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US government sues Allied Home Mortgage for $2.5 billion over lending fraud

The US government on Tuesday filed a lawsuit in the US District Court for the Southern District of New York (SDNY) [official website] alleging that Allied Home Mortgage Capital Corporation (Allied) [corporate website] and two of its top executives misled the government into believing that its loan qualified for federal insurance. In particular, the US claims [press release, PDF] that Allied engaged in "reckless" lending practices, including a decade-long period of operating "shadow branches," lying about its compliance with regulations set forth by the US Department of Housing and Urban Development (HUD) [official website] and concealing misconduct that has resulted in the default of nearly 32 percent of the 112,324 loans which the firm originated between 2001 and 2010. Such conduct has allegedly caused HUD more than $834 million in insurance claims already paid, and because the government expects additional claims to follow, the US has requested treble damages and penalties under the False Claims Act [text] for at least $2 billion. US Attorney for Manhattan Preet Bharara has publicly denounced the firm's alleged practices:

Allied and its CEO exploited a government insurance program to engage in a wholesale shifting of risk away from itself—playing a lending industry equivalent of heads-I-win and tails-you-lose. The losers here were American taxpayers and the thousands of families who faced foreclosure because they could not ultimately fulfill their obligations on mortgages that were deemed to fail.
Allied has yet to respond to the government's allegations.

Only six months ago, Bharara filed a civil suit [complaint] in the SDNY against Deutsche Bank [corporate website] for also allegedly engaging in mortgage fraud [JURIST report]. Similar to the government's current claim, the complaint against Deutsche Bank in May 2011 averred that, from 1999-2009, the bank regularly lied to the Federal Housing Administration (FHA) [official website] in order to obtain and maintain the Direct Endorsement Lender (DEL) status of its subsidiary, MorgageIT. The US argued that during the time this subsidiary acted as a DEL, it endorsed more than 39,000 mortgages for FHA insurance while failing to not only adhere to the program's edibility rules, but also failing to implement quality control procedures.

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