NEW YORK — U.S. prosecutors sued Houston-based home-lender Allied Home Mortgage Capital Corp. and two executives for alleged fraudulent lending practices related to hundreds of millions of dollars in government-backed mortgages.
The lawsuit, filed in Manhattan federal court on Tuesday, alleged that Allied Home Mortgage, which has claimed to be the nation's largest privately held mortgage banker and broker, engaged in "reckless" lending practices, flouted the requirements of the Federal Home Administration mortgage-insurance program and repeatedly lied about its compliance.
Nearly 32% of the 112,324 loans the firm originated between 2001 and 2010 have defaulted, resulting in more than $834 million in insurance claims paid by the U.S. Department of Housing and Urban Development, according to the lawsuit.
In 2006 and in 2007, the firm's default rate climbed to 55%, the lawsuit said.
"Allied's decade of concealed misconduct has resulted in tens of thousands of defaulted loans, thousands of American homeowners facing eviction and hundreds of millions of dollars in losses to the United States," prosecutors said in the lawsuit.
An Allied Home Mortgage representative didn't immediately return a phone call seeking comment Tuesday.
Prosecutors from the U.S. Attorney's office in Manhattan and representatives from HUD are expected to discuss the lawsuit in more detail at a 1 p.m. EDT press conference on Tuesday.
The lawsuit alleged that Allied Home Mortgage originated loans out of hundreds of "shadow" branches that weren't approved to participate in the mortgage-insurance program by HUD and submitted those loans using identification numbers for approved branches. For example, the firm allegedly operated about 50 shadow branches in Michigan and as many as 20 shadow branches under a single HUD identification number in other states, according to the lawsuit.
"Although several senior managers voiced concerns about this practice, it was continued under the direction of [Jim C.] Hodge, Allied's CEO," according to the lawsuit.
Hodge, the firm's president and chief executive, and Jeanne L. Stell, Allied Home Mortgage's former executive vice president from 1998 to 2007, were named as defendants in the lawsuit. Hodge and his wife own 99% of Allied Home Mortgage, with his son holding a 1% stake in the firm, according to the lawsuit.
Stell was hired as a consultant by Allied Home Mortgage last year to oversee compliance, licensing policies and procedures for its branch offices in the U.S. and the Virgin Islands, according to a press release on the company's website.
The company also allegedly lied to the government when it sought approval to originate FHA-backed loans at various branches, falsely certifying that those branches met HUD requirements, the lawsuit said.
For example, the company allegedly operated its branches like franchises: Collecting revenue when they were profitable and closing then without notice when they weren't, prosecutors said in the lawsuit. Branch managers were liable for a branch's financial obligations, even though the practice was prohibited by HUD, prosecutors said.
The company also failed to implement an internal quality-control plan, allowing its "shadow branches" to operate without any scrutiny whatsoever, according to the lawsuit. The firm had only two quality-control employees in its corporate office to oversee more than 600 branches between 2004 and 2008, the lawsuit said. It had an additional two to five quality-control employees operating in the U.S. Virgin Islands but, when a quality-control manager visited those employees, she found they didn't know "what a mortgage was," according to the lawsuit.
Allied Home Mortgage, which surrendered it mortgage-banking license in New York in 2010, also allegedly proposed a convicted felon — who had been sentenced to five years in prison for distributing methamphetamines — as the state manager for its New York operations, according to the lawsuit. Even though he had been with the company since 1998 and overseen its New Jersey operations since 2007, he wasn't identified to bank regulators as an employee with a felony record, the lawsuit said.
Earlier this year, Manhattan federal prosecutors sued Deutsche Bank AG (DB, DBK.XE) over alleged misrepresentations about the quality of loans made by its defunct Mortgage IT unit, which were backed by the federal government.
That lawsuit is seeking to recover alleged damages and losses on mortgages insured by HUD, which could total more than $1 billion.
