The Department of Housing and Urban Development (HUD) announced a $1 billion dollar settlement relating to mortgage fraud by Bank of America against the Federal Housing Administration (FHA).
HUD, which had been investigating lending practices at Bank of America since 2009 said that Bank of America knowingly made FHA loans to unqualified home buyers. HUD also accused Bank of America of originating mortgage loans based on inflated appraisal values. As a result of Bank of America’s actions, the FHA lost hundreds of millions of dollars according to HUD.
Bank of America agreed to pay the FHA $500 million immediately to compensate for losses incurred by the FHA on loans originated by Bank of America and Countrywide Lending which was acquired by Bank of America in 2008. The other $500 million will be set aside into a fund to be used to modify the mortgages of borrowers allegedly harmed by Bank of America’s actions. Any unused money from the loan modification fund not used after three years will be turned over to the FHA.
Discussing the settlement terms, U.S. Attorney Lynch had this to say:
“We announce today the largest ever False Claims Act settlement relating to mortgage fraud. Through their underwriting and origination of tens of thousands of government-insured loans to unqualified borrowers, Countrywide Financial subsidiaries systematically abused the Federal Housing Administration and became some of the main players in this country’s financial crisis. We are committed to protecting the FHA’s ability to provide assistance to qualified low income and first-time home-buyers, and this settlement goes a long way toward that end. It also puts lenders on notice that they will face serious financial consequences for violating their obligations under the FHA’s programs.”
Lenders who deliberately chose to bend the FHA rules to approve unqualified applicants can do so quite easily based on the manner in which the FHA lending program is set up. The FHA does not directly underwrite, fund or approve FHA loans – the FHA only insures FHA mortgage loans approved by authorized lenders.
The authority to approve FHA loans is given to authorized lending institutions who become “direct endorsed FHA lenders”. The lending decision is made by underwriters who work for the bank and are supposed to follow FHA lending guidelines. Often times, however, as seen in this case, the underwriters do not strictly follow FHA lending guidelines and approve unqualified borrowers.
The FHA has already expelled hundreds of FHA endorsed lenders that recklessly disregarded FHA lending guidelines and often times engaged in outright mortgage fraud. The FHA did not discover the fraud until after the fact when the borrower defaulted, resulting in losses to the FHA.
Considering the huge fine leveled against Bank of America and the fact that many of the notoriously fraudulently FHA lenders have already been expelled from the FHA lending program, the level of FHA mortgage fraud should decline dramatically.