“Speaking of legal matters, Guild Mortgage grabbed the headlines yesterday as the Department of Justice filed a lawsuit against Guild under the catch-all False Claims Act. The action is captioned United States ex rel. Dougherty v. Guild Mortgage Company (D.D.C.). It continues to be interesting why smaller lenders seem to continue to originate this product wholeheartedly whereas the big banks, such as Chase, have moved away from the program given the potential liability…

…Do smaller companies think that they are too small to be noticed, or are immune from prosecution? Or because they were originating perfect FHA loans ten years ago? Yes, this suit covers originations starting in 2006. Settling with the DOJ is certainly an option – just ask Wells Fargo, Franklin American Mortgage, Walter Investment, First Tennessee Bank, Freedom Mortgage or M&T Bank how to do it. Guild acted as a “direct endorsement lender” in the FHA insurance program, which grants the lender the authority to originate, underwrite and endorse mortgages for FHA insurance without prior review or approval from the FHA. The news prompted one industry vet to write to me saying, “I wonder if the DOJ understands how these enforcement actions cause FHA versus conventional primary market price spreads to widen and is costing every low and middle income FHA borrower about 200 bps in price compared to where levels would be without lenders building in the cost of the uncertainty into their daily price sheets? And ‘enforcement actions?’ ‘Extortion’ now numbering into the billions of dollars in actual fines levied upon lenders with deep pockets and the additional safeguards to avoid such extortion that has caused huge inefficiencies in producing the product. In the end the government wins and the consumer loses. This is the exact opposite effect that these programs were designed to avoid.” Taking the high road, Guild released a public statement. Mary Ann McGarry, president and CEO of Guild Mortgage Co., issued the following statement regarding an action initiated against Guild by the Department of Justice: “We are extremely disappointed that the Department of Justice has elected to pursue this action. Guild has a proud record of making FHA loans since 1961 and we welcome the opportunity to set the record straight and correct the numerous misstatements in the government’s complaint. The government’s action is unwarranted and without merit. The implication that any default on an FHA loan by a borrower represents wrongdoing by the lender is not justified. For more than five decades Guild has responsibly underwritten fixed rate and fully documented loans in accordance with FHA requirements. This enforcement environment that lenders face today threatens to limit opportunities for home ownership and hurts the housing market. It is contrary to the mission of HUD and the FHA program to help the underserved – a Guild tradition since its founding in 1960. It is unfortunate that lenders such as Guild have been placed in this untenable position where any minor error could result in substantial financial penalties. To help families with low and moderate incomes, we need to expand home buying opportunities, not shrink them. Sadly, if this punitive environment continues, the cost of lending will continue to increase for FHA borrowers and only the wealthy will be able to buy homes. Although we disagree with the allegations and intend to defend ourselves vigorously, we will continue to serve the FHA and first-time homebuyers, which we have served for more than 50 years.””, Excerpt from May 2016 Mortgage Industry Newsletter

Posted on May 24, 2016, in Postings. Bookmark the permalink. Leave a comment.

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