U.S. sues Allied Home Mortgage for lending fraud

By Jonathan Stempel

The civil fraud lawsuit seeks triple damages under the federal False Claims Act against Allied, Chief Executive Jim Hodge and Executive Vice President Jeanne Stell.

It contends that the poor quality of Allied mortgages insured by the federal Department of Housing and Urban Development (HUD) caused nearly one in three loans to default, causing more than $834 million of insurance claims.

According to the complaint, 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."

The company was also accused of making many of the loans through hundreds of "shadow" branches that had not received HUD approval and had inadequate quality control.

In addition to the triple damages, the lawsuit seeks civil fines and a permanent ban against making any FHA loans out of shadow branches.

Reached at his Houston office, Hodge said "they're so absurd" when asked about the alleged fraudulent lending practices and insurance claims. He had no immediate additional comment. A spokesman for the company had no immediate comment.

The government filed the lawsuit with the U.S. District Court in Manhattan, six months after accusing Deutsche Bank AG <DBKGn.DE> in a $1 billion fraud lawsuit of misleading it into insuring risky mortgages. Deutsche Bank has sought to dismiss that lawsuit.

Tuesday's lawsuit is part of the government effort to crack down on some lenders and executives it believes contributed to the nation's housing crisis by originating risky home loans that should not have been made or sold.

In its complaint, the government said 35,801, or nearly 32 percent, of 112,324 HUD-insured mortgage loans that Allied made from 2001 to 2010 defaulted, causing HUD to pay the more than $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.

The government said Hodge encouraged Allied's wrongful activities by maintaining a "culture of corruption" in which he eliminated various senior management workers, "intimidated" workers through sudden firings and aggressive email monitoring and "silenced" former employees by suing them.

"As a result, Allied was able to conceal its dysfunctional operations and maintain its profitable position in the mortgage industry," it said.

Founded in 1991, Allied is a privately held lender and broker and bills itself on its website as "the leader in residential mortgage lending."

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 Robert MacMillan and Andre Grenon)