by Brian Mahany
Flagstar Bank is the latest large lender to settle federal charges of mortgage fraud. Although Flagstar is based in Troy, Michigan, the case was prosecuted by the United States Attorney in Manhattan. (To date many of the large cases including our firm’s $2.4 billion dollar fraud case against Allied is being prosecuted by the feds in New York.) Two weeks ago, Flagstar settled the charges against them for $133 million.
Although mortgages are a private contract between the lender and the home owner, the government has a big stake in lending fraud because the government insures many mortgages. In the Flagstar case, HUD claimed the bank used unqualified employees to approve mortgages and approved mortgages that didn’t meet HUD and FHA legal requirements.
Flagstar set quotas for their “underwriting assistants” and paid them incentive pay. The more mortgages approved, the higher one’s pay. While many bank employees followed proper underwriting guidelines, the incentive was simply too great a temptation for some. HUD says that Flagstar often cut corners and allowed bad loans to be approved.
When real estate prices continued to rise, no one was hurt. Once the bottom fell out of the market, however, taxpayers were left paying the bills. The shoddy lending practices of many lenders contributed directly to today’s economic woes, unemployment and homeowners unable to refinance or sell their homes.
How bad was the problem at Flagstar? The government says that HUD was left paying “hundreds of millions of dollars in insurance claims” caused by their bad loans.
Federally backed loans are required to be reviewed by experienced, registered underwriters, The government says that Flagstar often used assistants that lacked the necessary experience to review these loans.
Inexperienced underwriting “assistants” and incentive pay resulted in huge losses for the bank.
Flagstar quickly settled the case and is not only paying $133 million in damages but has agreed to immediately fix its lending practices.
Many mortgage fraud cases are brought by whistleblowers – usually current or former lending employees. Federal law allows these folks to receive a percentage of the money collected by the government. In the case of Flagstar, had the case been brought by a whistleblower, that person could have received 20 or 25 million dollars.
The law firm of Mahany & Ertl represents the whistleblower in the largest mortgage fraud case in the U.S, Allied Home Lending, as well as other whistleblowers. If you have knowledge of illegal net branch practices, incentive pay schemes, or false HUD certifications, contact us immediately. The federal false claims law works only if you are the first to report. Because cases are filed under seal, there is no way of knowing what others are doing. If you have information of wrongdoing, call us.
Mahany & Ertl – America’s Fraud Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine and Minneapolis, Minnesota. Services available in many jurisdictions.
[Hat Tip to Aaron Krowne at Mortgage Lender Implode-o-Meter for today’s story idea.]