The DOJ filed the suit, United States v. Quicken Loans, Inc., under the False Claims Act, alleging that Detroit-based Quicken knowingly submitted “claims for hundreds of improperly underwritten FHA-insured loans” from September 2007 through December 2011.
The issue lies in the fact that Quicken is a direct endorsement lender (DEL), meaning they have the authority to underwrite FHA loans on their own, without any oversight from HUD or the FHA before the loans are closed and endorsed for FHA insurance.
Therefore HUD puts trust in lending partners such as Quicken to underwrite loans properly to ensure they meet the standards of the FHA. This ensures the agency’s insurance fund won’t be depleted, leading to a potential taxpayer bailout.
But it turns out many of the loans underwritten by Quicken may have been approved under suspect circumstances, only to default later and cost the HUD millions of dollars in insurance claims.
The E-Mail Evidence
One example of the alleged shoddy underwriting involves appraised values. Apparently Quicken had a “value appeal” process when after a low value came in, the company requested a “specific inflated value” with no justification for the increase.
This was referred to in an e-mail from Quicken’s Divisional Vice President for Underwriting as “push back on appraisers,” a practice they weren’t keen on sharing with the media.
For example, on one loan mentioned in the suit, the appraiser came up with a value of $180,000, but the borrower who was requesting cash out wanted more money, so it was apparently changed to $185,000.
The appraisal supposedly wasn’t any different other than the new increased value, and even the date of the appraiser’s signature remained unchanged.
The complaint alleges that this borrower missed his first payment, eventually resulting in a FHA insurance claim of $204,208.
It has also been asserted that Quicken granted “management exceptions,” a somewhat common practice in the industry where upper management reassesses an underwriter’s decision.
This in itself might be fine, but the same Divisional Vice President for Underwriting wrote to Quicken executives in an e-mail that “we make some really dumb decisions when it comes to client service exceptions.”
He cited an example where a borrower purchasing a home had stopped making payments on virtually all of his or her liabilities, leading to a 100-point credit score drop. The lender closed the loan anyway.
Another e-mail from an Operations Director at Quicken Loans tells of a loan approved on “bastard income,” that which is strung together “from something evil and horrible.”
Another borrower had bank statements with overdrafts in multiple months and apparently requested a refund of the $400 mortgage application fee to feed his or her family. The loan was still approved.
Unsurprisingly, only five on-time payments were made before the borrower became delinquent, leading to a FHA insurance claim of $93,955.19.
The complaint also claims Quicken failed to implement a quality control program to identify these types of defective loans, and that it failed to report to HUD the loans it did identify.
From September 2007 to December 2011, the company apparently failed to report a single underwriting deficiency to the agency, despite being obligated to do so.
For the record, Quicken preemptively sued HUD and the DOJ last week in an attempt to put an end to its three-year investigation.
In a statement posted on its website, Quicken called itself the “FHA’s largest lender” with the lowest default rate of any large FHA originator in the country, and claimed the FHA loans it originated since 2007 are projected to result in billions in profits (net of claims) for the agency.
The company said it has closed over $40 billion in FHA loans since 2007, and that the examples cited by the government amount to a “miniscule number of loans” from the nearly 250,000 funded by the company.
It referred to the ongoing investigation as a “witch-hunt” and said the real victims of the suit are middle-class Americans who rely on the FHA to attain the dream of homeownership.
Quicken said it plans to continue offering FHA loans, though “like nearly ever lender in the country,” will be evaluating its participation going forward.
(photo: Matt Churchill)