BULLETIN: Federal prosecutors in New York have filed a civil complaint against Allied Home Mortgage Capital Corp., Allied Home Mortgage Corp. and two Allied executives that alleges the U.S. Department of Housing and Urban Development (HUD) was put on the hook for at least $834 million in losses because of fraud at Allied.
Part of the fraud involved certifications by Allied that its operations were clean, but investigators discovered that the firm employed “numerous convicted felons” and hired “more than a dozen” in a single year, prosecutors said.
Losses could exceed $1 billion, and the government may file criminal charges after gathering additional evidence, authorities said.
Named civil defendants with Allied were President and Chief Executive Officer Jim C. Hodge and Executive Vice President Jeanne L. Stell.
Among the spectacular allegations — deemed by U.S. Attorney Preet Bharara as an Allied-orchestrated fraud scheme that created a situation of “heads-I-win and tails-you-lose” — was that the firm used a “quality-control” branch in the U.S. Virgin Islands purportedly to assess loan risk and staffed it with people who neither knew what HUD was nor what a mortgage was.
The workers, prosecutors said, mostly were located in St. Croix and were employed by a company Hodge set up “to obtain tax benefits” — even as the Allied firms were picking the pockets of taxpayers by not accurately assessing default risk on HUD-insured home loans.
In the past decade, Allied originated more than 110,000 Federal Housing Administration (FHA) mortgages, 30 percent of which are in default. In 2006 and 2007, the default rate mushroomed to 55 percent — and an additional 2,509 government-insured loans through Allied are now in default, potentially putting taxpayers on the hook for another $363 million on top of the $834 million they’ve already shelled out, prosecutors said.
FHA, which insures the mortgages of customers who may not meet traditional underwriting standards, is a division of HUD. Millions of Americans receive home loans backed by the government, and lenders such as Allied are required to comply with HUD requirements and to assess risk soberly.
“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 and tails-you-lose,” Bharara said. “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 alleged conduct in this case is egregious and our investigation is ongoing.”
Allied operated hundreds of “shadow, unapproved branch offices that originated FHA loans,” prosecutors alleged.
“To deceive HUD about this practice, Allied submitted loans from those branches to HUD substituting the ID number of a HUD-approved branch,” prosecutors continued. “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 — IDs that were based on false certifications. While some senior managers questioned this practice, it was continued under the direction of Hodge.”
Stell, according to prosecutors, knew she and Hodge had exposure to charges, and “routinely had another senior manager sign the certifications to HUD because she knew they were false.”
