A week after Federal Housing Administration Commissioner David Stevens vowed to remove "bad apples" from the agency's roster of lenders, he started with Ideal Mortgage Bankers Ltd., a Melville, N.Y., lender that does business as Lend America.
Volume at Lend America, one of the most visible beneficiaries of the renaissance in FHA lending over the past two years, nearly doubled last year, to $1.36 billion, and was on track to do so again this year.
Underscoring Lend America's status in the FHA market, last year it became an issuer of bonds for the Government National Mortgage Association, the agency that securitizes federally backed loans. Lend America's mock-newscast infomercials, featuring Michael Ashley, the company's chief strategy officer, have become a fixture of weekend-morning television in the New York area.
But the book of business that Lend America originated over that two-year period has produced an outsized default rate of 11.3%, compared with the 4.6% average for FHA loans.
And Ashley has a long history of legal scrapes. So when the government sought a court injunction to stop the company from writing FHA loans, alleging fraud at the lender, observers were not surprised.
"Not everybody was prudent and it's fair to question why Ginnie Mae opened to these guys with high default rates," said Brian Chappelle, a partner at Potomac Partners, a Washington consulting firm. "The data is so stark, many of these lenders stick out like sore thumbs."
Lend America said Tuesday it was "taken by surprise" by the civil suit that the U.S. Attorney's Office, working with FHA, filed in the U.S. District court for the Eastern District of New York. The company said then that it "expects to continue in business and will respond more completely once all allegations are reviewed."
It provided no update by press time Wednesday. Ashley was expected to appear that afternoon before U.S. District Judge Joseph Bianco at a court in Central Islip, N.Y.
Separate actions are being pursued against Lend America by the inspector general of the Department of Housing and Urban Development and by the FHA, which has proposed disbarring four of the firm's underwriters.
In the 155-page complaint, prosecutors said Ashley has been involved in "fraudulent schemes" as part of "a pattern of conduct over two decades." In addition to falsely certifying that more than $14 million in loans produced by Lend America met FHA requirements, the lawsuit claims Ashley also concealed his employment and criminal history from state regulators.
In 1993, Ashley pled guilty to conspiracy to commit wire fraud (for which he was put on probation and paid a $36,300 fine). According to the U.S. Attorney's suit, he moved from company to company and took the same four underwriters with him.
They followed Ashley from Consumer Home Mortgage, in Melville, N.Y., to U.S. Mortgage, in Pine Brook, N.J., and ultimately to Ideal Mortgage, the lawsuit says.
Last year Ashley told American Banker that being able to issue Ginnie securities would let him bypass large loan aggregators and perform his own underwriting rather than be tied to the aggregators' minimum credit scores. Robert J. Fishman, Ginnie's chief risk officer, said in an interview late Wednesday that because Lend America is a relatively new issuer, the default rates on the company's securities are low compared to its total FHA book.
Only 5.28% of the loans in Lend America's Ginnie Mae pools are 60 days or may past due, he said, and just 3.24% are 90 days or more delinquent.
"Clearly they're not securitizing with Ginnie Mae everything they're originating from FHA," Fishman said. "They may be selling them as whole loans to third-party aggregators."
Commissioner Stevens has talked repeatedly during his three months on the job of permanently weeding out lenders that do not follow the rules.
"We know that rogue loan originators shifted to FHA," he said at the Mortgage Bankers Association convention in San Diego last week.
With the FHA's losses on the rise — the agency has said its capital reserve ratio is expected to fall below the congressionally mandated minimum of 2% — and so much of the mortgage market flocking to the agency in recent years, experts say more violators are in the queue to be prosecuted.
"I think they're starting to be more aggressive," said Robert Warnock, a principal at Mortgage Compliance Advisors LLC, a quality-control auditor in Salt Lake City. "They're actually doing some things that are logical for a change. If someone isn't doing good loans, they're trying to cut them off. It's what should have been done for many years."