The United States Department of Justice has filed a lawsuit against Quicken Loans for improperly originating and underwriting mortgages insured by the Federal Housing Administration (FHA).
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.
Quicken’s Rebuttal
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.
They’re now focused on originating Rocket Mortgages, which is their proprietary streamlined loan process aimed at simplifying and speeding up the cumbersome home loan journey.
(photo: Matt Churchill)
1) Has anyone else noticed that the period in which most of the shenanigans occurred was 2005 onwards – i.e., as the rise in house prices was quickly losing steam?
2) That’s also when the rise in subprime lending took place – 2004 through 2007. The first year in which subprime borrowers – a third of US borrowers – got more than one tenth of the mortgage credit was 2004, which was the last year of double digit price increases on houses.
I’m not sure what would fall under the “shoddy underwriting” or “QC” category – – this isn’t commercial lending. There’s not this days-long or even hours-long process of poring through data and making a judgment – you can’t do that in an $11TN market comprised of $250K loans on which your spread is 175 bps. Resi lending is a FICO score and 2 ratios – – payment-to-income (33% for the mortgage or 40% for all debt, based on AGI, possibly with a few adjustments but for a given bank, the same adjustments for each loan) and LTC (or LTV for a refi). Payment to income didn’t change much on originations – it rose on outstanding loans due to re-sets in 2006-7. LTC shifted somewhat in some jurisdictions but not much on average – LTV rose when values plummeted after the rates, which had been inflating values, rose. Average FICO on a US mortgage was flat until 2004. From 2004-2007 it dropped by 21 points. That’s one past-due payment, since paid, and more than 24 months old.
Some banks were guilty of late-bubble or post-bubble misdeeds, or too much risk-taking – but the bubble itself was a simple function of sharp cuts to FFR prompting sharp cuts to ARM rates and sharp increases in ARM share of purchase mortgages as borrowers sought to take advantage of the temporary increase in purchasing power. That drove values up, but left them prone to collapsing when the rates rose back up. It also prompted over-building, as builders are financed at Prime, which is based on FFR – and that supply-side factor exacerbated the collapse. In the interim, cash-out refiis based on the rate-inflated values allowed the American consumer to sustain the late ’90s party lifestyle via debt – until the money was gone. The Fed can talk now about “savings gluts” but the bubble was a function of the short end of the yield curve, not the long end – via the ARM channel, not the 30/30 channel. And it ended when the FFR rose back up, even thought the 10 year did not rise back up. The Fed can speak of “macro-prudential reforms” but the bubble was a simple function of increased debt temporarily made affordable via the Fed’s own rate policy – which served no other purpose but to inflate a housing bubble – there was nothing to GDP gains in the 2000s except for residential investment and the spending of cash-out-refi proceeds. Nothing at all. The debt-bubble aspect of this was the main driver, and outside of Austrian circles it has been totally ignored.