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Banks Took $6B in Reinsurance Kickbacks, Investigators Say

Many of the country's largest banks received $6 billion in kickbacks from mortgage insurers over the course of a decade, according to a previously undisclosed investigation by the Inspector General of the Department of Housing and Urban Development.

The allegations, since referred to the Department of Justice, stem from lenders' demand that insurers cut them in on the lucrative business of insuring the mortgages they produced during the housing boom.

In exchange for their business, companies such as Citigroup Inc, Wells Fargo & Co, SunTrust Banks Inc. and Countrywide allegedly required reinsurance partnerships on generous terms that violated the Real Estate Settlement Procedures Act, a 1974 law prohibiting abusive home sales practices.

During a two-day presentation in the summer of 2009, HUD's team presented DOJ attorneys with a thick binder of evidence that major banks had engineered a decade-long kickback scheme, people familiar with the investigation say.

Documents from the investigation show that the inspector general's staff concluded that banks and insurance companies had created elaborate financial structures that had the appearance of reinsurance but failed to transfer significant amounts of risk to their bank underwriters.

Some of the deals were designed to return a 400% profit on a bank's investment during good years and remain profitable even in the event of a real estate collapse.

Making matters worse, banks allegedly forced unknowing consumers to buy more insurance than they needed and failed to properly disclose the reinsurance agreements, another RESPA violation.

HUD's acting inspector general, Michael Stephens, worked on the case before being appointed to head the inspector general's office last year. He acknowledged the investigation's existence and expressed frustration that the case had not yet produced a settlement or prosecution.

While Stephens said he was still "hopeful" that prosecutors would bring a case, "this thing has been going on for too damn long."



Market observers, analysts and ratings agencies long questioned the reinsurance deals, but banks and insurers publicly maintained they met the standard for arms-length transactions set out in a 1997 policy letter circulated by HUD. The deals, they said, were not the result of coercion.

What those companies may have believed in private is another matter.

Wells Fargo and Bank of America Corp. have settled class action cases alleging the same sort of misconduct flagged by HUD, and internal documents show that banks and insurers viewed the arrangements as a thinly veiled pay-to-play scheme. Even as insurers complained they couldn't afford the escalating cost of the reinsurance payments, banks threatened or punished companies that balked at providing them, documents obtained by American Banker show.

Wells Fargo & Co told one insurer that it should consider giving Wells such deals if it wanted business referrals. After insurer MGIC Investment Corp. announced plans to cut back on banks' share of premiums in 2003, Countrywide executives complained to an MGIC executive and told him that they were shifting Countrywide's business to MGIC's competitors.

"I think we should continue to decrease there [sic] share again," former Countrywide business operations executive Mitch Turley wrote in an email to colleagues that was later obtained by investigators and reviewed by American Banker. (B of A bought Countrywide in 2008, after the alleged wrongdoing occurred; Turley no longer works for B of A and did not respond to an interview request from American Banker.)

Noting that the mortgage industry was in dire shape when investigators handed their case to prosecutors, the inspector general's office proposed that much of the penalty should be stayed. Even still, the proposed settlement would be the most aggressive action ever pursued under RESPA, requiring banks to pay hundreds of millions of dollars in fines and restitution.

Although HUD's investigation was referred to the Justice Department last year, people familiar with the case say that prosecutors have done little to advance it. Contacted by American Banker, a spokeswoman declined to discuss the case.

Prosecutors had agreed the case was well worth taking when it was first referred to them, said former HUD Inspector General Ken Donohue and others.

"I'm bewildered by why this wasn't pursued on an aggressive basis," Donohue said.


HUD's case began far from its Washington headquarters. Around 2007, Special Agent Julien Kubesh of the inspector general's Minneapolis field office teamed up with the Minnesota Department of Commerce in a review of the insurance on home loans, people familiar with the investigation say.

Mortgage insurance, often required for borrowers without sizable down payments, is a substitute for equity that serves to protect a loan's owner in the event of a borrower default. Banks typically choose the insurance carrier, but borrowers pay for the coverage in the form of higher net mortgage payments. In the industry's early years, there were no financial ties between banks and the insurers.

But Kubesh, a former IRS agent, found that the insurers had taken out reinsurance from subsidiaries of the banks that had produced the loans. Virtually all major lenders had established such ventures, which supposedly shared insurers' risk in exchange for a portion of the insurance premiums.


(7) Comments



Comments (7)
While yet another disclosure of the broad range of fraudulent activities of mortgage originators and banks during the period leading up to the financial crisis, it is no longer a surprise that the bankers were (and perhaps still are) involved in these kinds of activities. I don't recommend that anyone hold their breath waiting for the government to begin prosecuting, unless you've built up your lung capacity to handle infinity. After a multiple Congressional hearings about the behavior of banks and financial institutions causing the financial crisis, Alan Greenspan eventually admitted that he was totally wrong about the ability and willingness of a totally unregulated, free market in financial products and services to police itself. Meanwhile, two of his preeminent disciples, Tim Geithner and Larry Summers, remain unrepentant, unchanged, and unwilling to pursue any course of action that would hold accountable their "too big to fail, too rich to jail" peers and former associates from the banking and finance industry. Although the Treasury Department may not have direct control over the actions that could be taken against participants in the mortgage reinsurance kickbacks fraud, it can be expected that they will exercise all power they can in their interactions with other Cabinet members to discourage the Justice Dept from taking any action, just as they have done in all of the other apparent bank and financial institution frauds that have been exposed over the last 4 years. Only thing will be to see whether or not Treasury under Geithner can create another bailout program for mortgage insurance that will be just as effective as TARP, student loan, credit card, repackaged foreclosed housing, and other programs have been in rewarding the main culprits who originally created the problems. Talk about putting the foxes in charge of the hen house.
Posted by RichardA_GA | Friday, December 30 2011 at 12:12AM ET
Mike G -- On the flood insurance issue, you can email me at stephen@sfclasslaw.com I'd like to discuss with you what happened. Thanks.
Posted by Stephen F | Thursday, September 08 2011 at 11:30AM ET
This explains why one of my short sales with only one lien had an MI get involved in the deal. Lender had put in place a separate insurance policy in place without the borrowers knowledge. Now because loan defaulted they wanted to be paid by the borrower...are you kidding.? Talk about covering your bets.
Posted by Dynamicbroker | Wednesday, September 07 2011 at 8:11AM ET
I'm running into similar tactics on flood insurance. Whom can I email to report the details of this abuse? Mike G
Posted by Mike G | Wednesday, September 07 2011 at 7:39AM ET
"Noting that the mortgage industry was in dire shape when investigators handed their case to prosecutors, the inspector general's office proposed that much of the penalty should be stayed."

This is a very unusual reason to not prosecute. Will I ever get the same consideration?
Posted by Robert K | Tuesday, September 06 2011 at 10:48PM ET
Dirt-bags with major sociopathic tendencies.
Posted by Peter F | Tuesday, September 06 2011 at 7:20PM ET
The way the system is set up for kickbacks is not unique to the banking industry. This same practice happens with GPO's in the medical supply industry. I recently saw a film that discusses this issue.

It is called PUNCTURE, starring Chris Evans as a lawyer who crusades to protect the often neglected and routinely injured healthcare practitioners and nurses who are systematically denied access to safer conditions and instruments by employers and powerful interest groups.

Check out the site, http://www.puncturemovie.com/, for more information about this amazing true story and show your support by liking it on Facebook:


See the film in theaters on September 23rd.
Posted by Jon B | Tuesday, September 06 2011 at 7:08PM ET
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