HUD Handbook 4000.1 Appendix 8.0: FHA Defect Taxonomy

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APPENDIX 8.0 – FHA DEFECT TAXONOMY (11/10/2026)

I. PURPOSE

The Defect Taxonomy is FHA’s quality assurance framework for Title II Loan Reviews. The Defect Taxonomy provides:

• a consistent method of identifying defects at the loan level; • useful data and feedback through structured categorization of defects and their sources, causes, and severities; and • balance between FHA’s risk management and quality assurance business processes.

The Defect Taxonomy does not:

• establish a universal statement on all monitoring or enforcement efforts by FHA; • address FHA’s response to patterns of loan-level defects, regardless of severity; • limit FHA’s actions with regard to fraud or misrepresentation; • establish standards for administrative or civil enforcement action, which are currently set forth in law; • preclude FHA from referring Findings of any severity to HUD’s Mortgagee Review Board, Departmental Enforcement Center, Office of Fair Housing and Equal Opportunity, or other HUD offices for violations of HUD requirements; or • affect or override FHA’s normal process for referral of fraud, waste, or abuse to the Office of the Inspector General.

FHA uses the Defect Taxonomy for loan reviews conducted by the Office of Single Family Housing’s Quality Assurance and Processing and Underwriting Divisions located in Headquarters and the Homeownership Centers. Mortgagees may use the Defect Taxonomy as a reference for their own loan-level Quality Control reviews.

The Defect Taxonomy is not used for any type of audit or review separately conducted by HUD’s Office of Finance and Budget or Ginnie Mae.

II. CORE CONCEPTS

A defect is any deviation from HUD policy requirements, regardless of severity.

In the context of Title II Loan Reviews, a Finding refers to a determination by FHA of a defect.

An individual Finding is classified in the Loan Review System (LRS) by its specific defect area, source, and cause.

A. Defect Areas Defect areas represent the fundamental loan characteristics for each review type based on corresponding HUD policy requirements. Applicable policies are listed in each defect area for reference only. They may not be all-inclusive.

• Underwriting Loan Reviews are categorized into nine defect areas covering loan origination, underwriting, closing, and endorsement for FHA insurance. • Servicing Loan Reviews are categorized into six defect areas covering servicing and loss mitigation activities throughout the potential lifecycle of an FHA-insured loan.

B. Sources and Causes

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Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Sources and causes are used to describe Findings in greater detail based on the underlying HUD policy violation.

C. Severity Tiers There are four potential severity tiers, one of which is assigned to each Finding in LRS based on the size and nature of the deviation from FHA requirements. Severity tiers indicate whether a Mortgagee response is required in LRS.

Tier 1 and 2 Findings are unacceptable and require a Mortgagee response. Potential remedies are listed in each defect area. Severity tiers 1 and 2 align with the definition of Material Finding for Mortgagee Quality Control.

Tier 1 is used for Findings of fraudulent or materially misrepresented information about which the Mortgagee knew or should have known. See Fraud or Material Misrepresentation for more details.

Tier 2 is used for:

• underwriting Findings that would have altered the loan’s approval and/or eligibility for FHA insurance; • servicing Findings that require mitigating documentation, corrective servicing action, and/or financial remediation; and • instances when required documents are missing or contain insufficient information to determine compliance.

Tier 3 and 4 Findings are deficient and do not require a Mortgagee response, but optional responses can be submitted.

Tier 3 is used for:

• underwriting Findings that do not adversely impact the loan’s approval and/or eligibility for FHA insurance; • servicing Findings that do not adversely impact FHA or that are based on loan-level reporting errors that cannot be corrected; • Findings of noncompliance remedied by the Mortgagee prior to review by FHA; and • Findings that represent deviations from HUD policy, but which are the consequence of an obligation to comply with other binding federal or state law.

Tier 4 is primarily used for Findings of fraudulent or materially misrepresented information about which the Mortgagee did not know and could not have known. Tier 4 is also used for underwriting Findings when minor data integrity issues exist that are inconsequential to the loan’s approval and eligibility.

Mortgagees may rebut any Finding or severity determination by responding in LRS with supporting information. Rebuttals are based on information available to FHA prior to the initial Finding.

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Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

III. REMEDIES

In addition to referring a Mortgagee to the Mortgagee Review Board, FHA has the authority to pursue loan-level actions and remedies reasonably related to a Mortgagee’s underlying violations. Pursuit of such loan-level actions and remedies does not limit FHA’s ability to refer a Mortgagee to the MRB or prevent the MRB from initiating its own action where appropriate.

The purpose of remedies is to mitigate risk to FHA and, if applicable, put Borrowers and/or other affected parties in the position they would have been in absent the violation. In some cases, multiple remedies may be used to address the full impact of an individual Finding.

Remedies are described below for unacceptable Findings in LRS. In each defect area, possible remedies for common policy violations are listed in order based on the degree of impact.

A. Mitigation Findings may be mitigated in LRS with the Mortgagee’s submission of one of the following as requested by FHA:

• additional documentation and/or information that was not included in the original loan file reviewed by FHA, which demonstrates the Mortgagee’s compliance with HUD policy requirements; or • evidence of corrective actions completed by the Mortgagee which, in FHA’s determination, adequately addresses the source and cause of the Finding so that the loan no longer presents an unacceptable risk to FHA.

B. Financial Remediation Consistent with FHA rules and requirements, Mortgagees may financially remediate certain loan-level Findings by submitting documentation showing completion of the requested action in the amount specified by FHA. Financial remediation may include:

• refunds to reimburse unallowable, prohibited or erroneous fees, penalties, or other charges to the Borrower; • principal reductions applied to the unpaid principal balance of the loan. For delinquent/defaulted loans, funds may be applied to the Borrower’s suspense account; • account adjustments to the Borrower’s loan, escrow, or suspense account in the amount necessary for the Servicer to bring the account in compliance with HUD policy and/or demonstrate corrective action; and • remittance of improperly paid servicing claims and/or loss mitigation incentives to HUD.

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Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

C. Indemnification When other remedies are not applicable, or when alternatives have been exhausted, Mortgagees may resolve loan-level Findings in LRS by indemnifying HUD against the risk of financial losses.

As specified in each indemnification agreement, the Mortgagee agrees to abstain from submitting an insurance claim to FHA in connection with the loan, or to reimburse FHA for any loss due to claims paid by FHA.

The term of an underwriting indemnification agreement is either 5-Year (from the loan endorsement date shown in FHA Connection) or Life- of-Loan. The term of a servicing indemnification is either 1-Year or 5-Year (from the date the agreement is signed by both the Servicer and FHA) or Life-of-Loan. Expiration of a 1-Year or 5-Year indemnification is subject to conditions detailed in the agreement.

Some general factors used by FHA to determine the term of an indemnification include:

Term General Factors 1-Year Servicing Only

• loan is current at the time of FHA’s review and the Servicer provides documentation of a good faith effort to mitigate the Finding but is unsuccessful due to circumstances beyond the Servicer’s control.

5-Year Underwriting

• violations related to the Borrower’s credit or income, which impact the Borrower’s creditworthiness or capacity to repay the loan; or • noncompliance with FHA requirements for verifying and documenting sufficient funds from an acceptable source to facilitate closing, or for determining the assets used to qualify.

Servicing

• loan is not current at the time of FHA’s review and the Servicer provides documentation of a good faith effort to mitigate the Finding, but is unsuccessful due to circumstances beyond the Servicer’s control; or • improperly completed mortgage assumption for a Borrower who was not credit qualified.

Life-of- Loan

All Tier 1 Findings of fraud or materially misrepresented information.

Underwriting

• violations related to property eligibility or valuation; • certain violations of FHA requirements for basic Borrower eligibility; or • HECM policy violations.

Servicing

• loan is in conveyance or claim status and FHA determines that foreclosure or other Home Disposition Options should not have been completed; or • certain violations of FHA’s eligibility standards and requirements described in specific defect areas, regardless of the current status of the loan.

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Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

IV. FRAUD OR MATERIAL MISREPRESENTATION

All Findings of fraud or materially misrepresented information are referred to the Office of the Inspector General (OIG), regardless of LRS severity tier or remedy provided by the Mortgagee.

A. Findings of fraud or materially misrepresented information can fall into one of two severity tiers:

• Tier 1: the Mortgagee knew or should have known. • Tier 4: the Mortgagee did not know and could not have known.

B. FHA determines if the Mortgagee knew or should have known based on whether:

• an employee of the Mortgagee, sponsored Third-Party Originator, or subservicer was involved; and/or • red flags in the loan file should have been questioned by the Mortgagee.

C. FHA’s loan review determinations regarding Findings of fraud or misrepresentation do not affect or override any separate determinations

of the Office of the Inspector General through any audit or investigative process.

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Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

V. UNDERWRITING LOAN REVIEW

Defect Area 1 Borrower Income (BI) Source, documentation, and verification requirements for employment and non-employment sources of income used to qualify.

HUD Policy References – Handbook 4000.1

Forward HECM

Underwriting with an Automated Underwriting System Income Requirements (TOTAL) Final Underwriting Decision (TOTAL) Income Requirements (Manual) Final Underwriting Decision (Manual)

Effective Income Analysis Residual Income Analysis Required Documentation Final HECM Decision Performing the Financial Assessment

Sources

1. Salary or Hourly Wages from Primary Employment 2. Part-Time (Secondary) or Seasonal Employment 3. Overtime and Bonus 4. Self-Employment 5. Retirement- Pension IRA/401(k), or SSI 6. Rental Income from Subject Property 7. Disability from SSA, VA, or Public/Private Source 8. Commission 9. Rental Income from Other Real Estate 10. Other Income Source

Causes

A. Qualifying income amount not supported or not calculated according to policy B. History, stability, and/or continuance not supported C. Unacceptable source of income D. Required documentation or verifications missing, illegible, or incomplete F. Evidence of Fraud or Misrepresentation

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Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 1 (continued) Borrower Income (BI)

Severity Tiers Remedies

Unacceptable

1 Evidence of fraudulent or materially misrepresented information about which the Mortgagee knew or should have known.

Indemnification

• Life-of-Loan

FHA is unable to substantiate the income necessary to support loan approval due to missing documentation; or borrower income was not supported based on documentation. Effective Income not supported or miscalculated and when corrected:

Mitigating Documentation

Indemnification Forward

• 5 Year

HECM

HECM Financial Assessment or residual income issue, compensating factors not documented, and/or Minimum Life Expectancy Set-Aside was not applied as required or HECM approval is not supported based on documentation.

• Life-of-Loan

Deficient

Required income documentation is out of compliance in some way, however, sufficient information exists to substantiate income necessary to approve the loan.

Effective Income not supported or miscalculated and when corrected:

HECM Financial Assessment or residual income issue, compensating factors not documented but Minimum Life Expectancy Set-Aside was applied and HECM approval is supported based on documentation.

4 Minor data errors or inconsistencies between TOTAL Scorecard, loan documentation and/or FHA systems that are inconsequential to the borrower’s income/ability to repay, and when corrected, TOTAL risk assessment remains an “Accept”. Evidence of fraudulent or materially misrepresented information about which the Mortgagee did not know and could not have known.

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Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 2 Borrower Credit (BC) Requirements for documenting and evaluating credit reports, credit history, liabilities, and debts.

HUD Policy References – Handbook 4000.1

Forward HECM

General Borrower Eligibility Requirements Underwriting with an Automated Underwriting System Credit Requirements (TOTAL) Final Underwriting Decision (TOTAL) Credit Requirements (Manual) Final Underwriting Decision (Manual)

Borrower Eligibility Credit History Review Requirements Property Charge Payment History Review Requirements Monthly Expense Analysis Required Documentation Final HECM Decision Performing the Financial Assessment

Sources

1. Credit Report and/or Non-Traditional Credit Verification 2. Minimum Decision Credit Score 3. Monthly Obligations 4. Housing and/or Mortgage Payment History 5. Non-Borrowing Spouse SSN, Credit Report, and/or Liabilities in Community Property State 6. Bankruptcy, Foreclosure, Deed-in-Lieu, Short Sale, and/or Credit Counseling/Payment Plan 7. Delinquent Federal Debt 8. Collections, Charge-Offs, Judgments, and/or Disputed Derogatory Accounts 9. Maximum Debt Ratios and Compensating Factors 10. Other Credit or Liability Issue

Causes

A. Required documentation missing, illegible, insufficient, and/or contains unresolved inaccuracies or issues B. FHA standards not met – credit approval not supported/ borrower ineligible C. Amount of qualifying debt not supported, omitted, undisclosed, or not calculated according to policy D. Other Policy Violation F. Evidence of Fraud or Misrepresentation

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Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 2 (continued) Borrower Credit (BC)

Severity Tiers Remedies

Unacceptable

1 Evidence of fraudulent or materially misrepresented information about which the Mortgagee knew or should have known.

Indemnification

• Life-of-Loan

FHA is unable to determine acceptability, eligibility, underwriting compliance, or cannot calculate monthly debts or obligations based on loan documentation. FHA is able to conclude that the borrower was ineligible and/or aspects of credit were unacceptable to the degree that approval cannot be supported. Amount of qualifying debt not supported, omitted, or miscalculated and when corrected:

Mitigating Documentation

Indemnification Forward

• 5 Year

• Loan underwritten with TOTAL Scorecard results in a “Refer” risk assessment and approval cannot be substantiated based on the requirements for manually underwritten loans. • Loan underwritten manually (referred or downgraded) approval is not substantiated with increase due to insufficient compensating factors or ratio in excess of maximum established by FHA. HECM Financial Assessment or credit/property charge payment history does not adhere to FHA standards, extenuating circumstances were not documented, and/or Minimum Life Expectancy Set-Aside was not applied as required or HECM approval is not supported based on documentation.

HECM

• Life-of-Loan

Deficient

Required credit documentation is out of compliance in some way, but documentation/information sufficient to substantiate loan approval. Amount of qualifying debt not supported, omitted, or miscalculated and when corrected:

• Loan underwritten with TOTAL Scorecard results in a “Refer” risk assessment, but approval is substantiated based on the requirements for manually underwritten loans. • Loan underwritten manually (referred or downgraded) approval is substantiated by sufficient compensating factors and ratio(s) do not exceed maximum qualifying ratio(s) established by FHA. HECM Financial Assessment errors or issues with credit and property charge data or extenuating circumstances, but Minimum Life Expectancy Set-Aside was applied and HECM approval is supported based on documentation.

4 Minor data errors or inconsistencies between TOTAL Scorecard, loan documentation and/or FHA systems that are inconsequential to the borrower’s credit/ability to repay, and when corrected, TOTAL risk assessment remains an “Accept”. Evidence of fraudulent or materially misrepresented information about which the Mortgagee did not know and could not have known.

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Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 3 Loan to Value and Maximum Mortgage Amount (LM) Allowable Mortgage Parameters for Purchase and Refinance transactions, including program and product-specific requirements that impact the maximum insurable loan amount.

HUD Policy References – Handbook 4000.1

Forward HECM

Maximum Mortgage Amounts Loan-to-Value Limits Required Investment Interested Party Contributions (TOTAL) Inducements to Purchase (TOTAL) Interested Party Contributions (Manual) Inducements to Purchase (Manual) Excessive Mortgage Amounts Programs and Products

Maximum Mortgage Amounts Maximum Claim Amount Principal Limit Disbursement Limits Life Expectancy Property Charges Principal Limit Calculation at Closing HECM For Purchase HECM Refinance

Sources

1. Purchase 2. Rate/Term or Simple Refinance 3. Streamline Refinance 4. Cash-Out Refinance 5. HECM 6. 203(k) 7. New Construction – Proposed, Under Construction, or Existing <1 Year 8. Build-on-Own Land or Construction to Permanent 9. HUD REO 10. Other

Causes

A. Required documentation missing, illegible, or insufficient B. Violation of maximum mortgage amount or LTV/CLTV limitation C. Minimum Required Investment (MRI) not met D. Principal Limit or Maximum Claim Amount, or Life Expectancy Set-Aside violation F. Evidence of Fraud or Misrepresentation

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Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 3 (continued) Loan to Value and Maximum Mortgage Amount (LM)

Severity Tiers Remedies

Unacceptable

1 Evidence of fraudulent or materially misrepresented information about which the Mortgagee knew or should have known.

Indemnification

• Life-of-Loan

FHA is able to conclude that the maximum mortgage amount and/or LTV exceeds allowable limits and/or was not calculated according to applicable FHA policies resulting in over- insurance.

Mitigating Documentation

Principal Reduction Allowed for all Tier 2 Findings EXCEPT

The borrower did not make the full Minimum Required Investment (MRI) at closing in compliance with statutory requirements.

• Statutory National Loan Limit violations • HECM violations • Minimum Required Investment
(MRI) not met on a purchase and shortage exceeds 10% of MRI

HECM FHA is unable to determine compliance with applicable policies for HECM Principal Limit or Maximum Claim Amount based on available information and loan file documentation.

Principal Limit, Maximum Claim Amount, Disbursement Limit exceeds allowable limits and/or

• Life Expectancy Set-Aside amount is insufficient and/or • HECM loan is over-insured as a result of violation.

Indemnification

• Life-of-Loan

Deficient

Violations exist, but the mortgage amount and/or LTV do not exceed allowable limits and loan is not over-insured. Error in the maximum mortgage amount or LTV identified by Mortgagee post-endorsement and an appropriate principal reduction was made prior to loan review.

HECM Error or miscalculation related to Principal Limit, Maximum Claim Amount, Disbursement Limit, but allowable limits not exceeded and

• Life Expectancy Set-Aside amount is sufficient; and • HECM loan is not over-insured as a result of violation.

4 Evidence of fraudulent or materially misrepresented information about which the Mortgagee did not know and could not have known.

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Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 4 Borrower Assets (BA) Guidelines and source requirements for the borrower’s Minimum Required Investment (MRI) and verification of other funds at underwriting.

HUD Policy References – Handbook 4000.1

Forward HECM

Underwriting with an Automated Underwriting System Asset Requirements (TOTAL) Final Underwriting Decision (TOTAL) Asset Requirements (Manual) Final Underwriting Decision (Manual)

Asset Requirements Required Documentation Final HECM Decision Performing the Financial Assessment

Sources

1. Checking/Savings Accounts 2. Gifts 3. Secondary Financing 4. Earnest Money or Other Deposits on Purchase 5. Large Deposits 6. Collateralized Loans or Unsecured Borrowed Funds 7. Retirement Accounts 8. Sale of Personal Property 9. Sale of Real Estate 10. Other Asset Type

Causes

A. Asset not sourced, input improperly, or required documentation missing, illegible, or insufficient B. Minimum Required Investment (MRI) not verified by underwriter or unacceptable source of funds C. HECM monetary investment not verified or from unacceptable source D. Other funds required to close and/or assets used to support approval not verified or supported F. Evidence of Fraud or Misrepresentation

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Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 4 (continued) Borrower Assets (BA)

Severity Tiers Remedies

Unacceptable

1 Evidence of fraudulent or materially misrepresented information about which the Mortgagee knew or should have known.

Indemnification

• Life-of-Loan

The amount of the borrower’s full MRI, Cash to Close (non-MRI), or HECM monetary investment, not fully verified by the underwriter; and/or

Mitigating Documentation

Funds to pay off debts, reserves required for 3-4 unit properties and Manually Underwritten loans, funds supporting the amount entered to TOTAL, or other assets required on a HECM were not verified by the underwriter; and

Indemnification Forward

• 5 Year

• Based on loan documentation, FHA determines that the borrower was unlikely to have accumulated sufficient funds by the closing date, there is a strong indication the funds were from an unacceptable source, and/or the borrower would not have otherwise qualified.

HECM

• Life-of-Loan

Deficient

Part of the borrower’s full MRI, Cash to Close (non-MRI), or HECM monetary investment, not fully verified by the underwriter; and/or

• Based on loan documentation, FHA determines that the borrower was likely to have accumulated sufficient funds from an acceptable source by the closing date and would have otherwise qualified.

4 Minor data errors or inconsistencies between TOTAL Scorecard, loan documentation and/or FHA systems related to borrower assets, and when corrected, TOTAL risk assessment remains an “Accept” and borrower eligibility is otherwise supported.

Evidence of fraudulent or materially misrepresented information about which the Mortgagee did not know and could not have known.

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Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 5 Property Eligibility (PE) Minimum property acceptability and eligibility standards for FHA insurance, including program and product-specific variations.

HUD Policy References – Handbook 4000.1 Forward HECM Property Eligibility and Acceptability Criteria Legal Restrictions on Conveyance (Free Assumability) Property Acceptability Criteria Mortgagee Closing Requirements Inspection and Repair Escrow Requirements for Mortgages Pending

Property Acceptability Criteria Inspection and Repair Requirements for HECMs Pending

Endorsement in Presidentially-Declared Major Disaster Areas HECM For Purchase Condominiums Application of Minimum Property Requirements and Minimum

Closing or Endorsement in Presidentially-Declared Major Disaster Areas Programs and Products Application of Minimum Property Requirements and Minimum Property

Property Standards by Construction Status Minimum Property Requirements and Minimum Property Standards

Standards by Construction Status Minimum Property Requirements and Minimum Property Standards

Sources

1. Property Acceptability and/or Eligibility
2. Minimum Property Requirements / Minimum Property Standards
3. Flood Certification and/or Special Flood Hazard Area Requirements
4. Manufactured Housing
5. Legal Restrictions on Conveyance (Free Assumability)
6. Property Ownership and/or Transfer History
7. Condo – Project Approval or Loan Level Certifications
8. Program & Product Specific Property Eligibility Requirements
9. Presidentially Declared Major Disaster Area Requirements
10. Other Property Eligibility Issues

Causes

A. Missing, illegible, or incomplete documentation to support acceptability or eligibility B. Unallowable Property Type, Use, and/or Zoning C. Repairs or Rehabilitation not complete and/or inspections not properly documented D. Restrictions on Resales/Flipping and/or owner of record requirements not met F. Evidence of Fraud or Misrepresentation

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Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 5 (continued) Property Eligibility (PE)

Severity Tiers Remedies

Unacceptable

1 Evidence of fraudulent or materially misrepresented information about which the Mortgagee knew or should have known.

Indemnification

• Life-of-Loan

FHA is unable to determine acceptability, eligibility, or compliance with applicable policies for Property Eligibility due to absence of required documentation.

Mitigating Documentation

FHA is able to conclude that the property did not meet Property Eligibility requirements based on documentation in the loan file.

Principal Reduction Allowed for all Tier 2 Findings where

• repairs or rehabilitation not completed as required • unused escrow funds exist

NOTE: In any case where documentation does not evidence completion/status of repairs or rehabilitation per FHA guidelines, Minimum Property Requirements, or Minimum Property Standards are not met, principal reduction must be made before and in addition to life-of-loan indemnification.

Indemnification

• Life-of-Loan

Deficient

3 Compliance errors, inconsistencies, or missing information identified within the Property Eligibility documentation, but FHA is able to conclude that the property is eligible.

4 Evidence of fraudulent or materially misrepresented information about which the Mortgagee did not know and could not have known.

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Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 6 Property Appraisal (PA) Appraiser requirements, acceptable reporting forms, valuation and reporting protocols, and property type-specific requirements that impact collateral.

HUD Policy References – Handbook 4000.1 Forward HECM

Underwriting the Property Programs and Products Appraiser and Property Requirements for Title II Forward and Reverse

Underwriting the Property HECM For Purchase Condominiums Appraiser and Property Requirements for Title II Forward and

Mortgages

Reverse Mortgages

Sources

1. Appraiser 2. Appraisal Report- including all required forms/exhibits/addenda 3. Comparable Sales 4. New Construction Documentation 5. Second Appraisal 6. Appraisal Update 7. Other Appraisal, Collateral, or Valuation issue

Causes

A. Form(s) missing, expired, invalid, illegible, contains errors, or incorrect form used B. Valuation & Reporting Protocols not met (Appraiser Responsibilities) C. Appraised Value is not supported D. Other Policy Violation F. Evidence of Fraud or Misrepresentation

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Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 6 (continued) Property Appraisal (PA)

Severity Tiers Remedies

Unacceptable

1 Evidence of fraudulent or materially misrepresented information about which the Mortgagee knew or should have known.

Indemnification

• Life-of-Loan

FHA is unable to determine appraiser and/or underwriter compliance with applicable policies for the appraisal, collateral valuation, or property acceptability due to absence of valid documentation. FHA is able to conclude that the property was not appraised and/or underwritten in compliance with applicable policies and the appraised value is not supported or the property is not acceptable as a result. Documentation required for specific property types, programs/products, or by construction status was not obtained to support FHA max insurable loan amount.

Mitigating Documentation

Indemnification

• Life-of-Loan

Deficient

3 Compliance errors, inconsistencies, or missing information identified within the Property Appraisal documentation, but FHA can conclude that there is no impact on the valuation or property acceptability.

4 Evidence of fraudulent or materially misrepresented information about which the Mortgagee did not know and could not have known.

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Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 7 Borrower Eligibility (BE) General eligibility criteria for borrowers, including program and product-specific variations.

HUD Policy References – Handbook 4000.1 Forward HECM General Borrower Eligibility Requirements Occupancy Types Programs and Products

Individuals Required to Receive HECM Counseling Certificate of HECM Counseling General Requirements HECM Application and Initial Supporting Documentation Borrower, Eligible Non-Borrowing Spouse, and Other Non-Borrowing

Household Member Authorizations Preliminary Review of Borrower Eligibility Requirements General Borrower Eligibility Requirements HECM For Purchase HECM Refinance

Sources

1. Borrower SSN and/or Identity 2. Borrower citizenship or lawful residency status 3. Borrower Age Restrictions 4. Borrower has another property already under HECM rule 5. Program/Product Specific Borrower Eligibility Requirement 6. Borrower on Exclusionary List(s) 7. Multiple FHA Loans/Exceptions 8. Non-owner Occupant co-Borrower or Co-signer 9. General Borrower Eligibility

Causes

A. Documentation of eligibility missing, illegible, improperly documented, or not validated B. Ownership and/or Occupancy Requirements not met C. Borrower is ineligible for FHA insurance D. Other Policy Violation F. Evidence of Fraud or Misrepresentation

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Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 7 (continued) Borrower Eligibility (BE)

Severity Tiers Remedies

Unacceptable

1 Evidence of fraudulent or materially misrepresented information about which the Mortgagee knew or should have known.

Indemnification

• Life-of-Loan

FHA is unable to determine acceptability, eligibility, or compliance with applicable eligibility policies due to absence of required documentation, authorizations, and/or validations. FHA is able to conclude that borrower(s) was ineligible based on loan file documentation or other available information. Borrower ownership and/or occupancy requirements, including program and policy specific policies, were not met.

Mitigating Documentation

Indemnification

• Life-of-Loan

Deficient

3 Compliance errors, inconsistencies, or missing information identified in loan documents, but FHA can conclude that the borrower was eligible based on other documentation or validating information.

4 Evidence of fraudulent or materially misrepresented information about which the Mortgagee did not know and could not have known.

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Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 8 Mortgage Eligibility (ME) Compliance standards for valid and enforceable FHA-insured Mortgages, including program and product-specific variations.

HUD Policy References – Handbook 4000.1 Forward HECM Sales Contract and Supporting Documentation HUD Required Disclosures Mortgage Purpose Valid First Liens Maximum Mortgage Term Mortgage Insurance Premiums Title Mortgage and Note Mortgagee Pre-endorsement Review Requirements Endorsement and Post-endorsement Programs and Products

General HECM Insurance Eligibility Valid First and Second Liens Payment Plan Maximum Mortgage Term Mortgage Insurance Premiums Mortgage and Note HECM Security Instrument HECM Second Security Instrument, if Applicable Title Insurance Endorsement and Post-endorsement Sales Contract and Supporting Documentation HUD Required Disclosures Mortgage and Note HECM Refinance

Sources

1. Mortgage Term 2. Mortgage Insurance Premiums 3. Program & Product Specific Requirements 4. Title and/or FHA Lien Position 5. Non-Profit, Government Agency, Living Trust, or Power of Attorney 6. Mortgage, Note, Riders, and Allonges 7. Sales Contract, Addenda, Amendments, and Related Certifications

Causes

A. Acceptable documentation of eligibility missing, illegible, improperly completed/incomplete, or incorrect form used B. Improper Application of FHA Policy C. Other Mortgage Eligibility Issue F. Evidence of Fraud or Misrepresentation

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Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 8 (continued) Mortgage Eligibility (ME)

Severity Tiers Remedies

Unacceptable

1 Evidence of fraudulent or materially misrepresented information about which the Mortgagee knew or should have known.

Indemnification

• Life-of-Loan

FHA is unable to determine mortgage acceptability or compliance with applicable eligibility policies due to absence of required documentation. FHA is able to conclude that mortgage is not in compliance with applicable policies based on loan file documentation or other available information. Mortgage does not comply with the program/product specific requirements for which it was approved and would not have been eligible under any other FHA program/product.

Mitigating Documentation

Indemnification Forward

• 5 Year

HECM

• Life-of-Loan

Deficient

Compliance errors, inconsistencies, or missing information identified in loan documentation, but FHA can conclude that the mortgage was eligible based on other documents or validating information. Mortgage does not comply with the program/product specific requirements for which it was approved but it would have been eligible under another FHA program/product.

4 Evidence of fraudulent or materially misrepresented information about which the Mortgagee did not know and could not have known.

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Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 9 Lender Operations (LO) Standard loan-level requirements for Mortgagee origination, processing, underwriting, closing, and pre-/post-endorsement, including data integrity.

HUD Policy References – Handbook 4000.1 Forward HECM Post-approval Operations Applications and Disclosures Underwriting with an Automated Underwriting System Final Underwriting Decision (TOTAL) Final Underwriting Decision (Manual) Closing Mortgagee Pre-endorsement Review Requirements Procedures for Endorsement Endorsement and Post-endorsement

Post-approval Operations Origination/Counseling Requirements Origination/Processing Performing the Financial Assessment of the Borrower Closing Mortgagee Pre-endorsement Review Requirements Procedures for Endorsement Endorsement and Post-Endorsement

Sources

1. NMLS Registration Issues 2. Loan Estimate(s), Closing Disclosure, and/or Certifications 3. Escrow accounts not properly established 4. Late Endorsement or Pre-Endorsement Delinquency 5. Unresolved Data Integrity Issues 6. Application & Underwriting Forms – URLA/1003, 92900a, 92800.5B, 92900LT 7. HECM Loan Agreement or Financial Assessment 8. FHA Program Participation/ Exclusionary List(s) 9. TOTAL Scorecard/AUS Feedback Certificate 10. Loan Review Case Binder Submission 11. Other

Causes

A. Required documentation missing, illegible, improperly completed, or incorrect form used B. Unallowable, undisclosed, or excess Closing Costs and/or Fees C. Loan closed or endorsed out of compliance with underwriting approval D. Other Policy Violation F. Evidence of Fraud or Misrepresentation

Page 1827

Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 9 (continued) Lender Operations (LO)

Severity Tiers Remedies

Unacceptable

1 Evidence of fraudulent or materially misrepresented information about which the Mortgagee knew or should have known.

Indemnification

• Life-of-Loan

FHA is unable to determine loan-level compliance with operational policies and procedures due to absence of required information/documentation. FHA is able to conclude that the loan is uninsurable due to noncompliance with operational policies and procedures based on documentation in the loan file.

Mitigating Documentation

Refund Allowed to remedy related violations unless

• FHA policy specifically prohibits post-endorsement refunds

Indemnification Forward

• 5 Year

HECM

• Life-of-Loan

Deficient

3 Compliance errors, inconsistencies, or missing information related to operational policies and procedures, but sufficient documentation/information exists to substantiate approval.

4 Minor data integrity errors or inconsistencies between TOTAL Scorecard, loan documentation and/or FHA but when corrected, TOTAL risk assessment remains “Accept” and approval is otherwise validated. Evidence of fraudulent or materially misrepresented information about which the Mortgagee did not know and could not have known.

Page 1828

Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

VI. SERVICING LOAN REVIEW

Defect Area 1 Servicer Operations (SO) Standards and procedures applicable to the servicing of all FHA-insured Single Family Mortgages, including the Servicer’s responsibility for records management, required actions, and various processing functions in the course of mortgage servicing regardless of loan performance.

HUD Policy References – Handbook 4000.1

Forward HECM

Rehabilitation Escrow Account Assumptions – Origination/Underwriting Servicing Roles and Responsibilities Responsibility for Servicing Actions Providing Information to HUD and HUD-Approved Counseling

Servicing in Compliance with Law Responsibility for Servicing Actions Providing Information to HUD Communication with Borrowers and Authorized Third Parties Set-Asides Completion of Required Repairs Post-endorsement HECM Amendments Occupancy Certification Property Maintenance Optional Assignment Demand Assignment Repurchase of Previously Assigned HECM Record Retention Presidentially-Declared Major Disaster Areas

Agencies Communication with Borrowers and Authorized Third Parties Post-endorsement Mortgage Amendments Disclosures Record Retention – Servicing File Presidentially-Declared Major Disaster Areas Programs and Products Assumptions – Servicing/Loss Mitigation

Causes

Sources

1. Servicing File
2. Sale of Mortgage
3. Servicing Transfer
4. Borrower Communications and Requests
5. Partial Release or Modification of Security
6. Assumption Processing
7. Property in Presidentially-Declared Major Disaster Area
8. 203(k) Rehabilitation Mortgage Program
9. HECM Repair Set-Aside
10. HECM Certifications and Determinations
11. Other Servicer Responsibility or Obligation

A. Incomplete or insufficient servicing records and/or audit trail B. Servicing activity not completed as required C. Unallowable, prohibited, or improperly assessed

fees/penalties/charges D. Mortgage record change or update not reported to FHA as

required E. Violation of program or product-specific requirement F. Evidence of fraud or misrepresentation

Page 1829

Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 1 (continued) Servicer Operations (SO)

Severity Tiers

Unacceptable

1 Evidence of fraudulent or materially misrepresented information about which the Servicer knew or should have known.

Forward • Required documentation is missing or incomplete, and FHA is unable to determine compliance with servicing requirements as a result. • Failure to report servicing transfer or mortgage sale to FHA as required. • Mortgage assumption was improperly processed or reported and/or completed without credit qualifying per program requirements. • Required servicing activities or property inspections for escrowed repairs or rehabilitation were not completed in accordance with HUD program requirements. • Failure to obtain HUD approval for a partial release or modification of security that impacts the Property Value. HECM • FHA inspection was not conducted to document completion of repairs required after closing (Set-Aside) or after hazard insurance claim. • Required repairs were not completed and delays were not supported in accordance with HUD policy. • Required servicing activities related to death notices or occupancy certifications were not completed in accordance with HUD policy.

Deficient

• Required documentation is missing or incomplete, but FHA is able to determine compliance based on other information contained in the Servicing File. • Servicing was not conducted in accordance with specific FHA requirements, but defects are inconsequential and do not require loan- level corrective action. • Inaccurate/erroneous data is revealed in the Servicing File or reported to FHA, but errors are inconsequential. • Apparent defects are present with respect to HUD policy, but the actions were required to comply with other federal or state law.

4 Evidence of fraudulent or materially misrepresented information about which the Servicer did not know and could not have known.

Page 1830

Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 1 (continued) Servicer Operations (SO)

Severity Tiers

Remedies

1 Life-of-Loan Indemnification

Forward • Correct any reporting issues and provide documentation showing Borrower was notified of any changes in writing. • FHA will accept a 5-Year indemnification agreement for unqualified mortgage assumptions that otherwise meet HUD eligibility requirements. • FHA will accept documentation showing a principal reduction for Findings related to incomplete property repairs or rehabilitation.  If the Property does not meet HUD’s Minimum Property Requirements (MPR) or Minimum Property Standards (MPS), FHA will

request a principal reduction made before, and in addition to, Life-of-Loan indemnification. • 1-Year indemnification is used for general servicing violations that cannot otherwise be addressed with mitigating documentation or corrective action at the loan level. HECM • Document the completion of repairs to bring the Property into compliance with HUD’s MPR and MPS. • For HECM violations, Life-of-Loan indemnification is the only available remedy in LRS if the Servicer is unable to provide mitigating documentation and/or complete corrective action.

Page 1831

Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 2 Account Administration (AA) Standards and procedures specific to the accounting and administrative functions in connection with the servicing of performing FHA-insured Single Family Mortgages, including various routine activities and related reporting, disclosures, and documentation requirements.

HUD Policy References – Handbook 4000.1

Forward HECM

Rehabilitation Escrow Account Payment Administration Servicing Fees and Charges Escrow Insurance Coverage Administration Mortgage Insurance Premium Remittance Mortgage Insurance Premium Cancellation Mortgage Insurance Termination Adjustable Rate Mortgages

Borrower Disbursements Payment Administration Servicing Fees and Charges Interest Rate Changes for Adjustable Rate HECMs Set-Asides Allowable Fees and Charges Prepayment Insurance Coverage Administration Mortgage Insurance Premium Remittance Mortgage Insurance Termination

Sources

Causes

1. Payment Administration
2. Prepayment
3. Costs, Fees, and Charges
4. Escrow Management and Property Charge Disbursements
5. Annual Escrow Analysis
6. Adjustable Rate Mortgage (ARM) Annual Review
7. Insurance Coverage Administration
8. Mortgage Insurance Premium (MIP) Remittance
9. Mortgage Payoff
10. Cancellation or Termination of Mortgage Insurance
11. HECM Life Expectancy Set-Aside (LESA) Administration
12. HECM Disbursements, Account Analysis, or Repair Set-Aside
13. HECM Payment Plan Changes

A. Incomplete or insufficient servicing records and/or audit trail B. Servicing activity not completed as required C. Calculation errors or unallowable/prohibited

fees/penalties/charges D. Account status not reported to FHA as required E. Violation of program or product-specific requirement F. Evidence of fraud or misrepresentation

Page 1832

Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 2 (continued) Account Administration (AA)

Severity Tiers

Unacceptable

1 Evidence of fraudulent or materially misrepresented information about which the Servicer knew or should have known.

Forward • Full payments were not applied correctly or prepayments were not applied as requested by the Borrower. • Annual escrow analysis was not performed or escrow amounts were inaccurately calculated resulting in a shortage. • Escrow funds were not disbursed on a timely basis and fees/penalties/charges were improperly deducted from the Borrower’s escrow account or otherwise charged to the Borrower as a result. • Unallowable or prohibited Late Charges, attorney’s fees, or other fees/penalties/charges were improperly collected and/or charged to the Borrower’s account. • Failure to obtain the Borrower’s consent to terminate mortgage insurance. • Failure to timely cancel or terminate MIPs. HECM • Failures or inaccuracies related to HECM account administration, including payments, Disbursements, and Repair Set-Aside or surplus. • LESA improperly administered resulting in unpaid Property Charges, late fees, or penalties assessed to the Borrower, account analysis, payments or Disbursements, and MIPs. • Noncompliance with rules and requirements related to payment of force-placed insurance premiums.

Deficient

• Servicing record, individual account information, or reporting data is missing, but FHA is able to determine compliance based on other information contained in the Servicing File. • Individual accounting or administrative activity was not conducted in accordance with specific FHA requirements, but defects are inconsequential and do not require loan-level corrective action. • Inaccurate/erroneous data is revealed in the Servicing File or reported to FHA, but errors are inconsequential. • Apparent defects are present with respect to HUD policy, but the actions were required to comply with other federal or state law.

4 Evidence of fraudulent or materially misrepresented information about which the Servicer did not know and could not have known.

Page 1833

Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 2 (continued) Account Administration (AA)

Severity Tiers

Remedies

1 Life-of-Loan Indemnification

Forward • Reverse or refund any unallowable or prohibited fees/penalties/charges. • Reverse or refund any fees/penalties/charges resulting from improperly applied payments, ARM adjustments, and/or late escrow disbursements.  If payments are reduced as a result of ARM adjustment, refund the excess payments with interest on the excess at the index rate from

the date of payment to the date of refund. AND • Provide documentation showing the Borrower was notified of any account adjustments in writing. HECM • Refund the Borrower the amount of surplus Repair Set-Aside or add the amount to the Borrower’s Principal Limit. • For HECM violations, Life-of-Loan indemnification is the only available remedy in LRS if the Servicer is unable to provide mitigating documentation and/or complete corrective action.

Page 1834

Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 3 Delinquent and Default Servicing (DS) Standards and procedures applicable to the servicing of non-performing FHA-insured Single Family Mortgages, including the Servicer’s responsibility for records management, accounting, and administrative functions, required actions, and various processing functions in the course of delinquent and default mortgage servicing.

HUD Policy References – Handbook 4000.1

Forward HECM

203(k) Rehabilitation Mortgage Insurance Program – Servicing Mortgages in Delinquency or Default Reporting to Consumer Reporting Agencies and the IRS Late Charges Partial Payments for Mortgages in Default Lien Status Imminent Default Early Default Intervention Presidentially-Declared Major Disaster Areas Reinstatement Programs and Products

Use of Counseling Agencies Due and Payable Servicing Defaults for Unpaid Property Charges COVID-19 HECM Property Charge Repayment Plan

Sources
1. Delinquency or Default Status
2. Partial Payments or Suspense Account
3. Late Charges and Fees
4. Collection Notices and Communications
5. Early Default Intervention
6. Non-Monetary Default
7. Imminent Default
8. Bankruptcy
9. Mortgage Reinstatement
10. Delinquent 203(k) Mortgages
11. Property Occupancy Status or Condition
12. HECM Default
13. HECM Deferral Period
14. Other Delinquent and Default Servicing Requirement

Causes A. Incomplete or insufficient servicing records and/or audit trail B. Servicing activity not completed as required C. FHA delinquency and default reporting inaccurate, incomplete,

or contrary to policy D. Requirements related to property inspections, repairs, or

preservation not met E. Violation of program or product-specific requirement F. Evidence of fraud or misrepresentation

Page 1835

Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 3 (continued) Delinquent and Default Servicing (DS)

Severity Tiers

Unacceptable

1 Evidence of fraudulent or materially misrepresented information about which the Servicer knew or should have known.

Forward • Failure to notify each Borrower, co-signer, and any other party requiring notice by state law that the Mortgage is in Default. • Failure to satisfy other HUD requirements to communicate with Borrowers in Default. • Failure to ensure the accuracy of all information reported to consumer reporting agencies. • Partial Payments were returned to the Borrower without meeting the criteria for returning payments and/or suspense funds equal to at least one full monthly installment were not applied according to HUD policy. • Unallowable Late Charges, attorney’s fees, inspection fees, or other fees or penalties were assessed and/or charged to the Borrower’s suspense account. • Escrow funds were not disbursed on a timely basis and fees or penalties were charged to the Borrower’s suspense account as a result. • Failure to obtain required property inspections to adequately determine occupancy and/or property condition. • Failure to perform required Property Preservation and Protection actions. HECM • Noncompliance with HECM-specific requirements including Due and Payable policies, Deferral Period, and cure policies.

Deficient

• Required documentation is missing, but FHA is able to determine delinquent and default servicing compliance based on other information contained in the Servicing File. • Delinquent and default servicing was not conducted in accordance with specific FHA requirements, but defects are inconsequential and do not require loan-level corrective action. • Partial Payments were returned to the Borrower without a letter of explanation, but the Servicing File demonstrates the criteria were met for returning the payments. • Inaccurate/erroneous data is revealed in the Servicing File or reported to FHA, but errors are inconsequential. • Apparent defects are present with respect to HUD policy, but the actions were required to comply with other federal or state law.

4 Evidence of fraudulent or materially misrepresented information about which the Servicer did not know and could not have known.

Page 1836

Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 3 (continued) Delinquent and Default Servicing (DS)

Severity Tiers

Remedies

1 Life-of-Loan Indemnification

Forward • Correct accounting issues and provide documentation showing the Borrower was notified of errors or account adjustments in writing. • Refund the Borrower’s account any late fees, penalties, or other charges paid or accrued from the month in which the violation initially occurred. • For Property Preservation and Protection violations resulting from servicing failures, complete all required repairs and designate related costs as non-recoverable to prevent inclusion in any future HUD claims.  Life-of-Loan indemnification is the only available remedy in LRS if the Servicer is unable to provide mitigating documentation

and/or complete corrective action. HECM • For HECM violations, Life-of-Loan indemnification is the only available remedy in LRS if the Servicer is unable to provide mitigating documentation and/or complete corrective action.

Page 1837

Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 4 Loss Mitigation Processing (LP) Standards and procedures applicable for loss mitigation processing, review activities, required reporting, communications, and financial evaluation for all available loss mitigation alternatives to foreclosure.

HUD Policy References – Handbook 4000.1

Forward HECM

Loss Mitigation Program Loss Mitigation Home Retention Options Loss Mitigation Incentives and Title Reimbursement Presidentially-Declared Major Disaster Areas Programs and Products

Defaults for Unpaid Property Charges COVID-19 HECM Property Charge Repayment Plan

Sources

Causes

1. Review Processing
2. Borrower Eligibility
3. Financial Evaluation
4. Escrow Analysis, Shortages, or Advances
5. Trial Payment Plan (TPP)
6. Communications and Notices
7. Bankruptcy
8. Loss Mitigation Agreements
9. Loss Mitigation Incentives
10. Other Loss Mitigation Requirement

A. Incomplete or insufficient servicing records and/or audit trail B. Loss mitigation activity not completed as required C. Calculation errors or unallowable/prohibited

fees/penalties/charges D. Loss mitigation reporting inaccurate, incomplete, or contrary to

policy E. Violation of program or product-specific requirement F. Evidence of fraud or misrepresentation

Page 1838

Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 4 (continued) Loss Mitigation Processing (LP)

Severity Tiers

Unacceptable

1 Evidence of fraudulent or materially misrepresented information about which the Servicer knew or should have known.

Forward • Loss mitigation activities were not conducted within HUD-specified time frames. • Failure to follow the Loss Mitigation Option Priority Waterfall. • Failure to fully document all required information obtained through communication with the Borrower and the loan was not reviewed for loss mitigation as a result. • Borrower’s request for loss mitigation was improperly processed and was not reviewed as required. • Financial evaluation is not supported by documentation in the Servicing File, or Servicer calculation errors result in improper review for Loss Mitigation Options. HECM • HECM loss mitigation Repayment Plan review activities were not completed in accordance with HUD program requirements.

Deficient

• Loss mitigation was not processed in accordance with specific FHA requirements and/or loss mitigation notifications did not include all required elements, but defects are inconsequential and do not require loan-level corrective action. • Required financial documents are missing, but FHA is able to determine loss mitigation compliance based on other information contained in the Servicing File. • Inaccurate/erroneous data is revealed in the Servicing File or reported to FHA, but errors are inconsequential. • Apparent defects are present with respect to HUD policy, but the actions were required to comply with other federal or state law.

4 Evidence of fraudulent or materially misrepresented information about which the Servicer did not know and could not have known.

Page 1839

Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 4 (continued) Loss Mitigation Processing (LP)

Severity Tiers

Remedies

1 Life-of-Loan Indemnification

Forward • Notify the Borrower of the servicing error. • Complete the Loss Mitigation Option that puts the Borrower in the position they would have been in absent the violation.  If the appropriate Loss Mitigation Option is unavailable or insufficient, complete a comparable alternative. • FHA will accept indemnification (1-Year or 5-Year) only when the Servicer provides documentation of a good faith effort to complete the remedies above but is unsuccessful due to circumstances beyond the Servicer’s control. AND • Remit the amount of any loss mitigation incentives to HUD. • Refund the Borrower’s account any late fees paid or accrued from the month in which the loss mitigation failure initially occurred. • Correct any credit reporting negatively impacted by the failure. HECM • For HECM violations, Life-of-Loan indemnification is the only available remedy in LRS if the Servicer is unable to provide mitigating documentation and/or complete corrective action.

Page 1840

Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 5 Home Retention (HR) Compliance with standards and requirements for various Home Retention Options from processing through completion of related servicing activities. Minimum property acceptability and eligibility standards for FHA insurance, including program and product-specific variations.

HUD Policy References – Handbook 4000.1

Forward HECM

Loss Mitigation Home Retention Options Presidentially-Declared Major Disaster Areas Programs and Products

Defaults for Unpaid Property Charges COVID-19 HECM Property Charge Repayment Plan

Sources

Causes A. Incomplete or insufficient servicing records and/or audit trail B. Servicing activity not completed as required C. Home Retention Option did not reinstate the loan D. Home Retention Option standards/requirements not met E. Presidentially-Declared Disaster/emergency program

1. Postponement of Servicemember Payments
2. Forbearance Plan
3. Standalone Loan Modification
4. Standalone Partial Claim
5. Combination Loan Modification and Partial Claim
6. Payment Supplement
7. HECM Repayment Plan
8. Borrowers in Foreclosure
9. Other Home Retention Option

requirements not met F. Evidence of fraud or misrepresentation

Page 1841

Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 5 (continued) Home Retention (HR)

Severity Tiers

Unacceptable

1 Evidence of fraudulent or materially misrepresented information about which the Servicer knew or should have known.

Forward • Servicing File does not support Borrower eligibility for the Home Retention Option received. • Improperly paid Partial Claim as the result of policy violations, calculation errors, impermissible or unsupported charges, fees, or amounts and/or process timing issues. • Unallowable or improperly calculated amount included in total outstanding debt to be resolved or capitalized. • Borrower was ineligible for the Home Retention Option received. • Improperly completed FHA-HAMP Loss Mitigation Option after TPP failure. • Failure to ensure first lien position through the completion of a Loan Modification. HECM • Improperly completed HECM Loss Mitigation Option and property charge default was not cured as a result. • Borrower’s ability to support the HECM Repayment Plan is not evident in the Servicing File. • Borrower was ineligible for the HECM Loss Mitigation Option received based on HUD program-specific requirements.

Deficient

• Required documentation is missing, but FHA is able to determine compliance with Home Retention Option requirements based on other information contained in the Servicing File. • Home Retention Option was not processed in accordance with specific FHA requirements, but defects are inconsequential and do not require loan-level corrective action. • Inaccurate/erroneous data is revealed in the Servicing File or reported to FHA, but errors are inconsequential. • Apparent defects are present with respect to HUD policy, but the actions were required to comply with other federal or state law.

4 Evidence of fraudulent or materially misrepresented information about which the Servicer did not know and could not have known.

Page 1842

Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 5 (continued) Home Retention (HR)

Severity Tiers

Remedies

1 Life-of-Loan Indemnification

Forward • Notify the Borrower of the servicing error. • Complete the Loss Mitigation Option that puts the Borrower in the position they would have been in absent the violation.  If the appropriate Loss Mitigation Option is unavailable or insufficient, complete a comparable alternative. • FHA will accept indemnification (1-Year or 5-Year) only when the Servicer provides documentation of a good faith effort to complete the remedies above but is unsuccessful due to circumstances beyond the Servicer’s control. AND • Remit the amount of any loss mitigation incentives to HUD. • Refund the Borrower’s account any late fees paid or accrued from the month in which loss mitigation failure initially occurred. • Correct any credit reporting negatively impacted by the failure. Improperly Paid Partial Claims • For overpaid Partial Claims, remit the overpayment amount to HUD. • If the Borrower or Property was ineligible for a Partial Claim, remit the entire Partial Claim amount and any incentives to HUD. • If the Partial Claim failed to fully reinstate the loan, adjust the Borrower’s account in the amount of the Partial Claim shortage. HECM • For HECM violations, Life-of-Loan indemnification is the only available remedy in LRS if the Servicer is unable to provide mitigating documentation and/or complete corrective action(s).

Page 1843

Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 6 Home Disposition (HD) Compliance with standards and requirements for various Home Disposition Options and includes foreclosure processing through property conveyance, claims, and other related matters.

HUD Policy References – Handbook 4000.1

Forward HECM

Foreclosure of Mortgage during Rehabilitation Period Home Disposition Options Presidentially-Declared Major Disaster Areas Foreclosure Programs and Products

Due and Payable Servicing Initiation of Foreclosure and Reasonable Diligence Time Frames Sale of Property Acquired through Foreclosure or DIL Claims Presidentially-Declared Major Disaster Areas Mortgagee Optional Election Assignment

Sources

Causes

1. Pre-Foreclosure Sale (PFS)
2. Deed-in-Lieu (DIL) of Foreclosure
3. Foreclosure Review and Activities
4. Fees and Costs
5. Foreclosure During 203(k) Rehabilitation Period
6. Foreclosure Processing
7. Conveyance and Payment of Claim
8. Claims Without Conveyance of Title (CWCOT)
9. HECM Property Disposition
10. Other Home Disposition Option

A. Incomplete or insufficient servicing records and/or audit trail B. Servicing action not completed as required C. Home Disposition Option improperly executed D. Eligibility or qualification requirements for Home Disposition

Option not met E. Violation of program or product-specific requirement F. Evidence of fraud or misrepresentation

Page 1844

Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 6 (continued) Home Disposition (HD)

Severity Tiers

Unacceptable

1 Evidence of fraudulent or materially misrepresented information about which the Servicer knew or should have known.

Forward • Unable to determine compliance with Home Disposition Option requirements due to missing/incomplete documentation. • HUD-approved extension or variance was not obtained as required and servicing records do not indicate a permissible reason or supporting documentation for exceeding HUD-specified time frames. • Foreclosure alternatives were not exhausted before foreclosure was initiated and/or completed. • Foreclosure was not initiated within HUD’s specified time frame and claim was submitted without required curtailment. • Claim was overpaid due to unsupported, unallowable or prohibited fees/penalties/charges, or other miscalculations. • Property is in unacceptable conveyance condition due to Servicer neglect or ineligible for CWCOT due to Surchargeable Damage. • Failure to ensure PFS Arm’s Length Transaction requirements were met. • Failure to follow property valuation requirements. HECM • Noncompliance with HECM disposition requirements including Property sale, assignment, foreclosure, claims, or other cure policies. • Unacceptable property condition due to disrepair, Servicer neglected Property Preservation and Protection, and/or required inspections.

Deficient

• Foreclosure was not initiated within HUD’s specified time frame and curtailment will be required at claim submission. • HUD-approved extension or variance was not obtained as required, but the Servicing File contains evidence to support approval if extension or variance had been requested. • Home Disposition Option was not processed in accordance with specific FHA requirements, but defects are inconsequential and do not require loan-level corrective action. • Inaccurate/erroneous data is revealed in the Servicing File or reported to FHA, but errors are inconsequential. • Apparent defects are present with respect to HUD policy, but the actions were required to comply with other federal or state law.

4 Evidence of fraudulent or materially misrepresented information about which the Servicer did not know and could not have known.

Page 1845

Appendix 8.0 – FHA Defect Taxonomy (11/10/2026)

Defect Area 6 (continued) Home Disposition (HD)

Severity Tiers

Remedies

1 Life-of-Loan Indemnification

Forward Loan Status – Pre-Foreclosure/Foreclosure • Notify the Borrower of the servicing error. • Complete the Loss Mitigation Option that puts the Borrower in the position they would have been in absent the violation.  If the appropriate Loss Mitigation Option is unavailable or insufficient, complete a comparable alternative.  Foreclosure must be suspended during the loss mitigation process and canceled upon completion of a Loss Mitigation Option. • FHA will accept a 5-Year indemnification only when the Servicer provides documentation of a good faith effort to complete the remedies above but is unsuccessful due to circumstances beyond the Servicer’s control. AND • Remit the amount of any incentives to HUD. • Refund the Borrower any improperly assessed fees/penalties/charges. • Correct any credit reporting negatively impacted by the failure. Loan Status – Conveyance/Claim • For improperly paid claims, remit any overpaid amount and incentive fee to HUD. • For improperly paid conveyance claims due to incomplete repairs less than $5,000, remit the cost of the repairs to HUD. • Life-of-Loan indemnification is the only available remedy in LRS when documentation in the Servicing File demonstrates the foreclosure should not have been completed, or the Property was ineligible for the Home Disposition Option or claim type received. HECM • For HECM violations, Life-of-Loan indemnification is the only available remedy in LRS if the Servicer is unable to provide mitigating documentation and/or complete corrective action.

Page 1846

Appendix 9.0 – Assumed Loan Periods for Computations of Total Annual Loan Cost Rates (04/29/2024)

Guideline text quoted as published by the agency. The latest published version governs. This is not an underwriting decision.