November 1, 2011 / 9:04 PM / 8 years ago

U.S. sues Allied Home Mortgage for lending fraud

NEW YORK (Reuters) - Prosecutors sued Allied Home Mortgage Capital Corp and two top executives for at least $2.5 billion, accusing the company of fraudulently misleading the U.S. government into believing its risky loans qualified for federal insurance.

The civil lawsuit seeks triple damages under the federal False Claims Act against Allied, which once billed itself as the largest privately held mortgage broker, and its Chief Executive Jim Hodge and Executive Vice President Jeanne Stell.

It contended that Allied mortgages insured by the federal Department of Housing and Urban Development (HUD) were so poor that nearly one in three went into default, causing more than $834 million of insurance claims.

“The losers here were American taxpayers and thousands of families who faced foreclosure,” U.S. Attorney Preet Bharara in Manhattan said at a news conference. “Today, Allied’s business as usual comes to an end.”

Reached by telephone at his Houston office, Hodge called the government’s allegations “so absurd.” A spokesman for the company had no immediate comment.

Tuesday’s announcement is part of a government crackdown on some lenders and executives it believes contributed to the housing crisis by originating risky home loans that should not have been made, insured or sold.

Six months ago, the government accused Deutsche Bank AG in a similar, $1 billion fraud lawsuit of misleading it into insuring risky mortgages. Deutsche Bank has sought to dismiss that lawsuit.

Bharara said that the government expects to bring more lawsuits of this type, and that the case against Allied is not finished. Although prosecutors had brought a civil case, Bharara left the door open for criminal action.

“If and when we have sufficient evidence to bring a criminal case we will bring it,” Bharara said in response to questions about why it was not a criminal prosecution.

WHISTLEBLOWER

The lawsuit was filed in U.S. District Court in Manhattan, and expands upon a whistleblower lawsuit filed in May by former Allied branch manager Peter Belli, a Massachusetts resident. Belli declined to comment when reached by phone.

The government said Allied profited for years as one of the largest lenders approved by the Federal Housing Administration, which is part of HUD, by “engaging in reckless mortgage lending, flouting the requirements of the FHA mortgage insurance program, and repeatedly lying about its compliance.”

According to the complaint, 35,801, or nearly 32 percent, of 112,324 HUD-insured mortgage loans that Allied made from 2001 to 2010 defaulted, causing the $834 million of insurance claims. It said 2,509 additional defaulted loans could lead to $363 million of further payouts.

Allied had been an FHA loan correspondent until HUD shut that program at the end of 2010, the complaint said.

Allied was also accused of making many of the loans through hundreds of “shadow” branches that had not received HUD approval and had poor quality control. The lawsuit seeks a permanent ban against making FHA loans out of such branches.

Hodge, meanwhile, encouraged a “culture of corruption” by eliminating other management, intimidating workers, and silencing former employees by suing them, the complaint said.

The U.S. lawsuit included an email that the government said Stell sent to a former Allied employee soon after HUD in February 2009 issued a negative audit report about Allied branches.

“Jim has to be the biggest target personally for his disregard for the regulations,” Stell wrote, referring to Hodge. “Serves him right never listening and thinking he didn’t have to play by the rules.”

The government said Hodge and his wife, Kathy, own 99 percent of the company, while their son Jamey owns 1 percent.

The case is U.S. ex rel. Belli v. Allied Home Mortgage Capital Corp, U.S. District Court, Southern District of New York, No. 11-05443.

Reporting by Jonathan Stempel in New York; editing by Gerald E. McCormick and Andre Grenon

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