A federal jury has ordered two Texas-based home mortgage companies and their chief executive to pay nearly $93 million for defrauding the government by issuing improper and risky home loans that later defaulted.
The companies, formerly known as Allied Home Mortgage Capital Corp. and Allied Home Mortgage Corp, and their founder, Jim C. Hodge, were the subject of July 2010 stories by ProPublica, which detailed a trail of alleged misconduct, lawsuits and government sanctions spanning at least 18 states and seven years. Borrowers said they’d been lied to by Allied employees, who in some cases had siphoned loan proceeds for personal gain. Some borrowers had lost their homes.
Despite the years of warnings, the federal government didn’t restrict Allied’s ability to issue mortgages until 2011, when prosecutors intervened in a pending whistleblower case and sued Hodge and both Allied companies in U.S. District Court in Manhattan. Simultaneously, the U.S. Department of Housing and Urban Development suspended Allied and Hodge from issuing loans backed by the Federal Housing Administration. Allied was also barred from issuing mortgage-backed securities through the Government National Mortgage Association (Ginnie Mae).
The case was transferred to Houston in 2012. On Tuesday, a federal jury found Hodge and Allied liable for violating the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act. The award of nearly $93 million in damages includes $7.4 million against Hodge, a sum that is subject to mandatory tripling. Further penalties are expected, which U.S. District Judge George C. Hanks Jr. will set at a later date.
Houston attorney Wendell Odom Jr., who represented Hodge and Allied at trial, said he “fully anticipated there will be an appeal.” Odom said there was a “causation” issue with the government’s case, with the assumption that Allied’s behavior “caused these loans to go bad” when it “may very well have been other market conditions.”
He also said the judge may have improperly removed one of the nine jurors for misconduct. The juror, who was the only one who supported Allied, Odom said, refused to deliberate and other jurors told the judge they felt threatened. That left eight to give the required unanimous verdict, he said.
Allied had billed itself as the nation’s largest privately held mortgage broker, with some 200 branches. (At one point, the company operated more than 600.) The sprawling network made Hodge a rich man with properties in three states and St. Croix in the U.S. Virgin Islands and two airplanes to get to them.
When the government sued Allied in 2011, it was facing stiff criticism that it had been slow to act on rampant fraud and abuse in the mortgage market. ProPublica found Allied had operated for years despite numerous red flags, including:
- The firm had the highest serious delinquency rate among the top 20 FHA loan originators from June 2008 through May 2010.
- Nine states had sanctioned it from 2009 to mid-2010 for such violations as using unlicensed brokers and misleading a borrower.
- Federal agencies had cited or settled with Allied or an affiliate at least six times since 2003 for overcharging clients, underpaying workers or other offenses.
- At least five lenders had sued, claiming Allied tricked them into funding loans for unqualified buyers by falsifying documents and submitting grossly inflated appraisals, among other allegations.
In its suit, the government contended that Allied operated more than 100 “shadow” branch offices that originated FHA-insured mortgage loans without HUD authorization. Allied then submitted these loans using the ID numbers of approved branches. This resulted in $7.4 million in losses to HUD when some of those loans defaulted, the government said in a press release announcing the verdict.
Under HUD guidelines, Allied was required to make sure that FHA-insured loans were only made to borrowers who could repay them, the government said. Instead, Allied “recklessly underwrote and certified” at least 1,192 loans for FHA insurance that were ineligible for insurance under HUD’s guidelines, resulting in $85.6 million in losses when the mortgages defaulted, the government said.