The U.S. attorney for the Southern District of New York has filed a civil mortgage fraud lawsuit against Houston-based Allied Home Mortgage Capital Corp.; its affiliate, Allied Home Mortgage Corp.; as well Allied President and CEO Jim C. Hodge and Executive Vice President Jeanne L. Stell, claiming the lender operated hundreds of ‘shadow’ branch offices that originated Federal Housing Administration (FHA)-insured loans.
The complaint, announced Tuesday by the U.S. Department of Justice and the Department of Housing and Urban Development (HUD), seeks damages and civil penalties under the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 for what government officials describe as nearly a decade of concealed misconduct.
According to the feds, the FHA has paid $834 million in insurance claims for mortgages originated and fraudulently certified by Allied that are now in default. The company originated more than 110,000 FHA-insured loans in the past decade, more than 30% of which have defaulted, officials say. The default rate on Allied-originated mortgages from the 2006 and 2007 books of business climbed as high as 55%.
According to officials, an additional 2,509 loans are currently in default but not yet in claims status, which could result in additional insurance claim payments of up to $363 million.
As a HUD-approved loan correspondent and direct-endorsement lender, Allied was required to seek HUD approval for each office from which it originated FHA loans. The company was also required to certify that it maintained a quality-control program that reviewed loans that went into early-payment default, and that it faced no sanctions in the states in which it operated.
Officials say Allied knowingly provided fraudulent certifications to HUD that it complied with these requirements. According to the government's complaint, Alllied originated loans via unapproved, "shadow" branches. To deceive HUD about this practice, Allied submitted loans from those branches to HUD substituting the ID number of a HUD-approved branch. Allied's undisclosed shadow branches could not be audited by HUD, and their default rates were disguised by the default rates of branches whose IDs they were using, officials say.
Allied executives questioned the practice, but it was continued under the direction of Hodge, the complaint says.
Manhattan U.S. Attorney Preet Bharara described the alleged conduct as "egregious," and said the investigation is ongoing.
‘As described in the complaint, Allied and its CEO exploited a government insurance program to engage in a wholesale shifting of risk away from itself – playing a lending industry equivalent of "Heads, I win; Tails, you lose,'" Bharara said in a statement. "The losers here were American taxpayers and the thousands of families who faced foreclosure because they could not ultimately fulfill their obligations on mortgages that were doomed to fail."
The complaint includes further allegations that Allied provided fraudulent information in seeking HUD's approval for new branches.
In relation to these and other claims, HUD's Mortgagee Review Board has suspended the company, thereby preventing Allied for originating and underwriting new FHA loans. HUD has also suspended and proposed debarring Hodge and Stell. In addition, the Ginnie Mae has suspended the lender's ability to issue securities in its mortgage-backed securities program