Government Sues Allied Home Mortgage for Lending Fraud

The federal government has sued Allied Home Mortgage Corp. and its CEO, Jim Hodge, over fraudulent lending practices totaling more than $834 million.

According to a 41-page complaint filed with the U.S. District Court in Manhattan Tuesday, Allied, one of the nation’s largest privately held mortgage lenders, was a massive engine of mortgage fraud controlled and disguised by its top brass who lied, used false documents and corporate manipulation to play a shell game with the U.S. Department of Housing and Urban Development at the expense of taxpayers.

Allied’s “decade of concealed misconduct has resulted in tens of thousands of defaulted loans, thousands of American families facing eviction, and hundreds of millions of dollars in losses to the United States,” said U.S. Attorney Preet Bharara during a press conference.

Allied operated hundreds of “shadow,” unapproved branch offices that originated Federal Housing Administration loans, Bharara said.

FHA mortgage insurance encourages lenders to make loans to creditworthy borrowers who might not otherwise be able to meet underwriting requirements. To assess the risk of default on the loans it insures, HUD relies on FHA approved lenders who grant loans that comply with basic HUD requirements. Allied had the authority to originate loans that would be backed by the government.

As part of this agreement, Allied was required to seek HUD approval for each branch office that originated FHA loans, which meant submitting a certification about its operations as a branch. Allied was also required to certify each year that it met certain quality control standards and was in good standing with each state in which it operated.

According to the complaint, Allied failed to disclose that it was operating unapproved shadow branches, lied about employing convicted felons, lied about its true default rates to HUD and failed to maintain an adequate quality-control program given the volume of loans it issued.

Bharara called Allied’s quality control program “dysfunctional or entirely nonexistent,” adding that 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.”

According to court records, between 2004 and 2008, Allied’s quality-control department was made up of just two people who didn’t know “what HUD was” or even “what a mortgage was.”

More than 30% of Allied’s 112,324 loans made between 2001 and 2010 have defaulted, resulting in more than $834 million in insurance claims by HUD. In 2006 and 2007, the  company’s default rate climbed to 55%.

Allied’s Executive Vice President, Jeanne Stell, was also named in the civil suit. Prosecutors say she knew Allied’s branch operations violated HUD requirements and routinely had another senior manager sign the certifications to HUD because she knew they were false.

Tuesday’s complaints against the Texas-based company did not come as a surprise for some. Since 1991, three federal agencies and more than a dozen states have cited Allied or a related company for misconduct. Nine states have sanctioned the firm in the last three years for violations such as using unlicensed brokers and misleading borrowers. At least five lenders have sued Allied, claiming the company tricked them into funding loans for unqualified buyers by falsifying documents as well as submitting grossly inflated appraisals.

Calls to Allied for comment were not immediately returned.