“Why would the government sue what is arguably the most taxpayer-friendly issuer of federally backed loans in the country? The Detroit-based lender put it this way in a filing last year: “Quicken Loans appears to be one of the targets (due to its large size) of a political agenda under which the DOJ is ‘investigating’ and pressuring large, high-profile lenders into paying nine- and ten figure sums and publicly ‘admitting’ wrongdoing, including conceding that the lenders had made ‘false claims’ and violated the False Claims Act.” That sounds like a fair summary…

…How confident is Justice that it can prevail on the facts? In 2013 the government told Quicken Loans that because of the investigation, the FHA would stop conducting standard reviews of the company’s mortgages originated prior to 2012—meaning all of the loans at issue in the suit. In other words, the government wanted less data generated on the quality of Quicken mortgages. Who needs to suppress evidence if prosecutors can ensure it’s never created in the first place?”, The Wall Street Journal Editorial Board, “The Quickening”, May 4, 2016

Opinion

The Quickening

Why is Justice suing one of the nation’s most careful FHA lenders?

unnamed

Quicken Loans CEO Bill Emerson in Detroit, MI on June 2, 2015. PHOTO: BRIAN WIDDIS/THE WALL STREET JOURNAL

‘If we’ve done nothing wrong, then we’re going to fight,” says Quicken Loans CEO Bill Emerson. He’s talking about the U.S. Department of Justice’s lawsuit against his company, which looks likely to go to trial. So be it. A trial might allow the public to see how the culture of Washington has elevated housing goals over taxpayer safety.

The Obama Administration has extracted more than $100 billion in mortgage settlements from the nation’s largest banks. And when the feds sued Quicken Loans last year, they probably figured that another corporate defendant would roll over and beg to be left alone in return for a large check to Uncle Sam. They may have figured wrong. Like the title character in the 1986 film “Highlander,” Quicken may be the last big mortgage lender standing in this legal fight.

Justice claims Quicken harmed taxpayers by willfully violating Federal Housing Administration rules to qualify risky loans for federal mortgage insurance. “Quicken’s conduct caused hundreds of improperly underwritten loans to be endorsed for FHA insurance,” says the government, “where the borrowers ultimately did not repay the loans.”

The government accuses the Detroit-based lender of violating the False Claims Act, breaching a fiduciary duty and negligence. The government calls Quicken “a culture that elevated profits over compliance.”

The feds can try to sell this story at trial. Justice offers spicy quotes from tens of thousands of emails and other internal documents that it extracted from the company. Readers of the federal complaint are treated to tales of Quicken employees discussing “fudging” borrowers’ income and questioning whether it was derived from legitimate sources. In one exchange quoted in the federal suit, Mr. Emerson asks “where is the upside” on one particularly sketchy loan. An employee responds that “the only upside here is we have FHA insurance.”

It looks bad on the surface, but a closer inspection shows why the feds might not want this case to get as far as a trial.

For starters, almost all of the ugly emails quoted by the government appear to refer to loans that haven’t failed. Prosecutors might find them useful in characterizing the “culture” at Quicken. But if this case is about harm to taxpayers, shouldn’t the evidence focus on loans that cost the government money?

On that score, Justice has a problem that goes beyond the particulars of corporate emails. You’d never know it from Washington’s tale of a reckless corporation endangering the public fisc, but instead of losing money, taxpayers appear to be making money off Quicken Loans. In a legal filing last year, the company said that, according to the government’s own evaluations of mortgage lenders, “the quality of loans originated by Quicken Loans today is more than twice as good as the national average, and the best among all large FHA lenders.”

Including more recent data, the company tells us that it has the lowest default rate in the FHA program at 0.37% for the two years ended Feb. 29, 2016. Quicken also says that taxpayers will end up booking billions of dollars in profits by collecting insurance premiums on Quicken mortgages that never go into default.

Why would the government sue what is arguably the most taxpayer-friendly issuer of federally backed loans in the country? The Detroit-based lender put it this way in a filing last year: “Quicken Loans appears to be one of the targets (due to its large size) of a political agenda under which the DOJ is ‘investigating’ and pressuring large, high-profile lenders into paying nine- and ten figure sums and publicly ‘admitting’ wrongdoing, including conceding that the lenders had made ‘false claims’ and violated the False Claims Act.” That sounds like a fair summary.

How confident is Justice that it can prevail on the facts? In 2013 the government told Quicken Loans that because of the investigation, the FHA would stop conducting standard reviews of the company’s mortgages originated prior to 2012—meaning all of the loans at issue in the suit. In other words, the government wanted less data generated on the quality of Quicken mortgages. Who needs to suppress evidence if prosecutors can ensure it’s never created in the first place?

About that email chain in which an employee told Mr. Emerson that the “only upside” of a loan was FHA insurance: The government also quotes the Quicken employee saying that “we would be hard pressed to lend this guy a dime out of our pocket.”

One might read this as an example of a company trying to get taxpayers to cover a shoddy loan. But the implicit message is that the profit-seeking company has higher underwriting standards than the federal bureaucracy that is supposed to be serving the public. A trial could be instructive in exploring the “culture” that continues to make taxpayers stand behind risky mortgages.

Posted on May 6, 2016, in Postings. Bookmark the permalink. Leave a comment.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: