortgage is submitted for endorsement. Satisfaction of repair
      requirements can take one of three forms.

      A.    Compliance Inspection Report. The mortgagee may use an
           inspection performed by an appraiser or inspector
           evidenced by completion of Form HUD-92051, Compliance
           Inspection Report, certifying that the repairs have been
           satisfactorily completed.

           Generally, since the repair requirements are placed by an
           appraiser, in most cases the same appraiser (staff or fee)
           would be able to determine whether the repair has been
           made. For those inspections which require architectural
           expertise (structural or basic system repairs), the
           mortgagee is to use either a staff inspector (approved by
           HUD) or a HUD fee inspector.

           The mortgagee is to contact the HUD Field Office for the
           assignment of an inspector. When assigning the case to
           the appraiser or inspector, the mortgagee should advise
           that the case is being processed under Direct Endorsement
           so that the Report is sent to the mortgagee and not to the
           HUD Field Office. Upon receipt of the Report, the
           underwriter is to review and, if satisfied, sign the
           Report.

      B.    Mortgagee Certification. In instances where the required
           repair items are minor and uncomplicated such as: (1)
           replacing broken glass; (2) installing splash blocks; or
           (3) removing debris, a certification by the mortgagee is
           acceptable as evidence that the conditions have been
           satisfied. The mortgagee is to determine whether the
           repair items can be considered minor and uncomplicated (if
           the homeowner would do the work himself as normal
           maintenance, HUD considers the work minor).

      C.    Escrow of Funds. To facilitate the insurance of the
           mortgage prior to completion of repair requirements, in
           certain situations funds may be escrowed and HUD will
           accept a Mortgagee's Assurance of Completion at the time
           of endorsement. For further information on this
           procedure, see chapter 5 of HUD Handbook 4145.1.

3-9 MONTHLY EXPENSE ESTIMATES AND CLOSING COSTS. <TOP> The
monthly
   expense estimates (hazard insurance, taxes, maintenance and
   repairs, heat and utilities) are developed by the appraiser
   from a schedule made available by the local HUD Office. A
   schedule is also provided for the closing costs.
3-10      FLOOD HAZARD AREAS. <TOP> When a property is located in an
       area designated as a special flood hazard area, it is
       required that the mortgagor and mortgagee obtain and
       maintain flood insurance coverage under the National
       Flood Insurance Program on the property during such
       time as the mortgage is insured. The insurance must be
       in an amount at least equal to the outstanding balance
       of the mortgage less estimated land costs or the
       maximum amount of NFIP insurance available, whichever
       is less. It is the responsibility of the mortgagee to
       determine whether or not the property is located in a
       flood hazard area. If a property is located in a
       special flood hazard area and NFIP coverage is not
       available, the property is not eligible for HUD
       mortgage insurance.

3-11      SECTION 223(e). <TOP> Section 223(e) of the National Housing
       Act provides flexible program requirements which are
       not included in other Title II Sections of the Act. A
       mortgage may be insured pursuant to Section 223(e) for
       the repair, rehabilitation, construction, or purchase
       of properties in older declining urban areas. Section
       223(e) authority does not require "economic soundness"
       with respect to location.

       Eligibility under Section 223(e) is to be determined by
       HUD. Upon a determination by the appraiser and the
       mortgagee's underwriter that a property located in an
       older, declining urban area does not meet the location
       eligibility requirements of Section 203(b), the
*      mortgagee must request HUD approval to process using
       223(e) consideration.                              *

3-12      MODIFIED COST APPROACH. <TOP> In certain situations, the HUD
       Field Office may determine an area to be speculator
       dominated, which means speculators constitute the
       principal source of real estate activity. In such
       areas, the appraiser is to supplement the standard
       appraisal approach with the modified cost approach to
       value as presented in HUD Handbook 4150.1, Valuation
       Analysis for Home Mortgage Insurance. The Field Office
       is to provide fee appraisers and Direct Endorsement
       staff appraisers with a list of areas, if any, subject
       to the modified cost approach.

3-13     HOMEBUYER'S STATEMENT OF APPRAISED VALUE. <TOP> When not
       using a HUD conditional commitment or a VA CRV, the
       mortgagee is to provide appraised value information to
       the applicant. After the mortgagee's underwriter has
       reviewed the appraisal report and determined that the
       property is eligible for HUD mortgage insurance, it is
       the responsibility of the mortgagee to immediately
       provide the applicant with the copy of the Form
       HUD-92800.5B marked "Home Buyer". The mortgagee is not
       required to provide a copy of the appraisal report to
*       the applicant, but must provide it when asked.       *

       In cases involving proposed or new dwellings that were
       not approved prior to the start of construction or
       covered by an early start letter, the Statement of
       Appraised Value must indicate that the property is not
       eligible for correction of defects under Section
       518(a).

3-14     LEAD-BASED PAINT HAZARD. <TOP> If the property was
       constructed before 1978, the appraiser must check for
       defective paint and condition for its repair. See HUD
*       Handbook 4150.1. In accordance with Mortgagee Letter
       92-24, the borrower must have executed the HUD
       prescribed "Notice about Lead" on or before the date
       the borrower executed the sales contract.             *

3-15      MORTGAGE CREDIT ANALYSIS PROCEDURES. <TOP> The purpose of
       mortgage credit analysis is to determine the mortgage
       credit risk in the mortgage transaction to be insured, and
       to limit the probabilities of foreclosure or collection
       difficulties through the application of predetermined
       standards with respect to acceptable risks.

       In addition, mortgage credit analysis is used to determine
       compliance with many provisions of the National Housing
       Act. Under Direct Endorsement, it is the responsibility
       of the mortgagee to perform the mortgage credit analysis,
       to determine if the mortgagor is an acceptable credit
       risk, and to determine if the terms of the mortgage comply
       with the Section of the National Housing Act under which
       insurance is requested.

(3-15) The purpose of this paragraph is to provide program
      participants with the procedures to be followed under
      Direct Endorsement when performing the mortgage credit
      analysis. For technical guidance, refer to HUD
      Handbooks 4155.1, Mortgage Credit Analysis Handbook,
      and 4020.1, HUD/FHA Underwriting Analysis (Chapter 3),
      mortgagee letters, and instructions from the HUD Field
      Office.

*      A.    Mortgage Credit Analysis. The mortgage credit
            analysis may be performed by either a mortgage
            credit examiner on the mortgagee's staff, by a fee
            mortgage credit examiner assigned by HUD on a
            rotation basis, or the mortgagee's underwriter.

       B.    Mortgage Credit Application and Worksheet. The
            forms to be used are: Freddie Mac Form 65/Fannie
          Mae Form 1003, Uniform Residential Loan
          Application (URLA), HUD/VA Addendum to the URLA
          (HUD-92900-A), and the Mortgage Credit Analysis
          Worksheet (HUD-92900-WS). The application and
          addendum are completed according to the
          instructions in Mortgagee Letter 92-7 issued
          March 2, 1992. The examiner should sign and date
          the worksheet which is to be included in the
          submission for endorsement. Instructions for the
          HUD-92900-WS are found in Mortgagee Letter 91-24
          issued May 28, 1991.                          *

     C.    Underwriter's Review. When the mortgage credit
          analysis is not performed by the underwriter, the
          underwriter must review the analysis. The
          underwriter may modify the conclusions of the
          mortgage credit examiner, provided such
          modifications are supported by the mortgage credit
          source documents. The underwriter is to sign and
          date the worksheet. Once the underwriter has
          reviewed the mortgage credit application,
          determined that the applicant is eligible for the
          specific mortgage amount, and that the mortgage
          complies with all applicable HUD guidelines, the
          mortgage loan may be closed. See Handbook 4155.1,
          paragraph 3-2, for the expiration date on credit
          documents.

     D.    Mortgage Loan Closing. If the loan approval is
          expected to expire before the loan is closed, the
          underwriter must reexamine the application and
          determine whether the approval should be extended
          for 90 days.

3-16     UNDERWRITER/MORTGAGEE CERTIFICATION. <TOP> The
underwriter
      is responsible for the quality of decisions made by the
      mortgagee under the program. For endorsement purposes,
      the Department relies upon certifications by the
      mortgagee and the mortgagee's underwriter that the
      mortgage loan complies with HUD regulations and
      underwriting instructions.

*     Two independent certifications must accompany the
     mortgagee's request for mortgage insurance. Both are
     executed on form HUD-54113; one by the underwriter who
     personally reviews the appraisal, credit application,
     and all associated documents, the other by a duly
     designated official of the mortgagee. These
     certifications serve to establish that the insurance
     application and all supporting documents are accurate
     and complete to the best of the signer's knowledge.
      A.    Use of Certification. Appendix 3 lists the
           underwriter certifications and Appendix 4 lists
           the mortgagee certifications which are required by
           applicable provisions of the National Housing Act
           and the Code of Federal Regulations (CFR).

           These regulatory provisions include the items that
           HUD reviews on all cases submitted for prior
           approval processing. Under Direct Endorsement,
           this responsibility is assumed by the mortgagee
           and carried out by the underwriter.

           The underwriter should use Appendix 3 during the
           underwriting process to ensure compliance with
           applicable laws and regulations. After approving
           the loan, the underwriter completes Form HUD-54113
           by executing the Underwriter Certification. The
           underwriter must sign, date and include his/her
           CHUMS ID number on the form.

           Following mortgage loan closing, an authorized
           representative (which may be the underwriter)
           completes the mortgagee's section of the Form
           HUD-54113. In transactions involving loan
           correspondents, the loan correspondent (not the
           underwriter) must complete the mortgagee's section
           of the certification form.

(3-16B.) B. List of Underwriter/Mortgagee Certifications. The
         certifications listed in Appendix 3 and 4 contain
         all provisions of the National Housing Act and
         Code of Federal Regulations applicable to mortgage
         loans which can be originated under Direct
         Endorsement. Underwriting requirements are
         explained in greater detail in the HUD Handbooks
         listed in the Foreword.

           1)    Coastal Barrier Resource System. Underwriter
                Certification number eleven (11) states that
                the property is not located in a coastal area
                which is part of the Coastal Barrier Resource
                System. That system consists of coastal
                barriers on the Atlantic and Gulf coasts of
                the United States that are identified and
                generally depicted on maps entitled "Coastal
                Barrier Resource System."

                There are such areas in the following states:
                Texas, Louisiana, Mississippi, Alabama,
                Florida, Georgia, South Carolina, North
                Carolina, Virginia, Delaware, New York,
                Connecticut, Rhode Island, Massachusetts and
                Maine. If the mortgagee is underwriting an
                  application in a coastal area, the
                  underwriter should contact the HUD Field
                  Office to check for the specific locations of
                  these coastal barriers.

             2)    Loan-to-Value Limitations. All HUD mortgage
                  insurance programs in Direct Endorsement are
                  subject to loan-to-value ratio limitations as
*                  well as statutory maximum mortgage limits.
                  The underwriter is certifying that the
                  mortgage does not exceed the not exceed the
                  loan-to-value ratios or mortgage limits.
                  Refer to HUD Handbook 4000.2 for details.       *

3-17       INVESTOR APPLICATIONS. <TOP> As a result of the Department
        of Housing and Urban Development Reform Act of 1989,
        private investors are no longer eligible for insured
        mortgages under HUD's single family mortgage insurance
        programs, except under the circumstances listed in
        Paragraphs 1-4 and 1-5 of HUD Handbook 4155.1.

        A.  Processing. Lenders will process the transactions
           for eligible investors unless instructed otherwise
           by the local HUD Field Office.
        B. Seven Unit Limitation. See Handbook 4155.1,
           paragraph 3-10, for additional information.

3-18*      CONDOMINIUMS. <TOP> Section 234(c) cases may be processed
        under Direct Endorsement. Because the National Housing
        Act requires that at least eighty percent of HUD
        insured mortgages in a condominium project must be
        owner-occupants, underwriters have primary
        responsibility for ensuring compliance with this
        requirement in Direct Endorsement cases. Investor
        mortgages can still be insured for public agencies and
        non-profits.

        Therefore, after the mortgage credit analysis has been
        completed, but prior to approving any borrower
        (occupant or eligible investor), the Direct Endorsement
        underwriter must contact the jurisdictional HUD Field
        Office for approval of an investor mortgagor and to
        record an occupant mortgagor.                         *

3-19       ADJUSTABLE RATE MORTGAGES. <TOP> The National Housing Act
        limits the number of adjustable rate mortgages (ARMS)
        HUD can insure to a percentage of the overall insurance
        activity in the prior fiscal year.

        ARMs may be processed under Direct Endorsement.
        However, after the mortgage credit analysis has been
        completed, but prior to notifying the applicant, the
        Direct Endorsement underwriter must contact the HUD
        Field Office for approval and to record the application
        against the ARM allocation in CHUMS.

3-20*       SALE OF HUD-OWNED PROPERTIES. <TOP> Since no appraisal is
        necessary, Forms HUD-92800 and HUD-92800.5B are not
        required. The signed copy of the Standard Retail Sales
        Contract (Form HUD-9548) becomes HUD's conditional
        commitment for the property. The agreed purchase price
        of the property (item 3, Form HUD-9548) will be treated
        as the estimate of value. The Direct Endorsement
        underwriter is not responsible for any valuation review
        on these properties.                              *

(3-20)     A.   Processing Steps.

           1)    HUD's Property Disposition Branch issues a
                notice of contract acceptance to the broker
                and attaches the purchaser's copy of the
                accepted contract. The sales contract will
                specify the maximum mortgage amount.

           2)    The broker provides the Direct Endorsement
                mortgagee with copies of the acceptance
                notice and the contract that has been signed
                by HUD.

           3)    The mortgagee must review the acceptance
                notice to make sure that the property is
                eligible for HUD/FHA insured financing.

           4)    The mortgagee calls the HUD Field Office for
                a case number.

           5)    The mortgagee completes the application for
                mortgage insurance and the underwriter signs
                the worksheet after analyzing the
                application. HUD's Property Disposition
                Branch determined the maximum mortgage amount
                which appears on the sales contract. The
                sales price set forth in item 3 of the sales
                contract is used as the estimate of value for
                the purpose of calculating the loan-to-value
                ratio only.

           6)    HUD's Property Disposition Branch may elect
                to have the Direct Endorsement mortgagee
                perform the sales closing. In such cases,
                specific instructions must be provided by
                Property Disposition, including wire transfer
                of sales proceeds and time frames for
                completing the sale.

                If Property Disposition chooses another
                  closing agent, it will advise the mortgagee.

            7)     The closing agent, if other than the Direct
                  Endorsement mortgagee, returns the closed
                  loan package to the Direct Endorsement
                  underwriter.

*            8)     The Direct Endorsement underwriter and
                  mortgagee properly certify and submit the
                  loan package to HUD for endorsement.            *

3-21        ESCROW PROCEDURE FOR DEFERRED IMPROVEMENTS. <TOP> In
certain
          circumstances, it is not possible to complete all new
          construction items or all required repairs prior to
          submission for insurance endorsement. To facilitate
          the insurance of mortgages before the completion of
          on-site improvements, a Mortgagee's Assurance of
          Completion (Form HUD-92300) may be used in some
          circumstances. Details are in chapter 5 of HUD
          Handbook 4145.1.

3-22 MORTGAGE ENDORSEMENT SUBMISSION. <TOP> Following mortgage
closing,
     the mortgagee is to submit the case to the HUD Field Office for
     endorsement. The case should be submitted for endorsement
     within 30 days after closing.

    When there is a delay in submitting the case or a delay in
    closing the loan, the mortgagee must submit additional
    documentation to obtain a Mortgage Insurance Certificate. If
    the mortgage is submitted more than 30 days after closing, the
    mortgagee must explain the delay in a cover letter. On loans
    where the first mortgage payment was due more than 30 days
    prior to the submission to HUD, the mortgagee must certify that
    the loan is current.

    If the loan was closed after the underwriter's approval had
    expired or the mortgage was submitted to HUD for endorsement
    more than 60 days after closing, HUD's retroactive endorsement
    procedures apply. Requests for retroactive endorsement must
    include an explanation and justification for the delay and a
    certification that the loan is current and that escrows are
    intact except for authorized disbursements.

    On loans where three or more payments have come due, the
    mortgagee must supply a copy of the payment ledger showing the
    date each payment was received by the mortgagee.

    Except in those instances where HUD was demonstrably
    responsible for a delayed request for endorsement, a mortgage
    will not be insured if it is in default. If, in the HUD Field
    Office's judgment, the delay in submission was entirely HUD's
fault, the mortgagee is not required to certify that the loan
is current.

The mortgagee must place the HUD case number on the side and
bottom tabs of the case binder. The mortgagee may use the
remaining space on the side tab for intra-office information
(e.g., borrower's name, address and loan number). Check the
appropriate boxes on the front cover of the HUD case binder.
The submission should include the following documents in the
listed order. Any supplementary documents, such as explanatory
letters, that pertain to a major exhibit should be placed
behind the listed exhibit.

A.   Right Side of Case Binder (top to bottom):

     On Master Conditional Commitments or Master Appraisal
     Reports, in lieu of items 13 through 16, provide copies of
     Form HUD-91322, properly prepared for closing. On VA
     CRVs, it is not necessary to submit items 13 and 15.

     1)    Cover letter or transmittal letter, if used. Include
          a mailing label for the Direct Endorsement
          Underwriting Report if HUD should send it to an
          address other than the branch office that originated
          the loan.

     2)   Letter of Assignment, where applicable.

     3)    Request for Insurance Endorsement Under the Direct
          Endorsement program, Form HUD-54111.

     4)    Current payment letter, if two payment due dates have
          passed. Payment history, if three or more payment
          due dates have passed.

     5)   One-Time MIP Statement of Account, if applicable.

     6)    Underwriter/Mortgagee Certification, HUD-54113, with
          signatures, CHUMS identification and date.

     7)    Special certifications or forms, if any, cited on the
          Underwriter/Mortgagee Certification (except for Forms
          HUD-92544 and HUD-92753 which should be placed on the
          left side of the binder). Certain mortgage loan
          types may require one or more of the following
          documents.

          a.    Escrow documents, when the repairs or
               construction have not been completed as of
               mortgage loan closing.

          b.   Form HUD-92561, Mortgagor's Contract With
               Respect to Hotel and Transient Use of Property,
          when the property contains more than one
          dwelling unit.

     c.   Minimum Property Standards certification (copy),
          when proposed construction eligibility is not
          based on prior approval by HUD or VA.

     d.   A statement of future intent to occupy, when a
          high loan-to-value ratio is involved for a
          mortgagor in military service.

     e.   A veterans certificate of eligibility when the
          mortgage involves the minimum investment
          provision for veterans.

     f.   When the mortgage is to be insured under Section
          221(d)(2), a letter from the local government
          authority stating that either the property
          complies with local codes or that there are no
          local codes relating to existing properties.

8)    Certified true copy of the note, with appropriate
     riders (allonges).

9)    Certified true copy of the mortgage instrument.

10) Copy of the HUD-1 Settlement Statement, plus
   addendum, if certifications required by HUD are not
   printed on the form.

11) Form HUD-92900 (copy 1 and either copy 4 or 5),
   Application for HUD/FHA Insured Mortgage, with
   mortgagee and mortgagor certifications signed on the
   reverse of these forms.

     Copy of Disclosure Statement(s) (a) HUD's disclosure
     statement regarding interest rates and discount
     points and, when applicable, the Federal Reserve
     Board disclosure statement regarding Adjustable Rate
     Mortgages or (b) HUD's ARM disclosure . Mortgage
     Credit condition sheet.

12) Form HUD-92900-WS, Mortgage Credit Worksheet
   (original). Include Attachment A, if the transaction
   involved any amount of seller or lender contribution.

13) The case binder copy of the Form HUD-92800.5B,
   Statement of Appraised Value, and Architectural
   and/or Valuation condition sheets.

14) Uniform Residential Appraisal Report (original) or a
   photocopy of the VA CRV, where applicable.
     15) Photographs of property and comparable sales data.

     16) Copy 1 of the Form HUD-92800, Application for
        Property Appraisal and Commitment.

B.   Left Side of Case Binder (top to bottom):

     1)   Form HUD-92900 (copy 7), Application for Insurance.

     2)    Form HUD-92900-WS, Mortgage Credit Worksheet (carbon
          or photocopy).

     3)   Uniform Residential Appraisal Report (photocopy).

     4)   Mortgagee's Assurance of Completion (Form HUD-92300),
          where escrow was established for incomplete work.

     5)    Affirmative Fair Housing Marketing Plan (required
          only on proposed construction cases).

     6)    Copy of Builder Certification (required only for
          proposed construction and new construction cases
          involving high loan-to-value ratios).

     7)    Form HUD-92051, Compliance Inspection Report(s), if
          applicable, for an existing or proposed construction
          case. Include photographs of site grading and
          drainage (Refer to HUD Handbook 4145.1).

     8)    Form HUD-92577, Request for Change to Plans and
          Specifications, if applicable.

     9)    Form HUD-92544, Warranty of Substantial Completion
          with Plans and Specifications. Include One-Year
          Performance Guaranty from builder on workmanship and
          materials.

     10) Specific Condition(s) clearance documentation (i.e.,
        local health authority approval letter or Form
        HUD-92573, termite inspection report or soil
        treatment certification, certificate of occupancy,
        amendatory clause, etc.).

     11) Ten-Year Warranty Insurance Certification, if
        applicable.

     12) Credit Report.

     13) Verification of Deposit.

     14) Copy of bank statement.

     15) Verification of Employment.
        16) Salary statement or pay stub.

        17) Picture identification of applicant(s).

        18) Evidence of Social Security Number(s) of
           applicant(s), if not on pay stub(s).

        19) Sales contract, if applicable.

        20) Remaining documents in any order.

   C.    Construction Exhibits. On individual new construction
        cases involving high loan-to-value ratios, construction
        exhibits are stapled together, folded to fit in the binder
        and left loose in the case binder. Generally, plans
        should be no larger than 18 inches by 24 inches.

        Half size (or scale) photocopies of the drawings are
        acceptable provided they are legible and lettering is no
        smaller than 1/16 inch. Ensure that a Builder
        Certification (original) is attached to the front sheet of
        the exhibits.

3-23 PRE-CLOSING REVIEW SUBMISSIONS. <TOP> While in this approval
status,
    the mortgagee is to underwrite mortgage loans in accordance
    with all provisions of Direct Endorsement processing, with the
    exception that, prior to closing, the application package is to
    be submitted to HUD for an underwriting review.

   Because the application package is submitted prior to closing
   the mortgage loan, the Underwriter/Mortgagee Certification form
   cannot be formally executed. The underwriter should complete
   all the information on the form with the exception of the
   closing date. Because the loan has not been closed, the
   mortgagee cannot make the certifications contained on the
   bottom of the form. Neither certification should be signed.

   The documents required in blocks 7 and 8 of the Certification
   form may be submitted with the firm commitment application, or
   they may be submitted after closing with the submission for
   endorsement. The documents required in blocks 9 and 12 must be
   submitted with the firm commitment application.

   A.    Case Binder. Send the case binder, with the documents
        assembled inside in the order required in paragraph 3-22
        above, include all copies of Form HUD-92900, but omit the
        closing documents.

        If the application is approved, HUD will retain the
        binder, issue a firm commitment to the mortgagee, and
        return the Underwriter/Mortgagee Certification, Form
        HUD-54113. If the application is rejected, HUD will
        return the binder to the mortgagee for correction.

   B.    Closing Package. After closing the loan, the mortgagee
        executes the closing certification on Form HUD-54113. The
        mortgagee should submit the closing documents, two hole
        punched and fastened together at the top with a metal
        fastener. The mortgagee should not submit another case
        binder. The closing documents should be arranged in the
        following order (top to bottom):

        1)    Transmittal letter indicating that the package
             contains closing documents for a Direct Endorsement
             pre-closing case.

        2)   Underwriter/Mortgagee Certification, Form HUD-54113.

        3)   One-Time MIP Statement of Account, if applicable.

        4)    Certified true copy of the note with appropriate
             riders (allonges).

        5)   Certified true copy of the mortgage instrument.

        6)   Copy of the HUD-1 Settlement Statement.

        7)   HUD-92900 (copy 4 or 5), with all certifications.

        8)   Remaining documents, if any.

3-24 CANCELLING CASES. <TOP> When the mortgagee has started Direct
   Endorsement processing (obtained HUD case number) and
   determines that the case will be neither submitted for
   endorsement nor converted to HUD processing, the mortgagee is
   to advise the HUD Field Office to cancel the case. If the
   applicant was rejected, a copy of the Mortgage Credit
   Worksheet, HUD-92900-WS, should be sent to the HUD Field
   Office.

3-25 MORTGAGES WITHOUT EXECUTED UNDERWRITER/MORTGAGE
CERTIFICATIONS. <TOP> Mortgages originated and processed under the
   Direct Endorsement program that do not have the
   Underwriter/Mortgagee Certification completed by the
   originating lender because the originating mortgagee was
   terminated or is no longer in business, may be submitted for
   insurance by another mortgagee (for example, a wholesale
   mortgagee or a mortgagee that purchased the mortgage), provided
   the mortgagee is Direct Endorsement approved and its
   underwriter reunderwrites the mortgage and executes the
   Underwriter Certification on Form HUD-54113. The mortgagee
   must execute the Mortgagee Certification on Form HUD-54113, but
   should line through the words "mortgagee at the time of
   closing" on the form.
                       CHAPTER 4. HUD PROCESSING PROCEDURES

4-1     PURPOSE. <TOP> This chapter explains internal HUD processing
      procedures for cases submitted under the Direct Endorsement
      program. HUD's review of the submission consists of two
      processing cycles. The first is the pre-endorsement review
      which for an acceptable submission, results in endorsement of
      the mortgage. The second is the post-endorsement technical
      review.

      In the description of the processing procedures, paragraphs 4-2
      through 4-7 are used for all cases in which the mortgagee
      maintains processing responsibility for the entire case.
      Included in this category are:

      A.   Existing construction cases.

      B.    Proposed construction cases meeting one of the following
           criteria:

           1)    Mortgagee obtains a certification from the builder
                that the plans and specifications comply with HUD
                requirements.

           2)    Prior to the start of construction, the builder or
                mortgagee obtains HUD acceptance of the builder's
                first submission of plans and specifications.

           3)    The property involves an insured ten-year protection
                plan (warranty plan) accepted by HUD.

           4)   Property is limited to low-ratio mortgage (90%).

      Alternative procedures for processing proposed construction
      cases with HUD conditional commitments and VA CRVs are
      discussed in paragraph 4-10. The processing steps for HUD
      acceptance of the plans and specifications are in HUD Handbook
      4145.1.

4-2 REQUEST FOR CASE NUMBER AND APPRAISER. <TOP> Mortgagees
obtain case
    numbers and appraisal assignments by using the CHUMS Lender
    Access System (CLAS), or calling or writing the HUD Field
    Office. Mortgagees using staff appraisers request a case
    number and identify the appraiser they have assigned.

      A.    Identifying the Case. The mortgagee identifies the case
           as a candidate for Direct Endorsement and provides
           information on the property address, type of construction,
           number of units, and other necessary information. The
           assignment clerk enters this data on the CHUMS
           Receiving/Assignment screen or processes the CLAS request.
   B.    Verifying Eligibility. CHUMS checks if the mortgagee is
        eligible, if another application is in process on that
        property, if HUD had previously rejected the property, or
        if HUD had previously sold the property through the
        Property Disposition (PD) Branch. If a prior reject or a
        PD sale, the assignment clerk advises the mortgagee to
        note the circumstances in the address field of Form
        HUD-92800.

        The assignment clerk checks whether the subdivision or PUD
        has been approved, if the application involves proposed
        construction; or that the condominium project has been
        approved, if the application is requested under Section
        234(c).

   C.    Assigning a Case Number and Appraiser. If the mortgagee
        is eligible, CHUMS assigns the next available case number
        and the appraiser with the lowest relative caseload who
        can take assignments in that geographic area. CHUMS
        ensures the proper rotation of appraisers, giving
        preference to those appraisers who complete assignments
        more quickly. Therefore, overriding the system's
        selection should occur infrequently and only for
        legitimate reasons. If the mortgagee is using a staff
        appraiser, the mortgagee furnishes the appraiser's CHUMS
        number. Compliance inspectors, if needed, should be
        assigned at this time. The assignment clerk checks the
        case number assigned off the CHUMS Available Case Number
        Listing.

4-3 SENDING THE APPRAISAL PACKAGE TO APPRAISER. <TOP> The
mortgagee
   sends the appraisal package to the appraiser. The appraisal
   package consists of a URAR and a completed Form HUD-92800
   (except, that the mortgagee retains the Requestor's Copy). The
   package must be clearly identified as a Direct Endorsement case
   to ensure that the appraiser returns the appraisal to the
   mortgagee rather than HUD.

4-4 RETURN OF APPRAISAL PACKAGE TO MORTGAGEE. <TOP> Upon
completion, the
   appraiser returns the appraisal package, including Copy 1 of
   the Form HUD-92800, to the mortgagee. The appraiser sends a
   photocopy of the URAR and Copy 4 of the HUD-92800 to the HUD
   Field Office, and retains Copy 3 of the 92800.

   This procedure is applicable to appraisals performed by staff
   appraisers as well as those performed by HUD fee panel members.
   It provides the Field Office with notice that the appraiser has
   completed an assignment for workload purposes and also allows
   the Field Office to monitor appraisal performance on a regular
   basis.
4-5     HUD RECEIPT OF THE APPRAISAL COPY. <TOP> When a copy of the
      appraisal report is received in the office, the receiving clerk
      date stamps the copy and enters the appraisal into CHUMS on the
      Appraisal Received Logging screen. At the discretion of the
      Field Office, the photocopy may be discarded after logging or
      used for a field review.

      The Chief Appraiser should review the CHUMS reports showing
      completed and pending appraisals on a regular basis to ensure
      that timely appraisals are being performed.

4-6 HUD RECEIPT OF MORTGAGE SUBMISSION. <TOP> Upon receipt of the
case
    in the Field Office, the receiving clerk date stamps the
    mortgagee's cover letter and then performs the following
    processing tasks.

      A.   Logs Receipt of the Package into CHUMS.

      B.    Verifies Mortgagee Eligibility. The clerk checks whether
           the mortgagee is unconditionally approved to participate
           in the program.

      C.    Checks Submission Packaging. If the submission is from an
           unconditionally approved mortgagee, it must be in an
           acceptable case binder. If not, it should be returned to
           the mortgagee. Do not check the order of documents.

      D.    Routes Case to Pre-Endorsement Review. The package is
           routed to the closing clerk for pre-endorsement review and
           insurance endorsement.

4-7 PRE-ENDORSEMENT REVIEW. <TOP> The pre-endorsement review is
confined
    to those items specified in this paragraph. No further review
    is required or authorized prior to endorsement unless HUD has
    reason to suspect fraud in the origination process.

      A.    Review Criteria. The following documents are included in
           the review.

           1)    Current Payment Letter, if two payment due dates have
                passed.

           2)    The payment history, if three payment due dates have
                passed. If the delay is not considered to be beyond
                the mortgagee's control, the payment history should
                show few or no delinquencies and any assumptor must
                have been underwritten.

                Where the mortgagee can show that the delay in
                submission was outside of its control but was due, in
             part, to actions or inactions by HUD, the mortgage
             may be insured even though it is delinquent.

        3)    Form HUD-54113, Underwriter/Mortgagee Certification
             is properly executed.

        4)    Special certifications and forms, when applicable, as
             cited in item numbers 7 through 12 on the
             Underwriter/Mortgagee Certification.

        5)    Copies of the note and mortgage. The note must be an
             approved form without unauthorized variation. The
             mortgage must be 30 years or less. The mortgage must
             contain the assumption provision required by HUD.

        6)    Form HUD-92900. The mortgagee and mortgagor
             certifications on the back of Forms HUD-92900.1 and
             either 92900.4 or 92900.5 must be signed.

        7)    Form HUD-92800, with certifications completed and
             completed Uniform Residential Appraisal Report.

        8)    Order of Documents. That the above documents are in
             the prescribed order. The order of other documents
             is not to be a reason for denying insurance
             endorsement.

        9)   Condominium owner occupancy log.

   B.    CHUMS Entries and Reviews. After completing the above
        reviews, the closing clerk enters required information on
        the CHUMS Direct Endorsement Mortgage Insurance
        Certificate Screen.

        1)    The closing clerk visually confirms that the property
             address in CHUMS matches that on the Request for
             Insurance Endorsement form.

        2)   CHUMS verifies that:

             a.    the mortgage amount does not exceed the dollar
                  limitation for the program, number of units and
                  local jurisdiction.

             b.   the monthly payment will amortize the loan.

             c.   sufficient one-time Mortgage Insurance Premium
                  has been credited to the case, where applicable.

             d.   the Underwriter is approved.
(4-7)
   C.    Endorsement. If the review criteria are met, the closing clerk
        endorses the mortgage for insurance, prints a Mortgage Insurance
        Certificate, Form HUD-59100, from CHUMS and sends it to the
        mortgagee.

   D.    Deficient Submission. If the review criteria are not all met,
        reject the case, enter the reason for rejection into CHUMS and
        print a Notice of Rejection. Return the case binder to the
        mortgagee along with the Notice of Rejection.

   E.    Tracking Processing Times. The CHUMS Workload Status Report,
        F17IHCC, lists cases received for insurance endorsement
        processing and the length of time they have been on hand. Other
        reports that provide information on volumes and processing times
        are discussed in paragraph 4-14.

4-8 PROCESSING RECONSIDERATIONS. <TOP> If an insurance endorsement
is rejected
    during the pre-endorsement review and the rejection is upheld after
    supervisory review, the mortgagee may submit a request for
    reconsideration.

  Upon receipt of the request, the receiving clerk logs the case into
  CHUMS and routes the binder to the closing clerk for review. If the
  problems listed on the original non-endorsement notice or Form
  HUD-92026, have been corrected, the clerk insures the case, prints a
  Mortgage Insurance Certificate, and sends it to the mortgagee. If the
  case is selected for review, the case is routed to the appropriate
  branch to initiate the technical review cycle as described in
  paragraph 4-9.

  If the case is still unacceptable, the clerk records the deficiencies
  in CHUMS, prints another non-endorsement notice and returns the case
  binder to the mortgagee.

4-9 POST-ENDORSEMENT TECHNICAL REVIEW. <TOP> The technical review
of
   mortgagee underwriting is critical to the success of the Direct
   Endorsement program. Since underwriting decisions rely heavily on
   the subjective interpretation of the mortgagee, it is imperative that
   Field Offices identify and respond to underwriting problems.

  A.     General. Field Offices must provide meaningful, constructive
        and legible comments to ensure that quality underwriting is
        maintained in the future. Review how the underwriter, the
        appraiser, and the mortgage credit examiner, arrived at a
        decision, whether problems were addressed and whether reasonable
        conclusions were made.

        Items that do not affect the quality of analysis must not be
        reflected in the technical ratings.

        1)    Percentage of Cases to be Reviewed. After the mortgagee has
             been granted unconditional approval, the Development
             Division Director or Office manager, or designee, will
     establish the percentage of the mortgagee's cases that are
     subject to post-endorsement technical review. For
     mortgagees that are new to the program, all of the
     mortgagee's cases should be reviewed for the first six
     months or through the first 50 cases.

     Thereafter, the percentage can range from 5% to 100%,
     depending on early default and claim rates for the
     mortgagee, ratings given the mortgagee's underwriter,
     whether a staff appraiser is employed, results of field
     reviews, findings of complaints from homebuyers or
     applicants.

     Generally, the percentage should be set at 5% to 10% if the
     mortgagee's performance meets the norm for the area (i.e.,
     early default and claim rates for the mortgagee are less
     than or equal to the average for the Field Office).

2)   Selecting Cases for Review.

     a.    The Field Office should select high risk cases for
          review. High risk factors include: investors, 2-4
          unit dwellings, manufactured housing, shared equity
          mortgages, low mortgage amounts, PD properties, and
          transactions involving excessive seller buydowns.

          Additionally, the applicant may be a high risk because
          of unusually high expense-to-income ratios or other
          factors. In certain market areas, a condominium would
          be a high risk factor.


          If any of these high risk factors are present, the
          appropriate box will be checked on the front of the
          case binder.

     b.    CHUMS monitors the percentage of each mortgagee's cases
          selected for review. If the percentage falls below the
          level established, CHUMS prompts for a post-endorsement
          review.

3)    Form HUD-54118. For cases selected for review, the closing
     clerk prepares an Underwriting Report, Form HUD-54118,
     attaches it to the front of the binder, and prepares the
     case for technical review.

4)    Ratings. The closing clerk reviews the closing package.
     The appropriate HUD reviewer rates the quality of the
     appraisal, the mortgage credit processing, the underwriting
     and the closing. There are three rating levels which can be
     given, examples are provided for each stage of the review
     cycle, definitions are as follows:
          a.   Good. Quality processing with no deficiencies as noted
               below. Comments are minor in nature.

          b.   Fair. Any deficiency that does not change the
               eligibility determination of the property, the
               mortgagor, the mortgage amount, or the term.

          c.    Poor. Any deficiency that results in a significant
               increase in mortgage risk, through either greater
               credit risk or a decrease in property security, or

               An acceptance of a mortgagor, or property, not
               permitted by HUD policy or statute, or

               Any action by the mortgagee to misrepresent either the
               financial capacity of the applicant mortgagor or the
               condition of the property offered as security for the
               mortgage, or

               Any action that results in the omission or improper
               disclosure of information on the application that does
               not allow for a complete picture of the applicant's
               financial position and/or the intended use of the
               property.

     5)   Supervisory review process.

          a.    A supervisor, or designee, should review a
               representative sample of "Good" and "Fair"
               post-endorsement technical review ratings in order
               to ensure compliance with review guidelines.

          b.    All "Poor" ratings should be reviewed by the
               supervisor, or designee, before being sent to the
               mortgagee.

          c.   The supervisor, or designee, should document and
               maintain a record of problems associated with all
               review ratings categories which will be useful in
               managing the quality of reviewer's work and in
               determining training needs.

B.    Direct Endorsement Post-Endorsement Technical Review Checklist
     (Mortgage Credit and Valuation). The Post-Endorsement Technical
     Review Checklist (see Appendix 16) is designed to assist
     technical reviewers in evaluating and assigning ratings of
     underwriters. This checklist identifies the most common
     deficiencies resulting in fair or poor ratings. (Any one element
     rated poor should result in an overall poor rating. Enter
     overall ratings on Form HUD-54118.) In addition to providing a
     means of assigning ratings throughout HUD's Field Office network
     in a consistent manner, the checklist is designed to alert the
     reviewer to "warning signs" that may indicate fraud and identify
     deficiencies that may warrant indemnification. Those
     deficiencies identified with an asterisk {*} may warrant referral
     of the loan file to HUD's Mortgagee Monitoring Division for
     possible indemnification or to the Office of Inspector General
     for investigation. If such referral is warranted, the Field
     Office should prepare a referral memorandum and attach a
     photocopy of the completed checklist as supporting documentation.

     Within each of the five categories of the loan file that must be
     examined, there are generally two areas of evaluation: (1) the
     documents used to underwrite the loan, and (2) the underwriting
     analysis itself.


     1)    Documents. The reviewer must determine if a document used
          in the processing and underwriting of an insured mortgage
          meets HUD's requirements and sufficiently conveys the
          information necessary to adequately analyze
          creditworthiness.

     2)   Underwriting Analysis.

          a.    Fair. Ratings of fair must be accompanied by comments
               from the reviewer.

          b.    Poor. Poor ratings must be justified by the reviewer.
               While the checklist indicates elements that may
               constitute a poor rating, the reviewer is expected to
               explain how HUD's risk was significantly increased by
               the deficiency. For example, while cash investment
               requirements may have been understated in underwriting
               the loan and is generally ground for assigning a poor
               rating, the reviewer must explain the increased risk to
               HUD. In this example, the reviewer must show that the
               borrower did not have sufficient cash to close and that
               unsecured borrowing was the likely result.

C.    Closing Review. Includes a review of the settlement sheet,
     review of the note and, if applicable, a review of escrow forms,
     in accordance with HUD Handbook 4165.1, Endorsement for Insurance
     for Home Mortgage Programs. All post-endorsement closing reviews
     on Direct Endorsement cases are to be detailed reviews. Findings
     are noted in the closing section of the Underwriting Report.
     Following closing review, the date is entered into CHUMS and the
     case binder is routed to the appropriate branch for
     post-endorsement technical review.

     Examples of Poor and Fair Ratings:

     1)    Fair: Appropriate boxes are not checked on the front of the
          case binder; the documents are significantly out of the
          prescribed order; certifications on the back of Forms HUD
          92900.1 and either 92900.4 or 92900.5 are signed but not
          dated.

     2)    Poor: Significant documents are missing, such as the
          interest rate disclosure or the HUD-1 Settlement Statement.

D.    Architectural Review. For those proposed construction cases
     meeting the criteria in paragraph 4-1, the closing clerk should
     send the package to the Architectural Branch for review to
     determine whether the property meets HUD MPS requirements.

     The construction analyst should mark-up the documents accordingly
     and note comments on the architectural portion of the
     Underwriting Report, Form HUD-54118. Plans and specifications
     should remain with the underwriting package throughout the
     technical review process. After completing the review, the
     architectural ratings are entered into CHUMS and the case binder
     is routed to the Valuation branch.

     Examples of Poor and Fair Ratings:

     1)   Architectural Processing Procedures

          a.    Fair: Not all construction exhibits are present;
               however, there are sufficient exhibits to make an
               inspection of the property; Builder Certification not
               properly completed or has incorrect code reference;
               plans and specifications not signed by the builder;
               underwriter did not make any specific conditions to the
               Statement of Appraised Value for missing construction
               exhibits.

          b.    Poor: Construction exhibits are insufficient (or too
               incomplete) to make an inspection of the property;
               Builder Certification not provided; construction
               exhibits accepted but builder not on certification
               list.

               High ratio loan was provided to a builder after
               construction was started. Statement of Appraised Value
               was not corrected to show the property was "under
               construction." "Early start" letter was not provided
               by underwriter.

     2)    Compliance Inspections

          a.    Fair: Inspection reports not properly
               completed; Section III of Form HUD 92051 was not
               properly completed by the underwriter;
               inspection fees charged to the borrower were
               greater than allowed by HUD.

          b.   Poor: Inspection reports not signed by the
               underwriter; loan was closed without the
               required inspections; the construction exhibits
               were changed without an acceptance of Form
               HUD-92577; construction deficiencies were
               allowed without requiring corrections; required
               special conditions shown on Form HUD-92800.5B
               were not properly completed and/or submitted
               (includes termite certification and individual
               well and septic letter, etc.)

     3)   Escrows

          a.    Fair: escrows established with insuffient funds
               to complete the work, i.e., 1-1/2 times total
               amount of repair, or insufficient estimate;
               escrows established on incomplete items that
               should not have been accepted for an escrow.

          b.    Poor: underwriter released escrow money without
               adequate documentation on a Compliance
               Inspection Report or a mortgagee's
               certification, when applicable.

D.    Senior Appraiser Review. It is essential that appraisals
     are reviewed by a senior review appraiser. Lower grade
     review appraisers should concentrate on HUD processed
     cases. Included in this underwriting review is an
     assessment of the quality of the appraisal and the
     underwriting. The senior review appraiser will conduct
     the review in accordance with outstanding instructions in
     HUD Handbook 4150.1.

     1)   Examples of Poor and Fair Ratings

          a.   Comparable Sales

               Fair: used outdated comparables, sale occurred
               more than six months prior to the appraisal,
               without explanation; numerous, and ordinarily
               unnecessary, adjustments indicating little
               similarity between comparables and subject
               property; failure to include one comparable that
               was a conventional sale, without explanation;
               location map omitted.

               Poor: selected comparables located in an
               entirely different market, which affects final
               market value; unreasonably large adjustments
               that affect final value; required pictures not
               provided and not requested by the underwriter;
               mathematical miscalculation(s) resulting in over
               or under valuation.

          b.   Completion of Appraisal Report
          Fair: Some general information not provided,
          e.g., location analysis, value and/or rent
          range, or minor oversights.

          Poor: Critical information lacking, e.g., land
          value or income approach, if appropriate.

     c.   Property Analysis

          Fair: Failure to report and compare
          neighborhood conditions, e.g. heavy traffic and
          noise, if appropriate.

          Poor: conclusion not supported by the data;
          failure to report location as a 223(e) area;
          failure to report flood designated area.

     d.   Neighborhood Data

          Fair: Use of subjective factors in judging
          neighborhood.

          Poor: does not apply.

     e.   Proposed Construction

          Fair: not all construction exhibits are
          present; however, there are sufficient exhibits
          to make an appraisal of the property; oversight
          in calculating cost with no significant effect
          on value.

          Poor: construction exhibits are insufficient
          (or too incomplete) to make an appraisal of the
          property; replacement cost, when required, not
          provided on Marshall Swift forms; improper
          procedure used in arriving at replacement cost;
          required special conditions shown on Form
          HUD-92800.5B were not properly submitted.

2)    Different Ratings for Appraiser and Underwriter.
     Ratings for the appraisal and the underwriting may be
     the sane or can vary. If the underwriter modified
     the appraisal, the underwriter can have a higher or
     lower rating than the appraiser.

     However, if the underwriter did not modify the
     appraisal, it is possible that a lower rating be
     given because the underwriter has additional
     processing responsibilities (i.e., valuation and/or
     architectural specific conditions).
     3)    Marginal Properties. Since HUD mortgage insurance is
          designed to assist those homebuyers who are not
          served by the private sector, review appraisers
          should take this fact into account in their ratings.

          For example, if a mortgagee does a good job
          underwriting an extremely marginal property on which
          the reviewer might not agree totally with the final
          decision, the rating could be a "Good" depending on
          the remainder of the package. It does not
          necessarily have to be a "Fair" or "Poor." On the
          other hand, a "Poor" rating can be given to a
          property which offers no risk to the Department.
          Review appraisers must consider the quality of the
          appraisal and the underwriting in determining the
          ratings and not just the potential risk for the
          Department.

     4)    Field Review Requirement. The 10 percent field
          review requirement applies to all appraisals, whether
          by mortgagee staff appraisers or HUD fee panel
          members. Appraisals that were judged poor based on
          the desk review, should be field reviewed. It is
          important that at least five percent of every
          appraiser's work is reviewed and that the work of
          every mortgagee is analyzed. Particular attention
          should also be given to those appraisal reports in
          which the underwriter made significant adjustments to
          the appraisal. In the event that a field review has
          already been completed on a case, this fact should be
          noted on the Underwriting Report.

          Copies of all field reviews performed on mortgagee
          staff appraisers are to be mailed to the underwriter,
          the mortgagee's quality control department or
          appropriate company executives.

E.   Mortgage Credit Review. The senior mortgage credit
     examiner conducts the review in accordance with
     outstanding instructions as described in HUD Handbook
     4155.1, Mortgage Credit Analysis for Mortgage Insurance on
     One- to Four-Family Properties.

     1)    Cursory vs. Detailed Review. While every case
          receives a cursory review, 10 percent of each
          mortgagee's cases selected for post-endorsement
          review should receive a detailed review. The
          selection of the cases for this in-depth analysis
          should be based on the examiner's brief evaluation of
          the case.

     2)   Examples of Poor and Fair Ratings
a.   Illegal or Improper Loans

     Fair: File processed correctly by underwriter
     but closed incorrectly. Minor prepayment
     required by HUD.

     Poor: exceeds statutory loan-to-value ratio;
     cash back on non-owner occupied refinance;
     ineligible non-owner occupant condominium; 90
     percent loan processed as high ratio loan;
     incorrect MIP (closed as monthly, when should
     have been one-time; closed as one-time, when
     should have been monthly; MIP calculated
     incorrectly); loan amount not rounded down on
     condominium, Section 221(d)(2), or case with
     one-time premium not financed in the mortgage.

b.   Improperly Computed Income

     Fair: miscalculation that does not affect the
     acceptance of the case; however, points to
     potentially hazardous underwriting practices.

     Poor: improper analysis of financial
     statements; taxes computed incorrectly; YTD
     and/or prior year's earnings do not support
     income used on analysis; nonacceptable use of:
     overtime, bonus, child support, contract income,
     car allowance; use of any income that will be
     curtailed in the near future.

c.   Improperly Computed Liabilities

     Fair: miscalculations that do not affect
     acceptance of the case; however, point to
     potentially hazardous underwriting practices.

     Poor: miscalculations that allow acceptance of
     a case that would otherwise be a reject; child
     support/alimony not included; any large consumer
     debt not included; expenses of personal
     residence for non-owner occupant or
     co-borrower(s); real estate liabilities not
     correctly analyzed (real estate schedule).

d.   Unacceptable and/or Unexplained Credit Items

     Fair: credit deficiency--explanation, although
     included, is not considered sufficient to offset
     the deficiency. Underwriter used questionable
     judgment.

     Poor: recent bankruptcy; deed in lieu of
               foreclosure; foreclosure; unpaid suits,
               collections and/or judgments; pattern of
               consistently late payments; failure to check
               HUD's Credit Alert Interactive Voice Response
               System.

          e.   Large Unacceptable or Unverified Credit toward
               Downpayment

               Fair: does not apply.

               Poor: that affects loan amount.

          f.   Lack of Verified Assets to Close

               Fair: does not apply.

               Poor: improperly computed settlement
               requirements on analysis; earnest money note not
               verified as paid but used as a credit on
               analysis; no visible documentation of receipt of
               equity claimed; trade value of personal property
               not established; repair costs not charged to
               borrower; value of stock, bonds, other
               securities not verified; unacceptable secondary
               financing.

          g.   Violation of the "7 Unit" Concentration Rule for
               nonoccupant owners should be a poor.

     3)    Marginal Borrowers. Since HUD mortgage insurance is
          designed to assist those homebuyers who are not
          served by the private sector, mortgage credit
          reviewers should consider this fact in their ratings.
          For example, if a mortgagee does a good job of
          underwriting on an extremely marginal borrower
          offering excellent compensating factors for approving
          the case, the mortgage credit examiner could give a
          rating of "Good" even though the examiner might not
          agree totally with the final decision. Conversely, a
          "Poor" rating can be given to a case where a
          substantial number of obligations are omitted even
          though the Department's risk is not affected in the
          transaction. Mortgage credit reviewers must consider
          the quality of underwriting in determining the rating
          and not just the potential risk to the Department.

F.   Supervisory Review. When individually serious (a Level 2
     or 3 deficiency as described in Chapter 5) or continual
     problems with a single mortgagee are detected, those cases
     should be routed to the immediate supervisor over the
     Architectural, Valuation, and Mortgage Credit Branches.
     That supervisor is responsible for reviewing the quality
        of the mortgages underwritten and taking appropriate
        action to resolve uncovered deficiencies. See Chapter 5.

   G.    Conclusion of Technical Review Processing. A copy of the
        Underwriting Report is placed in the case binder as part
        of the permanent record. The original is used for
        entering the ratings into CHUMS, then is filed in the
        mortgagee's file if significant errors were found.
        Another copy is sent to the appraiser if the appraisal was
        deficient. A photocopy is sent to the compliance
        inspector if the inspection was deficient. The final copy
        of the Report is sent to the mortgagee, if significant
        errors were noted. Send the report to the branch that
        originated the loan, unless the mortgagee provided a
        mailing label specifying a different address.

        To conclude the processing cycle on Direct Endorsement
        cases, the the final ratings must be entered into CHUMS
        from the Underwriting Report. After the data is entered
        from the Underwriting Report, that copy is filed in the
        mortgagee's file as described in paragraph 2-15. The case
        binder can then be prepared for submission to Headquarters
        unless the binder is needed for further analysis. If any
        poor ratings were given, the case binder should be
        retained for 30 days to allow time for an appeal.

   H.    Appealing Poor Ratings. Appraisers, inspectors,
        underwriters and mortgagees may appeal poor ratings, in
        writing, to the HUD Field Office within 30 days of
        receiving the Underwriting Report. The Field Office must
        respond within 30 days.

   I.   Tracking Processing Times. As each phase of the review
        cycle is completed, a clerk in the branch enters the
        ratings into CHUMS. The CHUMS Workload Status Report,
        F17IHCT, lists cases in each branch for review, the length
        of time the case has been in the branch and the target
        date for completing the technical review cycle. Other
        CHUMS reports are described in Chapter 5.

4-10 PROCESSING PROPOSED CONSTRUCTION CASES WITH HUD
CONDITIONAL COMMITMENTS AND VA CRVS. <TOP> In addition to presenting
the
    processing procedures for these two forms of property approval,
    this paragraph also addresses mortgagee and builder requests
    for HUD approval of the plans and specifications.

   A.    Conditional Commitments. Processing of the conditional
        commitment should be consistent with established
        procedures for regular HUD processed cases. The mortgagee
        must send a case binder to the HUD Field Office at the
        same time it sends the appraisal package to the appraiser.
        When the Direct Endorsement package is submitted, the
        receiving clerk date stamps the mortgagee's cover letter,
        verifies that the mortgagee is unconditionally approved to
        participate in the program, logs the case into CHUMS, and
        retrieves the conditional commitment binder from the
        files. The clerk adds the mortgage credit documents and
        the closing documents to the case binder and routes it to
        the closing clerk.

        The endorsement process should follow the procedures
        outlined in paragraphs 4-6 and 4-7. The only difference
        for the remainder of the process is that the case does not
        have to be reviewed by the Architectural and Valuation
        Sections if the case is selected for a post-endorsement
        Technical Review. When preparing the Underwriting Report,
        Form HUD-54118, the clerk should write "HUD conditional
        commitment" in the property section of the report and
        route the case to the Mortgage Credit Section.

   B.    VA CERTIFICATES OF REASONABLE VALUE. Prior to the
        submission of the insurance endorsement request, the
        mortgagee calls HUD to obtain a case number and places it
        on the appropriate documents.

        When the Direct Endorsement package is submitted, the
        receiving clerk date stamps the mortgagee's cover letter,
        verifies that the mortgagee is unconditionally approved to
        participate in the program, logs the case into CHUMS, and
        routes the case to the closing clerk. The pre-endorsement
        review is completed consistent with paragraph 4-7.

        These cases should then go to the Valuation Branch for
        clerical review. The clerk notes any findings on the
        Underwriting Report. There is no need for any appraiser
        review unless the clerk discovers a problem which requires
        the attention of a technician. (No appraisal rating
        should be given for these cases.) After the appropriate
        clerical processing duties are performed, the case should
        be directed to the Mortgage Credit Branch for further
        processing. Similar to cases with HUD conditional
        commitments, the only entry made into CHUMS is the
        mortgage credit rating.

   C.    HUD Review of Plans and Specifications. If the builder is
        not authorized to certify that his plans and
        specifications comply with HUD's MPS, the
        mortgagee/builder may request HUD review of the builder's
        first submission of plans and specifications. Detailed
        instructions are in Chapter 3 of HUD Handbook 4145.1.

4-11 PROCESSING CONVERSIONS. <TOP> The mortgagee may convert the
case to
    HUD processing only under certain circumstances (see paragraph
   1-15). Once converted, processing should be consistent with
   established procedures for regular HUD processed cases.

4-12 PROCESSING PRE-CLOSING CASES. <TOP> These cases must be given
   priority and have a three-day processing goal. After the
   mortgagee is given conditional approval, a card or a
   Pre-Closing Submission Log, Form HUD-54110, should be placed in
   the new mortgagee file to track the 15 case (or more) trial
   period. The procedures described in paragraphs 4-2 through 4-5
   apply to cases in this category.

   A.    HUD Receipt of the Underwriting Package. The receiving
        clerk date stamps the package and checks the new mortgagee
        file to verify that the mortgagee is eligible for the
        Direct Endorsement program. For proposed construction
        cases involving conditional commitments, VA CRVs, or
        review of plans and specifications, appropriate processing
        steps described in paragraph 4-10 should be followed.

        The clerk should note the fact that the mortgagee has
        conditional approval and the number of cases which have
        been submitted to date on the first line of the section
        for other review comments.

        To better manage the pre-closing review cycle, Field
        Offices may elect to maintain a log in the mortgagee's
        file, showing cases submitted for pre-closing review.
        Appendix 5 contains an optional form. If used, the log
        should be pulled and attached to tie front of the file,
        beneath the Underwriting Report.

        The package is then routed to the appropriate branch to
        begin the technical review cycle.

   B.    Technical Reviews. The reviews and processing performed
        in the branches is almost identical to those outlined in
        the post-endorsement review process. If eligible, a firm
        commitment is issued to the mortgagee; but, the case
        binder is retained in the Field Office.

   C.    Conclusion of the Pre-Closing Review. After the various
        sections complete their reviews, one copy of the
        Underwriting Report is retained in the case binder and the
        original is placed in the mortgagee's file. Deficiencies
        should be brought to the attention of the mortgagee,
        appraiser or inspector, as appropriate.

        As the mortgagee approaches the end of the conditional
        review period, the Mortgagee Approval Specialist should
        review the mortgagee's file to determine whether the
        mortgagee's work is acceptable. If it is not, the Field
        Office should advise the mortgagee that the trial period
        will be extended for a certain number of cases before a
        decision is made. Should the mortgagee exhibit extremely
        poor performance, a meeting should be held to discuss the
        deficiencies. If no improvement is seen, the mortgagee's
        conditional approval can be withdrawn.

   D.    Reconsiderations. In the event that the mortgagee
        disagrees with the Field Office's revisions during the
        pre-closing review, it may request reconsideration. The
        mortgagee must submit documentation to support its
        request. Upon receipt, the clerk logs the case into CHUMS
        and routes the case to the appropriate branch for review.

   E.   HUD Receipt of Mortgage Submission. The receiving clerk
        assembles the Case Binder and follows the instructions in
        paragraph 4-6.

   F.   Pre-Endorsement Review. Follow instructions in paragraph
        4-7.

   G.    Post-Endorsement Review. These cases are subject to
        pre-closing review; no post-endorsement technical review
        is necessary. However, the ratings from the pre-closing
        review must be entered into CHUMS.

4-13 PROCESSING GOALS. <TOP> To promote prompt processing, HUD's
Regional
    Management Plan establishes processing goals which apply to
    Direct Endorsement cases. Accomplishment of these goals is
    tracked by the CHUMS Summary of Single Family Operations,
    F17JLCA.

   A.    Insurance Endorsement Processing. Insurance endorsement
        requests are to be insured or rejected within the number
        of workdays established in the Management Plan objectives.

   B.    Pre-Closing Reviews. Ninety percent of all cases subject
        to a pre-closing review are to be processed within 3
        workdays. This goal does not apply to cases from lenders
        which are returned to pre-closing review status because of
        unacceptable underwriting performance.

   C.    Technical Review Cycle. Complete technical reviews on
        insured Direct Endorsement cases in accordance with
        Management Plan objectives.

4-14 ACTIVITY AND INVENTORY TRACKING. <TOP> CHUMS automatically
monitors
   all program activity from case number assignment through the
   completion of the technical review cycle by entry of the
   quality ratings developed by the technical branches. The
   following reports are generated by CHUMS to assist Field
   Offices meet their goals. Detailed descriptions are in the
   CHUMS User Handbook.
   A.    Manager's Activity/Backlog Report, F17ILCB. This report
        is produced weekly and monthly. It provides Field Offices
        with a brief summary of work processed during the
        preceding week (or month) and the number of cases awaiting
        processing. Both HUD-processed and Direct Endorsement
        cases are shown on the report. Field Office Managers
        should review this report closely.

   B.    Activity Summary Report, F17IFCA. This report is produced
        twice a week to provide the Valuation and Mortgage Credit
        Branch Chiefs with information about the types of
        processing steps completed.

   C.    Summary Case Status Report, F17IMCA. This report is
        produced twice a week to provide the Valuation and
        Mortgage Credit Branch Chiefs with information about cases
        awaiting processing by HUD, fee or staff appraisers, fee
        examiners, or awaiting submission by the mortgagee.

        Specific cases numbers are shown on the various Workload
        Status Reports, F17IHC series and the Pending Cases Report
        (which is sorted by mortgagee), F17JACA.

   D.    Summary of Single Family Operations, F17JLCA. This report
        is the principal source of information on single family
        activities. It shows work processed, processing times,
        the number and age of cases awaiting processing.

        This report is produced semi-monthly, monthly, quarterly,
        and fiscal-year-to-date.

   E.    Activity by Location/Mortgagee, F17NDCA. This report
        shows the volume of applications and endorsements by
        individual mortgagees. It is produced quarterly and
        provides Field Offices with a tool to monitor requests for
        HUD-processing by mortgagees approved under Direct
        Endorsement.


                          CHAPTER 5. PROGRAM MANAGEMENT

5-1 PURPOSE. <TOP> The authority to participate in the Direct Endorsement
   program is a privilege. This is evidenced by HUD's reliance on the
   mortgagee's certification for the purpose of endorsing the mortgage.
   The mortgagee maintains this privilege by recommending for endorsement
   only mortgages which comply with HUD requirements. Because the
   substantive review occurs after the mortgage is endorsed, it is
   imperative that mortgagee performance be continually monitored and
   that remedial action, when necessary, be taken by the Field Office as
   soon as underwriting deficiencies are identified. The objective of
   the remedial action is to either improve mortgagee performance or to
   remove noncomplying mortgagees from the program. This chapter sets
   forth the actions which can be taken against noncomplying mortgagees
   and mortgage employees.

5-2 FIELD OFFICE MONITORING. <TOP> HUD Field Offices monitor the
performance of
   mortgagees, underwriters, and mortgagees' technical staff by reviewing
   cases during post-endorsement technical reviews, analyzing quality
   control reports, following upon construction complaints or consumer
   complaints, and sharing information with other field offices, HUD's
   monitoring division, the Mortgagee Review Board, and the Housing Civil
   Penalties Panel.

   A.    Post-Endorsement Technical Review. Chapter 4 discusses problems
        which may be detected during a review and gives examples of
        problems which should yield fair and poor ratings.

        The Underwriting Report, Form HUD-54118 is the basic method of
        notifying the mortgagee that underwriting is unsatisfactory. The
        Underwriting Report, which accompanies the case binder through
        the post-endorsement technical review, is sent to the mortgagee,
        the fee appraiser and the fee inspector, as appropriate, after
        completion of the technical review to inform the underwriter,
        appraiser, inspector and closing supervisor of any deficiencies.
        If significant errors were found, the original report is placed
        in the Field Office's file on that Direct Endorsement mortgagee.
        If requested by the mortgagee, HUD will send the Underwriting
        Report to the mortgagee's main office or to the company's quality
        control department. However, the mortgagee must provide the HUD
        Field Office with mailing labels if the reports are to be sent to
        any address other than the branch office which originated the
        case.


   B.    Quality Control Reports. Early default and claim reports and a
        variety of CHUMS reports are available to assist Field Offices
        with their management responsibilities. Analysis of these
        reports will alert the Field Office to continuing problems and
        trends.

        1)    Early Default and Claim Report. This report is produced
             quarterly using data extracted from the Single Family
             Insurance in Force File, A43, and the Single Family Default
             Monitoring System, R17.

             It shows, for each mortgagee, the number and percentage of
             recently originated loans that are in default or have gone
             to claim. This is the key quality control report as poor
             underwriting practices would probably result in higher
             default and claim rates.

        2)    Analysis of Technical Reviews, F17JYCA. This CHUMS report
             is produced monthly, quarterly, and fiscal-year-to-date. It
             shows, for each mortgagee, the number of mortgages insured,
            technical reviews completed, and ratings given by the
            technical branches.

       3)    Underwriter Performance Report, F17GBCA. This CHUMS report
            is produced monthly, quarterly, and fiscal-year-to-date and
            shows ratings given to the underwriter by the technical
            branches.

       4)    Appraiser Performance Report, F17GCCA. This CHUMS report is
            produced monthly, quarterly, and fiscal-year-to-date and
            shows ratings given to the appraiser during the technical
            review cycle based on a desk review of the appraisal.

       5)    Field Review Report, F17FOCA. This CHUMS report is produced
            monthly (showing quarter-to-date data) and quarterly
            (showing fiscal-year-to-date data). It provides information
            on appraisals performed by fee panel members and mortgagee
            staff appraisers for both HUD-processed and Direct
            Endorsement cases. The report shows the ratings given to
            the appraiser during the field review of the appraisal.

  C.    Manual Records. The only manual records kept for Direct
       Endorsement relate to the mortgagee's approval and performance.
       Copies of Underwriting Reports which have significant findings
       are filed in the mortgagee's file. The Director of Housing
       Development, Field Office manager, or Field Office Chief should
       review these files on a regular basis to ensure that mortgagees
       are performing acceptably and that technical review ratings are
       consistent with findings noted on the Underwriting Reports.

5-3 TYPES OF DEFICIENCIES. <TOP> This paragraph offers parameters to
consider
   the seriousness of noncompliance actions.

  A.   Level One Deficiencies.

       1)    Definition. A level one deficiency is generally any minor
            underwriting deficiency which does not change the
            eligibility determination of the property, the mortgagor,
            the mortgage amount or the term.

       2)    Examples of level one deficiencies are the following:
            improperly completed builder certifications; missing
            construction exhibits that do not preclude inspection;
            appraisal reports without a conventional sale; use of a
            comparable sale more than six months old; insufficient
            documentation of compensating factors; and use of an
            outdated credit report.

            Level one deficiencies also include more serious
            deficiencies which the mortgagee is able and willing to
            correct, such as obtaining flood insurance coverage for a
            dwelling located in a flood hazard area and increasing the
          amount of escrow when the mortgagee's assurance of
          completion escrow is insufficient as submitted with the
          endorsement request.

     3)    Response. Isolated incidents are brought to the attention
          of the underwriter via the Underwriting Report. Patterns or
          continual problems should result in probation or withdrawal
          of Direct Endorsement approval.

B.   Level Two Deficiencies.

     1)    Definition. A level two underwriting deficiency is one
          which, when corrected, results in a significant increase in
          mortgage risk, through either greater credit risk or a
          decrease in property security. It is also one which
          involves acceptance of a mortgagor or property not permitted
          by HUD policy, such as a condominium unit in an ineligible
          project.

     2)    Examples of level two deficiencies include: gross
          miscalculation of income; acceptance of a property seriously
          deficient of the required standards; missing builder
          certifications; construction exhibits inadequate for
          inspection; construction changes that affect value without
          proper change orders; and utilization of the mortgagee's
          assurance of completion when the dwelling involved is not
          habitable, safe and essentially complete.

     3)    Response. Appropriate Field Office response to level two
          underwriting deficiencies requires careful consideration of
          the deficiency in terms of the previous Direct Endorsement
          performance of the mortgagee. A deficiency of this nature
          should result in probation or withdrawal.

C.   Level Three Deficiencies.

     1)    Definition. A level three deficiency is one which involves
          an action by the mortgagee to misrepresent either the
          financial capacity of the applicant-mortgagor or the
          condition of the property offered as security for the
          mortgage.

     2)    Examples of level three deficiencies include: fraudulent
          information or documentation, such as falsified
          Verifications of Employment; false certifications, such as
          reporting a delinquent loan as being current; omitting
          conditions relating to the health and safety of the
          property; and construction exhibits that do not represent
          the property resulting in a significant change in the
          security of the mortgage.

     3)    Response. Due to the severity of this type of deficiency,
          the appropriate response could include: (a) imposing a
           limited denial of participation, (b) withdrawal of Direct
           Endorsement approval, (c) referral to the Mortgagee Review
           Board to consider withdrawing the mortgagee's HUD approval,
           (d) referral to the Participation and Compliance Division in
           Headquarters to consider debarment proceedings, (e) referral
           to the Director of the Office of Lender Activities and Land
           Sales Registration for consideration of civil money
           penalties by the Housing Civil Penalties Panel or the
           Mortgagee Review Board, or (f) referral to the Regional
           Office of the Inspector General.

5-4 APPLICATION OF SANCTIONS. <TOP> The sanctions described in this
Chapter
   have been designed to give Field Office staff the flexibility to
   respond appropriately to any noncompliance action of a mortgagee or an
   individual. Noncompliance actions vary significantly in their scope
   and effect. The more serious the scope and effect of the actions, the
   more serious would be the sanction applied by the Field Office.

   In deciding what sanction is appropriate, consider the seriousness and
   extent of the violations, the degree of fault on the part of the
   individual or the mortgagee, and any mitigating factors.

   Withdrawal actions should be taken particularly where there is a
   pattern or practice of actions demonstrating noncompliance with the
   Direct Endorsement program requirements or where any pre-closing
   review status period (whether initially imposed or imposed under terms
   of a probation) has failed to demonstrate that the mortgagee can
   perform satisfactorily.

   A.    Probation or Withdrawal of Direct Endorsement Approval. The
        authority to apply the mortgagee sanctions (probation and
        withdrawal) rests with the same individual who has the authority
        to approve mortgagees for Direct Endorsement.

   B.    Indemnification Agreement. The authority to enter into an
        indemnification agreement rests with the Office of Lender
        Approval and Land Sales Registration.

   C.    Limited Denial of Participation. The authority to impose a
        Limited Denial of Participation rests with the Field Office, and
        with the Deputy Assistant Secretary for Single Family Housing.
        Refer to HUD Handbook 1300.13 for further guidance.

   D.    Withdrawal of HUD-approval and Administrative Sanctions against
        Mortgagees. The Mortgagee Review Board is the sole organization
        within HUD authorized to take administrative action against
        HUD-approved mortgagees. Refer to HUD Handbook 4060.2.

   E.   Debarment and Suspension. Any Assistant Secretary of HUD, the
        General Counsel of HUD or the President of the Government
        National Mortgage Association (GNMA) may debar or suspend
        participants or contractors. Refer to HUD Handbook 1300.13 for
        further guidance.

   F.    Civil Money Penalties. Field offices may refer program
        participants for consideration of civil money penalties by the
        Housing Civil Penalties Panel (HCPP) or the Mortgage Review
        Board. The Office of Lender Activities & Land Sales Registration
        (OLA) serves as the staff to the HCPP and the Mortgagee
        Review Board.

5-5 PROBATION. <TOP> When a mortgagee fails to comply with the Direct
   Endorsement program requirements, the Field Office may place the
   noncomplying office on probation.

   A.    Probation Elements. Probation consists of one or more of the
        following elements:

        1)    Training. The mortgagee's underwriter, or other technical
             staff, may be required to attend appropriate training
             sessions.

        2)    Pre-closing Review Status. The mortgagee may be placed back
             in pre-closing review status. Mortgagee submissions would
             then be subject to technical underwriting reviews and firm
             commitment processing prior to endorsement.

             The pre-closing review status continues until the mortgagee
             demonstrates, through satisfactory performance, that the
             underwriting shortcomings have been corrected, or until the
             mortgagee's Direct Endorsement approval is withdrawn.

        3)    Mortgagee Audit. The Field Office may require the mortgagee
             to perform a procedural underwriting review and report the
             results to HUD.

        4)   Quality Control Plan. The Field Office may require the
             mortgagee to make changes to its quality control plan.

   B.    Notification Procedure. A written notice of the probation action
        is sent to the mortgagee. The notice explains which of the
        probation elements are being applied and describes the
        noncomplying action which precipitated the probation. The
        probation is effective upon receipt by the mortgagee of the
        notice. The format of the probation letter is in Appendix 12.

5-6 WITHDRAWAL OF DIRECT ENDORSEMENT STATUS. <TOP> Depending
upon the
   nature and extent of the noncompliance with the requirements of the
   Direct Endorsement program, the HUD Field Office may withdraw the
   approval of the noncomplying office to participate in the program.

   A.    Notification Procedure. A written notice of the withdrawal
        action is sent to the mortgagee. The withdrawal is effective
        upon receipt by the mortgagee of the notice. The notice states
        the grounds for the action and provides the mortgagee the right
        to an informal conference before the decision maker. Such
        hearing, if requested, is to be arranged within 15 days of the
        mortgagee's request. The mortgagee may be represented by
        counsel.

        A copy of the withdrawal letter is to be sent to the Office of
        Lender Activities and Land Sales Registration in Headquarters.
        Another copy is to be sent to the Single Family Development
        Division in Headquarters. The format of the withdrawal letter is
        in Appendix 13.

   B.    Hearing. The purpose of the hearing is to provide the mortgagee
        the opportunity to address the grounds for the action as stated
        in the notice, make documentary and oral presentations and advise
        the decision maker what, if any, corrective action may have been
        taken to address the problems identified.

   C.    Hearing Follow-up. Following the hearing, the decision maker
        advises the mortgagee in writing whether the withdrawal is
        rescinded, modified or affirmed.

5-7 EFFECT OF DIRECT ENDORSEMENT SANCTIONS. <TOP> The probation
and
   withdrawal sanctions are applied to the mortgagee office (branch or
   main) which submitted the noncomplying cases. The action applies only
   to the one office of the mortgagee and only to the jurisdiction of the
   Field Office.

   In those instances where an underwriter serves more than one office of
   a mortgagee in one or more HUD Field Office jurisdictions, the
   application of probation and/or withdrawal sanctions by one Field
   Office does not automatically affect the eligibility of the
   underwriter to serve other offices of the mortgagee in the same or
   other Field Office jurisdictions. The Field Office which applies
   mortgagee sanctions is to notify other offices. Other Field Offices
   would than act accordingly.

5-8 INDEMNIFICATION AGREEMENTS. <TOP> Violations of HUD's
requirements which
   significantly increase the Department's risk and were caused by fraud
   or serious negligence on the part of the mortgagee should be referred
   to the Monitoring Division of the Office of Lender Activities and Land
   Sales Registration. The Monitoring Division may schedule an on-site
   review of the mortgagee's origination practices. The Office of Lender
   Activities and Land Sales Registration may request that the mortgagee
   enter into an Indemnification Agreement with the Department in lieu of
   referring the matter to the Mortgagee Review Board.

   These agreements essentially guarantee that the Department will not
   suffer a loss on the loans. The mortgagee agrees to abstain from
   filing a claim or to reimburse the Department if a subsequent holder
   files a claim. The term of the agreement varies with the severity of
   the violation, typically they are effective for five years from the
   date of endorsement.

5-9 WITHDRAWAL OF HUD APPROVAL. <TOP> Serious noncompliance with
the
    requirements of the Direct Endorsement program are to be referred to
    the Mortgagee Review Board and may result in withdrawal by the Board
    of the mortgagee's basic HUD approval. Withdrawal of HUD approval
    applies to the Mortgagee's main office and all branches. While HUD
    approval is withdrawn or suspended, the mortgagee may not originate or
    purchase any insured mortgages.

5-10 CIVIL MONEY PENALTIES. <TOP> The Department may impose civil
money
   penalties on program participants who knowingly and materially violate
   relevant program statutes, regulations and handbook requirements.

   A.    Background. The HUD Reform Act of 1989 was signed into law on
        December 15, 1989. Section 107 of the Reform Act authorizes the
        Department to impose civil money penalties on program
        participants. The Reform Act and the implementing regulations
        (24 CFR Part 30) provide for increased program enforcement
        efforts on the part of the Department. A civil money penalty may
        be imposed in addition to other administrative sanctions or any
        other civil or criminal penalty.

   B.    Housing Civil Penalties Panel (HCPP) and Mortgagee Review Board.
        The HCPP, which is within the Federal Housing Administration, is
        responsible for reviewing recommendations for civil money
        penalties and proposing the imposition of civil money penalties
        against program participants. The HCPP is composed of the
        following members, or their designees: Assistant Secretary for
        Housing-Federal Housing Commissioner, Chairman; Deputy Assistant
        Secretary for Operations; Deputy Assistant Secretary for
        Multifamily Housing Programs and the Deputy Assistant Secretary
        for Single Family Housing. The HCPP also includes the Assistant
        Secretary for Fair Housing and Equal Opportunity, or designee (in
        cases involving violations of the Department's nondiscrimination
        requirements). A designee of the Office of General Counsel
        serves in a non-voting advisory capacity to the HCPP.

        The Department's Mortgagee Review Board is also authorized to
        impose civil money penalties against mortgagees. This authority
        is in addition to the Board's other functions.

   C.    Office of Lender Activities & Land Sales Registration. The
        Office of Lender Activities & Land Sales Registration (OLA)
        serves as the staff to the HCPP and the Mortgagee Review Board.
        The OLA coordinates all referrals and is the designated
        contact point for all civil money penalty cases involving
        Housing's programs. The OLA notifies program participants of
        the Department's intention to seek civil money penalties,
        presents cases to the HCPP and Mortgagee Review Board for action,
     negotiates Settlement Agreements and notifies program
     participants of all HCPP and Mortgagee Review Board decisions.

D.    Field Office Referrals of Civil Money Penalty Cases. Field
     Offices may refer program participants for consideration of civil
     money penalties by the HCPP or the Mortgagee Review Board. A
     referral must be based upon adequate documentation that a program
     participant has knowingly and materially engaged in violations of
     the Department's rules or requirements. Generally, the term
     "materially" means that the violations have a financial impact on
     the Department or may have influenced a Departmental decision,
     i.e. whether to endorse a mortgage for insurance. The term
     "knowingly" means that the program participant had actual
     knowledge of the violations or was acting with deliberate
     ignorance or reckless disregard of the Department's requirements.

     All referrals are to be sent to the Director, OLA The
     referral must contain a report which includes a full factual
     background of the violations, citation(s) of the Department's
     regulations or requirements that have been violated, and all
     available supporting documentation that evidences the violations
     and all information that the program participant has previously
     submitted to the field office. The Director of the OLA will
     coordinate the referral and, if appropriate, submit the case to
     the HCPP or the Mortgagee Review Board for action.

E.    Examples of Violations for Which Civil Money Penalties May Be
     Imposed on Mortgagees. A civil money penalty may be imposed by
     the Department against a mortgagee for knowing and material
     program violations that include:

     1)    Transfer of an insured mortgage to a mortgagee not approved
          by the Department.

     2)   Use of escrow funds for any purpose other than that for
          which they were received.

     3)    Falsely certifying to the Department or submitting to the
          Department a false certification by another person.

     4)   Failure to comply with mortgage servicing requirements.

     5)   Submitting false information to the Department in connection
          with any insured mortgage transaction.

     6)    Hiring or employing an individual such as an officer,
          director, principal or employee whose duties involve
          programs administered by the Department, while that
          individual is under suspension or debarment by the
          Department.

     7)    Failing to comply with any agreement, certification or
          condition set forth, or applicable to, the application of
          a mortgagee for approval by the Department.

     8)    Failure by a mortgagee to segregate escrow funds received
          from mortgagors and to deposit such funds in a special
          account with a federally insured depository institution.

     9)    Hiring or retaining an agent whose duties involve programs
          administered by the Department while such agent is under
          suspension or debarment by the Department.

     10) Failure to remit, or timely remit, mortgage insurance
        premiums, loan insurance charges, or late charges or
        interest penalties.

     11) Failure to timely submit documents that are complete and
        accurate in connection with a conveyance of property or a
        claim for insurance benefits.

     12) Failure to comply with the provisions of the Real Estate
        Settlement Procedures Act (RESPA).

5-11 EFFECT OF SANCTIONS ON CASES IN PROCESS. <TOP> The application
of Direct
    Endorsement sanctions against a mortgagee does not affect the
    eligibility of the mortgagee to participate in HUD's single family
    programs through the conditional/firm commitment process.

  Arrangements will be made for those mortgage loan applications
  undergoing the mortgagee's Direct Endorsement origination process.
  Mortgages closed on or before the date the mortgagee receives the
  notification will be accepted for Direct Endorsement processing. All
  other applications in process are to be submitted to HUD for prior
  approval processing prior to closing.

  If HUD approval is withdrawn and the mortgagee does not intend to
  seek reinstatement, cases must be submitted to the HUD Field Office
  for prior approval processing within five days of receipt of the
  withdrawal letter. Loans covered by firm commitments may be closed
  and insured in the name of the mortgagee. Conditional commitments
  must be transferred or assigned to another HUD-approved mortgagee.

5-12 SANCTIONS AGAINST INDIVIDUALS. <TOP> Where the situation
warrants, take
   action against the individual as well as the mortgagee. See HUD
   Handbook 1300.13.

  Under the Department's regulations (24 CFR Part 24) there are
  administrative sanctions which may be taken against persons who lack
  business responsibility. The sanctions discussed in this paragraph
  may be applied against mortgagee employees approved for Direct
  Endorsement participation, such as the underwriter, a staff appraiser,
  a staff mortgage credit examiner and a staff inspector.
Underwriters who falsify their credentials or experience should have
their approval revoked. In addition, apply other administrative
sanctions as appropriate.

Any criminal, fraudulent or other seriously improper conduct of an
underwriter may be attributed to the organization with which the
underwriter was connected when the impropriety was performed within
the course of the underwriter's official duty, resulting in
appropriate administrative sanctions against the mortgagee.

A.    Limited Denial of Participation. A Regional Administrator or a
     Field Office Manager may impose a Limited Denial of Participation
     (LDP) against any participant or contractor, except HUD-approved
     mortgagees. Officers and employees of mortgagees may also be
     sanctioned, unless that would be a de facto sanction against the
     mortgagee.

     In each case, even if the offense or violation is of a criminal,
     fraudulent or other serious nature, the decision to order an LDP
     is discretionary and should be imposed only if in the best
     interests of the Government.

     1)    Causes for ordering a Limited Denial of Participation are
          listed in 24 CFR 24.705.

          Included are: (a) approval of an applicant who is an
          unsatisfactory risk; (b) falsely certifying in connection
          with any HUD program; (c) failure to proceed in accordance
          with the Direct Endorsement underwriting requirements which
          include the Department's written regulatory and handbook
          requirements relating to all aspects of mortgage loan
          origination (architectural review, property analysis,
          mortgage credit analysis, underwriting procedures).

     2)    Period and Scope. A Limited Denial of Participation extends
          only to participation in the program under which the cause
          arose. In terms of an LDP, program means any or all of the
          functions within the jurisdiction of an Assistant Secretary.
          Where the LDP is based on an indictment, conviction, or
          suspension or debarment by another agency, it need not be
          based on offenses against HUD and it may apply to all
          programs of HUD.

          The sanction may be imposed for a period not to exceed 12
          months and is limited to the geographic jurisdiction of the
          office imposing it.

     3)    Written Notice. The individual is sent a written notice of
          the action, by mail, return receipt requested. The sanction
          is effective as of the date of the notice. When the
          sanction is taken against an individual employed by the
          mortgagee, a copy of the notice is sent to the mortgagee.
             The notice provides the grounds upon which the action is
             based and the potential effect of the sanction. The notice
             advises the individual of his right to request in writing,
             within 30 days of receipt of the notice, a conference on the
             sanction, and the right to have such conference held within
             10 business days of receipt of the request by HUD.

        4)    Conference. Upon receipt of a written request for a
             conference, the decision maker in the HUD Field Office will
             arrange such a conference within 10 business days. The
             decision maker may designate another official to conduct the
             conference.

             The sanctioned individual may be represented by counsel and
             may present all relevant materials to the official, or
             designee.

             After consideration of the materials presented, the official
             will advise the individual, in writing, within 20 days after
             the conference and receipt of materials, of the decision to
             withdraw, modify or affirm the order, the individual may
             request an appeal.

             Any individual desiring an appeal must file a written
             request for a hearing before an Administrative Law Judge
             authorized to conduct these proceedings by HUD's Secretary
             or his designee. The appeal request must be sent to the
             Debarment Docket Clerk, Department of HUD 451 Seventh
             Street, SW, Washington, DC 20410-8000.

        5)    Combined TDP/LDP List. Field Offices must notify HUD's
             Participation and Compliance Division when LDP actions are
             taken. That Division distributes a list of Temporary
             Denials of Participation (the precursor to LDP) and Limited
             Denials of Participation. Requests for this list would be
             directed to the Participation and Compliance Division, 451
             Seventh Street, SW, Washington, DC 20410-8000.

   B.    Suspension and Debarment. In addition to the actions described
        above, serious noncompliance is referred to HUD Headquarters
        and may result in suspension and debarment sanctions. These
        sanctions, taken by an Assistant Secretary, are effective
        nationwide and exclude the individual from participating in any
        HUD program. The sanctioned individual is entitled to appeal
        the action. Upon appeal, a hearing will be held before an
        Administrative Law Judge.

                        APPENDIX 1 <TOP>

Click Here to Download Attachment

                        APPENDIX 2 <TOP>
      Underwriter/Mortgagee
      Certification

      Direct Endorsement Program

                        APPENDIX 3 <TOP>

                   UNDERWRITER CERTIFICATION

     The underwriter executing form HUD-54113 has personally reviewed
the appraisal report (if applicable) and credit application, including the
analysis performed on the mortgage credit analysis worksheet, and
certifies, for and on behalf of the mortgagee, that the mortgage complies
with HUD underwriting requirements as contained in all outstanding HUD
handbooks and Mortgagee Letters, and is in compliance with the applicable
regulations described below. The mortgage loan is eligible for mortgage
insurance under the Direct Endorsement program. This underwriter
certification is in addition to any certifications required of the
mortgagee, the mortgagor, or both on form HUD-92900-A. If a requirement
from 24 CFR Part 203 is incorporated in a different regulation by
cross-reference (e.g., 203.40 in Certification 1 is cross-referenced in
  221.1), a reference to the Part 203 requirement in a certification shall
also be deemed a reference to each instance where the requirement is
incorporated by cross-reference. Each of the below-listed certifications
apply to the loan submitted for endorsement, except to the extent the
certification itself defines the situation to which it applies.

(1)    The mortgaged property is located in a community where the housing
      standards and location meet the requirements of 24 CFR 203.40 or
       234.63 (condominiums).

(2)    There is located on the mortgaged property a dwelling unit designed
      principally for residential use for not more than four families, as
      required by 24 CFR 203.38, or for eleven families if 220.20 is
      applicable.

(3)    The mortgage is executed by a mortgagor who is to occupy the dwelling
      as a principal residence (as described in 24 CFR 203.18(f)(1) or
      234.27(e)(1)) or, if the mortgagor is a non-occupant, the mortgagor
      is eligible under 24 CFR 203.18(f)(3), 234.27(e)(3), or is purchasing
      the dwelling from HUD.

(4)    The mortgagor's monthly mortgage payments will not be in excess of
      his or her reasonable ability to pay, as required either under 24
      CFR 203.21, 203.45(d) (GPMs), 203.47(a) (GEMs), 220.1, or
       234.36 (condominiums).

(5)    The mortgagor's income is and will be adequate to meet the periodic
      payments required to amortize the mortgage submitted for insurance,
      as required under 24 CFR 203.33, or 234.56 (condominiums).

(6)    The mortgagor's general credit standing is satisfactory, as required
      under 24 CFR 203.34, or 234.57.
(7)    The buildings on the property secured by the mortgage comply with
       203.17(e) and property standards issued by HUD as required by the
      applicable provisions of 24 CFR part 200, subpart S, for proposed
      construction, and 203.39, 203.50(d) (if a Section 203(k)
      mortgage), 220.15 (urban renewal), 234.25(d) (if a condominium
      unit) or the standards set forth in HUD handbook 4905.1 for
      existing construction as applicable.

(8)    In cases where the mortgaged property is subject to a junior
      mortgage or lien, the applicable requirements of 24 CFR 203.32(b),
      (c) or (d), or 234.55(b), (c) or (d) (condominiums), are met.

(9)    For a condominium unit, the mortgaged property is in a project that
      has been approved by HUD and all other requirements under 24 CFR
       234.26 are met.

(10) In the case of proposed or new construction in a new subdivision,
    the property covered by the application for insurance meets the
    requirements of 24 CFR 203.12.

(11) The property covered by the mortgage is not located in an area that
    is precluded from receiving Federal financial assistance pursuant to
    the Coastal Barrier Resources Act (Pub. L. 97-349).

(12) If the mortgage loan is for rehabilitation under Section 203(k),
    the mortgage also meets the requirements of 203.50(c) (dwelling
    at least one year old), 203.50(d)(2) (meets energy conservation
    standards), and 203.50(e) (is an acceptable risk).

(13) If the property is located in an older declining urban area and is
    to be insured under Section 223(e) of National Housing Act, it also
    meets the additional requirements of 24 CFR 203.43a.

SPECIFIC CERTIFICATIONS FOR SECTION 235(r) MORTGAGES. The
certifications contained in Items (1) through (13) do not apply to
mortgages insured under Section 235(r). The certifications which do
apply are the following:

(14) The mortgagor meets all the eligibility requirements of 24 CFR
    235.1202(b)(6)(i) through (viii).

(15) The monthly payments of principal and interest at the 235(r) interest
    rate on the mortgage submitted for insurance are less than the
    monthly payments of principal and interest on the mortgage being
    refinanced.

(16) The computation of the amount of assistance payments which the
    Secretary will pay on behalf of the mortgagor was computed in
    accordance with the formula contained in 24 CFR 235.1210(a).


                     APPENDIX 4 <TOP>
              MORTGAGEE'S CERTTFICATIONS

    The mortgagee executing form HUD-54113 has personally reviewed the
mortgage documents and the application for insurance endorsement and
certifies that the mortgage is eligible for mortgage insurance under HUD's
Direct Endorsement program. The mortgagee has submitted all appropriate
documents, properly executed, as required by all outstanding HUD handbooks
and Mortgagee Letters. This mortgagee certification is in addition to any
certifications required of the mortgagee, the mortgagor, or both on forms
HUD-92800 or 92900-A. If a requirement from 24 CFR Part 203 is
incorporated in a different regulation by cross-reference (e.g., 203.17 in
Certification 1 is cross-referenced in 222.1), a reference to the Part 203
requirement in a certification shall also be deemed a reference to each
instance where the requirement is incorporated by reference. Each of the
below-listed certifications apply to the loan submitted for endorsement,
except to the extent the certification itself defines the situation to
which it applies.

GENERAL CERTIFICATIONS. The following general certifications apply to all
mortgage loans categories eligible for insurance under the Direct
Endorsement program. Variations from the general certifications for
mortgages with special features are listed here as alternative
certifications. Additional requirements are listed below as specific
certifications.

(1) The mortgage is a first lien and contains the mortgage provisions
   required by 24 CFR 203.17 (except as provided in 203.50(i) for
   rehabilitation loans under Section 203(k) of National Housing Act); or

    221.25, 221.30, 221.32, 221.35 or 221.40, and 221.45 for low- and
   moderate income mortgagors under Section 221(d)(2) of National
   Housing Act; or

    234.25 for condominiums; or

   235.22 for refinancing mortgages insured under Section 235(r) of the
   National Housing Act.

(2) The mortgage is on real estate held in fee simple or on a leasehold
   under a lease for not less than 99 years which is renewable, or under
   a lease which otherwise meets the requirements of 24 CFR 203.37 or

    234.65 for condominiums.

(3) The stated mortgage amount satisfies the requirements of:
    203.18, 203.18a, 203.18b, or 203.29; or

    203.50(f) or (g) for rehabilitation loans; or

                     Page 1

    220.25 and 220.30 (urban renewal); or
    221.10, 221.11, 221.20, 221.50, for low- and moderate-income
   mortgages; or

    234.27 or 234.49 for condominiums; or

   235.1202(b)(1) for refinancing mortgages under Section 235(r) of the
   National Housing Act; or

    240.5 for fee title purchasers; or

   For a mortgage given to refinance an existing HUD-insured mortgage
   pursuant to Section 223(a)(7) of the National Housing Act, the stated
   amount satisfies the limitations set forth in 203.43(c) and 234.52;
   or

   If the mortgage involves refinancing to be insured under 24 CFR
    221.21, the mortgage, in addition to the limitations contained in
     221.10, 221.11, and 221.20, does not exceed the estimated cost of
   repair and rehabilitation and the amount required to refinance the
   existing indebtedness secured by the property; or

   If the mortgage is on property sold by HUD, the mortgage amount is
   that determined by the Secretary under 24 CFR 203.43(k) and Part 291.

(4) The mortgagor has made the minimum investment required by 24 CFR
    203.19; or

    220.35 (urban renewal); or

    221.50 (low- and moderate income); or

    234.28 (condominiums); or

    203.43(k) for properties sold by HUD where the Secretary has
   determined the minimum cash investment; and

   no prepaid expenses, other than those listed in 24 CFR 221.54 were
   included in determining the mortgagor's minimum investment.

(5) If the mortgaged property is in a flood plain, the mortgage meets the
   flood insurance requirements set forth in 203.16a or 234.17.

(5A) The property is free of legal restrictions on conveyance as required
   by 24 CFR 203.41, 203.512 or 234.66, except for restrictions
   specifically permitted by those regulations.

SPECIFIC CERTIFICATIONS. The following specific certifications reflect
additional special features of the mortgage loan categories eligible for
insurance under the Direct Endorsement program.

(6) If the property is located in an older declining urban area and the
   mortgage is to be insured under Section 223(e) of National Housing
   Act, it also meets the requirements of 24 CFR    203.43a or 234.68.

(7) If the mortgage is an adjustable rate mortgage it also meets the
   requirements established under 24 CFR 203.49 or 234.79.

(8) If the mortgage is a graduated payment mortgage it also meets the
   requirements established under 24 CFR 203.45 or 234.75; if a growing
   equity mortgage it also meets the requirements established under 24
   CFR 203.47 or 234.77;

(9) If the property is located in an outlying area and is insured under
   Section 203(i) of the National Housing Act, the mortgage also meets
   the requirements of 24 CFR 203.18(d).

(10) If the property to be insured is for a borrower who is a disaster
   victim under Section 203(h) of the National Housing Act, it also meets
   the requirements of 24 CFR 203.18(e).

(11) If the mortgage loan is for rehabilitation under Section 203(k) of the
   National Housing Act, the mortgage also meets the requirements of 24
   CFR 203.50.

(12) If the mortgage to be insured is on a property in an area determined
   to be a federally impacted area under Section 238(c) of National
   Housing Act, it also meets the requirements of 203.43e.

(13) If the mortgage to be insured is on Indian lands and is insured
   pursuant to Section 248 of the National Housing Act, it also meets the
   requirements set forth in 24 CFR 203.43h.

(14) If the mortgage to be insured is on Hawaiian Home Lands property and
   is insured pursuant to Section 247 of the National Housing Act, the
   mortgage also meets the requirements of 203.43i including the
   eligibility requirements set forth in 203.43(i).

(15) If the mortgage to be insured is eligible as an openend advance, it
   also meets the requirements of 203.44 or 234.70 (condominiums).

(16) If the mortgage is a service person's mortgage to be insured under
   Section 222 of the National Housing Act, it also meets the
   requirements of 24 CFR Part 222.

(17) If the mortgage to be insured is for fee title purchases under Section
   240 of the National Housing Act, it also meets the requirements of 24
   CFR Part 240.

(18) If the mortgage to be insured is for loans for urban renewal under
   Section 220(d) of the National Housing Act, or if for a home
   improvement loan under Section 220(h) of the National Housing Act, it
   also meets the requirements of 24 CFR Part 220, Subpart A.

(19) If a refinance from a Section 235 mortgage to a Section 203(b)
   Streamline mortgage and the recapture mortgage has been subordinated
   to the Section 203(b) Streamline mortgage that is submifled for
   insurance, that the recapture mortgage is a second lien; provided that
   in the case where there is a loan made, held or insured by a Federal,
   State or local governmental agency which was approved by the Secretary
   as a second lien and which has been subordinated to the mortgage being
   submitted for insurance, the recapture mortgage may be a third lien.

SPECIFIC CERTIFICATIONS FOR SECTION 235(r) MORTGAGES. The
certifications shown as Items (4), and (6) through (19), do not apply to
mortgages insured under Section 235(r) of the National Housing Act. The
certifications in addition to Item (1) through (3) and (5) herein, are the
following:

(20) The mortgage term meets the requirements of 24 CFR 235.1202(b)(2).

(21) The interest rate on the mortgage does not exceed the maximum rate as
   computed in accordance with 24 CFR 235.1202(b)(3) and such interest
   rate is less than the interest rate shown on the mortgage being
   refinanced.

(22) The refinancing costs paid by the mortgagee, if any, meet the
   requirements of 24 CFR 235.1202(b)(4).

(23) The mortgagor has not received payments for the costs of refinancing,
   nor have the payments been made on his behalf, for the period set
   forth in 24 CFR 235.1202(b)(6)(iii).

(24) The recapture second mortgage, if applicable, has been modified and
   subordinated to the mortgage being submitted for insurance and the
   recapture mortgage is a second lien; provided that in the case where
   there is a loan made, held or insured by a Federal, State or local
   governmental agency which was approved by the Secretary as a second
   lien and which has been subordinated to the mortgage being submitted
   for insurance, the recapture mortgage may be a third lien.

                     APPENDIX 5 <TOP>

Click Here to Download Attachment

                     APPENDIX 6 <TOP>

Click Here to Download Attachment

                     APPENDIX 7 <TOP>

Click Here to Download Attachment

                    APPENDIX 8 <TOP>

              FORMAT - MORTGAGEE APPROVAL
            LETTER - PRE-CLOSING REVIEW STATUS

PURPOSE:       To notify applicant mortgagees of acceptance in Direct
          Endorsement program on pre-closing review status.

PREPARED BY: Mortgagee Approval Specialist, with appropriate
        assistance from technical branches, for signature of
        decision maker.

FORMAT

TO: Mortgagee Name
   Address
   Ten Digit Mortgagee Number (I.D.)

   We have reviewed the qualifications of your organization and
have determined that the Direct Endorsement mortgagee eligibility
requirements have been met. With respect to the staff personnel you
have nominated, those listed below meet the necessary requirements
and have satisfactorily completed the appropriate training sessions.

NAME                      EXPERTISE         CHUMS ID

____________________________           UNDERWRITER         ______

____________________________           ___________        ______

____________________________           ___________        ______

    Accordingly, the office noted above is approved to submit
mortgages in the Direct Endorsement program on the pre-closing review
status to this HUD Field Office. During the pre-closing review
period, we will perform a complete technical review of each
submission. If found to be eligible, a firm commitment will be
issued. This pre-closing review will include at least 15
submissions. Should these 15 submissions fail to demonstrate
acceptable underwriting, the pre-closing review status will be
extended. We will notify you when the pre-closing review period has
been successfully completed.

    HUD's receipt and review of the Quality Control Plan are solely
for the purposes of determining whether the Plan addresses the Direct
Endorsement program requirements. HUD's review was not for the
purpose of approving the adequacy of any other provisions. Please be
advised that participation in the Direct Endorsement program is a
privilege accorded only to those mortgagees who have demonstrated the
ability to originate mortgage loans in accordance with HUD
underwriting policy. Accordingly, should the mortgage loans
submitted for Direct Endorsement indicate unsatisfactory
underwriting, the privilege will be reduced or withdrawn.

                                     Appendix 9 <TOP>

             FORMAT - MORTGAGEE APPROVAL
            LETTER - UNCONDITIONAL APPROVAL
PURPOSE:      To notify applicant mortgagees of successful
           completion of pre-closing review.

PREPARED BY: Mortgagee Approval Specialist, with appropriate
        assistance from technical branches, for signature of
        decision maker.


FORMAT

TO: Mortgagee Name
   Address
   Ten Digit Mortgagee Number (I.D.)

   The purpose of this letter is to inform you that the office
noted above has satisfactorily completed the pre-closing review
period of the Direct Endorsement program.

   Accordingly, your office may now begin to underwrite and close
mortgage loans without prior HUD review. Upon submission to HUD, the
case will undergo a pre-endorsement review, as outlined in the Single
Family Direct Endorsement Program Handbook (HUD Handbook 4000.4).

   Please be advised that participation in the Direct Endorsement
program is a privilege accorded only to mortgagees who continue to
demonstrate the ability to originate mortgage loans in accordance
with HUD underwriting policy. Some of the mortgage loans which you
submit will be subject to post-endorsement technical reviews. Should
the reviews indicate unsatisfactory underwriting, the privilege of
participating will be reduced or withdrawn.

    Mortgagees are required to notify HUD of any changes to the
elements reduction in (net worth; staff underwriter, appraiser,
inspector, mortgage credit examiner) upon which this approval was
based.

                                       Appendix 10

           FORMAT - MORTGAGEE DISAPPROVAL LETTER

PURPOSE:         To notify applicant mortgagee that application is not
           eligible for approval. Letter is to outline reasons
           for the disapproval.

PREPARED BY: Mortgagee Approval Specialist, with appropriate
        assistance from technical branches.

Appendix 10 <TOP>

FORMAT

TO: Mortgagee Name
   Address
   Ten Digit Mortgagee Number (I.D.)

   The purpose of this letter is to inform you that we have
received and reviewed your application to participate in the
Department's Direct Endorsement program.

   Based on the information you have provided, we have determined
that your office is not eligible for approval. The following
requirements of the program have not been satisfied:


       (List requirements not met, with appropriate

_____________________________________________________________
      references from HUD Handbook 4000.4,

_____________________________________________________________
      Single Family Direct Endorsement program)

_____________________________________________________________

                                   Appendix 11 <TOP>

       FORMAT - RETURN OF QUALITY CONTROL PLAN LETTER

PURPOSE:        To notify applicant mortgagee that Quality Control
           Plan does not meet the requirements of the Direct
           Endorsement program.

PREPARED BY: Mortgagee Approval Specialist, with appropriate
        assistance from technical branches.

FORMAT

TO: Mortgagee Name
   Address
   Ten Digit Mortgagee Number (I.D.)

   The purpose of this letter is to inform you that we have
received and reviewed your application to participate in the
Department's Direct Endorsement program.

    The Quality Control Plan which you have submitted does not meet
the requirements of the Direct Endorsement program. As outlined in
the Single Family Direct Endorsement Program Handbook, HUD Handbook
4000.4, the Quality Control Plan must adequately cover four elements:
Maintaining HUD published underwriting guidelines; a system of
corrective measures; system integrity; and a system of case review.
To qualify for Direct Endorsement approval, your Quality Control Plan
must be modified to include these four elements and the Plan must be
implemented accordingly. The modified Plan should be resubmitted to
this office.
   HUD's review of the Quality Control Plan was solely for the
purpose of determining whether the Plan addresses the Direct
Endorsement Program requirements. HUD's review was not for the
purpose of approving the adequacy of any other provisions.


                                          Appendix 12 <TOP>

            FORMAT - MORTGAGEE PROBATION LETTER

PURPOSE:        Means of official notification from HUD to mortgagee
           that probationary sanctions are being applied.

PREPARED BY: Mortgagee Approval Specialist, for signature of
        decision maker.


FORMAT

Registered/Certified Mail - Return Receipt Requested

TO: Mortgagee Name
   Address
   Ten Digit Mortgagee Number (I.D.)

   The purpose of this letter is to inform you that the above noted
mortgagee office has been placed in probation status in the
Department's Direct Endorsement program.

    As a result of the failure to underwrite mortgage loans in
accordance with HUD underwriting policy, the probationary actions
described below are being imposed against the office of your company
noted above. The probationary action is effective as of your receipt
of this letter. This action is taken pursuant to Title 24, Part
200.164(h) of the Code of Federal Regulations, as detailed in
Paragraph 5-5 of the Single Family Direct Endorsement Program
Handbook (HUD Handbook 4000.4).

    (Provide grounds for action, including case numbers and
deficiencies.)

  (If probation involves the pre-closing review of cases, letter
must provide for Direct Endorsement cases in process.)

   This action does not affect your eligibility to submit
applications for commitments to insure mortgages.

                                    Appendix 13 <TOP>

       FORMAT - WITHDRAWAL OF MORTGAGEE APPROVAL LETTER

PURPOSE:       To notify mortgagee of withdrawal of Direct
           Endorsement approval status.
PREPARED BY: Mortgagee Approval Specialist, with appropriate
        assistance from technical branches. Prepared for
        signature of decision maker.

             FORMAT - REGISTERED/CERTIFIED
             MAIL - RETURN RECEIPT REQUESTED

TO: Mortgagee Name
   Address
   Ten Digit Mortgagee Number (I.D.)

    The purpose of this letter is to advise you that the approval of
the above noted mortgagee office to participate in the Department's
Direct Endorsement program is withdrawn. This action is effective as
of your receipt of this letter. This action is taken pursuant to
Title 24, Part 200.164(h) of the Code of Federal Regulations, as
detailed in paragraph 5-6 of the Single Family Direct Endorsement
Program Handbook (HUD Handbook 4000.4).

(Provide grounds for action, including case numbers and deficiencies.
Also provide for conversion of Direct Endorsement cases in process.)

    You have the right to an informal hearing before the decision
maker to discuss this matter. You may make documentary and oral
presentations and advise what, if any, corrective action you may have
taken to address the problems identified. You may be represented by
counsel. If requested, the hearing will be arranged within 15 days
of your request.

                                       Appendix 13

       FORMAT - LIMITED DENIAL OF PARTICIPATION LETTER

PURPOSE:        To notify individual (underwriter, appraiser, mortgage
           credit examiner, etc.) of application of a limited
           denial of participation.

PREPARED BY: Appropriate technical branch chief, for signature of
        Manager and Regional Administrator.

Appendix 14 <TOP>

             FORMAT - REGISTERED/CERTIFIED

             MAIL - RETURN RECEIPT REQUESTED

TO: Individual Name
   Address

SUBJECT: Limited Denial of Participation

   This Department has developed information regarding your
(appraising, underwriting, mortgage credit analysis) of mortgage
loans submitted under HUD's Direct Endorsement program. The
information indicates your performance does not meet HUD's
requirements. (Cite case numbers and grounds).

    As a result, you are notified that, effective as of the date of
this letter, you are denied participation in the Department's Direct
Endorsement program as an approved (expertise). This action is taken
pursuant to Title 24, Code of Federal Regulations, Section 24.605.
This action will continue for 12 months unless there is a correction
or dismissal of the grounds for the denial or a demonstration that it
is in the best interest of HUD to allow your continued participation.
This action is limited to the (Direct Endorsement or single family
programs) and encompasses the jurisdiction of the (Field Office).

    Should you desire to contest this action, you have a right to
make a request in writing to the undersigned for a conference. The
request must be made within 30 days from your receipt of this letter.
At such conference, you may be represented by counsel and may present
any relevant materials. After the conference, the action will be
withdrawn, modified or affirmed.

    Be advised that any other Field or Regional Office of HUD may
similarly deny your participation in (program) on the basis of this
action without the need for an additional conference.


                     APPENDIX 15 <TOP>

     Direct Endorsement Underwriter/
     HUD Reviewer
     Analysis of Appraisal Report


                                       APPENDIX 16 <TOP>

     Direct Endorsement/
     Post-Endorsement
     Technical Review Checklist

Click Here to Download PDF Form




                     APPENDIX 17 <TOP>
               PRE-ENDORSEMENT REVIEW CHECKLIST
                  CASE NUMBER ______________

This list represents the pre-endorsement review documents required by the
CFR 203.255 and represent Statutory and Regulatory requirements.

1.      Was case submitted MORE than 60 days AFTER the date of loan
         closing?
Y    N
              If yes, does the case meet, the requirements of Late
              Submission Processing (4165.1 Chapter 3)? Note: Loan
              must be current to endorse.

2.        Form HUD-54111 (DE Request for Insurance Endorsement) or
         alternative version. (same sequence of information) (DE
         cases only)
Y    N
              Is the 54111 completed sufficiently to execute the CHUMS
              screens?

3.       Original Uniform Residential Loan Application (URLA).

Y    N
              Is the URLA signed by lender and borrower? (Lender's
              signature on the initial application is acceptable in lieu
              of lender's signature on final URLA).

4.       Form HUD-92900-A (Addendum to URLA).

Y    N
         a.   Are pages one through four signed by the appropriate
              parties?

5.        Form HUD-54113 (DE Underwriter/Mortgagee Cert) or closing cert
         if non-DE.

Y    N
         a.   If DE, is the 54113 complete and both sections signed by
              appropriate parties?

         b.   If non-DE, is the closing certification present and signed
              by the lender?

6.      Are Special Certifications and Forms executed as applicable?
       i.e., Hotel and Transient Use, intent to occupy by military
Y    N personnel, well or septic certs, local code letter (221(d)(2),
       well/septic local authority approval letter, etc.

7.       Note and Security Instrument (mortgage or deed of trust).

Y    N
         a.    Is the face page of the note and the security instrument
              marked "certified copy"? Are the note and security
              instrument signed or conformed?

         d.    Is the principal mortgage amount or maturity date greater
              than that approved by the DE underwriter?

         e.   Does the note contain all nine paragraphs of the model note?
          f.   Does the security instrument contain paragraph 9 entitled
               "Grounds for Acceleration of Debt" and paragraph 17 entitled
               "Foreclosure Procedures"

          h.    Are all riders indicated in paragraph 4(D) of the note and
               on the last page of the security instrument completed and
               signed/or conformed?

8.        Form HUD-1 (Loan Settlement Statement) and Addenda.

Y     N
          a.   Is the settlement statement complete and signed? Are
               certifications signed?

9.        Original Uniform Residential Appraise Report (URAR).

Y     N
          a.   Does the URAR contain the appraiser's original signature and
               date?

          b.   If this case involves a VA conversion, does the file contain
               a copy of the VA-CRV?

10.        Form HUD-92541 (Builder Certification) for new construction.

Y     N
          Is the 92541 complete and signed and dated by the builder?

11.        Form HUD-92051 (Compliance Inspection Report(s).

Y     N
          Is the 92051 complete and signed and dated by an approved
          inspector?

12.        Ten Year Warranty Insurance Binder (application) (if required)
          for new construction.

Y     N
          Is the property address (including unit number if Condo/PUD)
          correct?

Completed by:______________________________ date ____________

				
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