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FHA LOANS

Wells Fargo Sued For FHA Mortgage Fraud

Written By:
October 10, 2012 at 11:48 AM

Wells Fargo Sued

On Tuesday, the federal government filed a lawsuit against the nation’s largest mortgage lender Wells Fargo. The legal action accuses the bank of engaging in the systematic practice of “reckless underwriting” and knowingly running a fraud-infested mortgage operation.

According to the claim, Wells Fargo engaged in these practices for nearly ten years. Over this timeframe, the bank submitted approximately 100,000 mortgages insured by the Federal Housing Administration (FHA). The suit says the lender knew that many of these mortgages had significant underwriting issues.

Well Fargo filed insurance claims to recover losses after many of these homeowners defaulted on their mortgages. The allegations contend the lender’s practices cost taxpayers hundreds of millions of dollars.

Bank Management Ignored Warnings

The U.S. attorney alleges in its 193-page complaint that between 2002 and 2010 the bank had knowledge that its loan processes violated FHA underwriting rules and in some cases, represents outright fraudulent.

The allegations state that the firm’s management had a “singular focus on increasing the volume of FHA originations.” Wells Fargo employed temporary workers to “churn out” the fraudulent mortgages. In addition, the lender “pressure loan officers to fast-track the loans with little regard for quality control.

Instead of remedying the situation, the bank’s management continued to dole out incentives to poorly trained staff persons who received encouragement to continue approving these questionable loans. The complaint states that the driving force for these loan originations concerned financial gain “rather than the quality of the loans.”

Consequently, when the economy collapsed, many homeowners could no longer maintain their monthly mortgage payments, which eventually led to an onslaught of foreclosures. Figures in the court documents show that HUD paid Wells Fargo $190 million for reimbursement on these faulty FHA loans.

FHA-insured mortgages allow borrowers to refinance or purchase a home. Many of these borrowers cannot save the require 20 percent down payment or meet the underwriting criteria to qualify for conventional loans. Government-insured mortgages provide incentives for lenders to make loans to homebuyers by eliminating the financial risk to the banks.

When a homeowner defaults on FHA-insured loan and the lender fails to recover the outstanding loan amount and foreclosure costs, HUD pays the lender and takes title to the property.

Bank Denies Charges

In response to the federal government’s legal action, Wells Fargo released a statement denying the assertions listed in the complaint. The lender stated that it “acted in good faith” and followed underwriting rules as laid out by FHA and HUD. Furthermore, Wells Fargo argues that most of the problems outlined in the complaint have already been addressed by the lender.

The bank’s response also stated it” has acted as a prudent and responsible lender. Wells Fargo points to performance measurements, saying its FHA delinquency rates fall below half the average rate for similar loans made in the industry.

Settlement Reached for Similar Allegations

Wells Fargo is not the only lender the federal government has charged with mortgage fraud. Deutsche Bank/MortgageIT and CitiMortgage, Inc settled their cases for $203.3 million and $158.3 million, respectively. Ally Financial has a case pending with the pending a resolution. Last week, the New York Attorney General filed mortgage fraud charges against JPMorgan Chase.

In another mortgage fraud-related case settled in February 2012, Wells Fargo, Citibank, JP Morgan Chase, Ally Financial, and Bank of America agreed to pay $25 billion to 49 states. The settlement resolved many of the issues as revealed in the robo-signing scandal, which surfaced in October of 2010. The core of the matter concerned mortgage lenders practices of using illegal or questionable paperwork to foreclose on homeowners.

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