”Mortgage lenders have to be crazy or desperate (or both) to continue to originate FHA and VA loans, where they now subject themselves to millions, tens of millions, hundreds of millions, maybe even billions in arbitrary fines or penalties from the government under the False Claims Act…
“…You say “arbitrary how so?” On October 7, 2014, I posted Statement #410, which discussed FHA’s audit of a sample of over six thousand mortgage loans they insured in Q12014. FHA said 48% of the loans they reviewed were ”unacceptable”, with material underwriting deficiencies!!!! (Exactly the same allegation made by the U.S. Attorney in the False Claims Act case below.) Just 16% of the Q12014 loans were deemed “acceptable” by FHA!!!! And I posted on December 12, 2014, Statement #514, commenting on an article in the Wall Street Journal that cited 1 in 7 appraisals being overvalued by 20% or more. These are exactly the types of allegations the U.S. Justice Department is pursuing under The False Claims Act these days.(Pre-crisis, as far as I am aware, this Act was never used against mortgage lenders.) I may be wrong, but I believe the Justice Department can pursue these claims, despite contrary assurances to mortgage lenders regarding reduced repurchase risks, currently being made by FHFA, HUD/FHA or VA. I also believe Justice can pursue these claims without the support or agreement of any of these other government agencies. As I said in #410 and #514, clearly if these material mortgage underwriting deficiency rates were anywhere in the ballpark of reality (I personally don’t believe they are), then it would be imprudent for FHA and/or VA to continue insuring/guaranteeing government mortgages from the mortgage lending industry. They would have to stop to avoid massive losses, right? And they would also have to institute a massive buyback program (or cancel their insurance/guarantee) and yet they, Fannie, Freddie (and FHFA, their regulator) are doing the opposite today; assuring the mortgage industry of reduced buybacks and penalties. That being said, it seems to me that U.S. Attorney’s around the Country, using this False Claims Act and armed with what I believe are mostly immaterial or highly subjective/judgmental underwriting deficiencies (with no objective facts determined by a court of law), can come after any mortgage lender (for a lot of money) any time they don’t like how, with the benefit of hindsight, the mortgage loans are performing. That’s scary as hell to me and should be scary as hell to any lender. Given the recent history of government actions against the industry (especially ones utilizing the False Claims Act) and these current allegations (about material underwriting and appraisal error rates), in my opinion, it is NOT prudent to originate FHA and VA mortgage loans until this is resolved clearly by the federal government.”, Mike Perry, former Chairman and CEO, IndyMac Bank
P.S. I have no idea whether the case I cited below had merit or not. I believe it was settled without any facts being determined or allegations being admitted or proven in a court of law. Given that and the federal government’s awesome power to force settlements upon the largest financial institutions in the U.S….let alone small firms or individuals….the allegations in the settlement should be treated as just that….allegations.
Mortgage Lender Agrees To $4.2 Million Settlement
A Southfield mortgage lender has agreed to pay $4.2 million to resolve allegations that it violated the False Claims Act in its origination of loans backed by the federal government, United States Attorney Barbara L. McQuade announced today.
GTL Investments, Inc., doing business as John Adams Mortgage Company (JAMCO), entered into the agreement with the U.S. Attorney’s Office for the Eastern District of Michigan to resolve allegations that it originated mortgage loans that had material underwriting deficiencies. The loans were guaranteed by the Federal Housing Administration.
The FHA makes home financing available by insuring residential mortgages for the purchase of properties with modest down-payments for purchasers meeting certain criteria, known as underwriting standards. The original lender or loan originator is responsible for making sure that the borrower meets these underwriting standards to minimize the possibility of default and the need for the FHA to pay the mortgage holder for the losses caused by the default.
An investigation by the Office of Inspector General for the Department of Housing and Urban Development found that GTL originated 31 FHA mortgage loans between January 2008 and April 2012 that had material underwriting deficiencies. Twenty-nine of these loans went to claim, causing the FHA damages of $2,445,912. The investigation also identified two loans that had not yet been presented for payment by the FHA with approximately $250,000 in potential losses. GTL has agreed to indemnify the FHA for these two loans.
“By holding accountable lenders who fail to comply with underwriting requirements, we hope to send a message to all lenders that they must comply with government standards for federally insured loans,” McQuade said.