Catch of the Week: Guild Mortgage
We’re in the midst of a recession, 13 million Americans are out of work, GDP growth is slowing, and stock market volatility is approaching record-breaking levels. This recession is largely driven by the emergence of a mostly natural and random phenomenon, COVD-19, though there is plenty of blame to go around in how humans have reacted to the spread of the virus. This week’s catch of the week, however, harkens back to the last global recession, occurring in 2007-2008. That crisis was almost exclusively driven by unchecked greed and bolstered by a lack of accountability.
Guild Mortgage, a nationwide mortgage lender and advisor, has agreed to pay nearly $25 million to resolve allegations that the company violated the False Claims Act by issuing federally-insured mortgages that violated the requirements of the Fair Housing Act mortgage insurance program.
Background: Mortgages and the Great Recession
As any reader/viewer of the Big Short knows, the Great Recession was largely brought on by risky and greedy practices in the residential mortgage market. As anyone who has recently bought property has the experience, that process comes with thorough credit checks and voluminous financial disclosures. These standards were laxly enforced in the early 2000s, with many lenders issuing what has come to be known as “subprime” mortgages, or mortgages issued to borrowers with low credit ratings.
Lenders were comfortable with issuing subprime mortgages because they relied on two basic assumptions. First, that housing prices would continue to generally increase, and as a result, there were not meaningful financial risks in foreclosures, since the repossessed houses could be sold to recoup any costs of default. Second, that the issuing lenders would not own these mortgages for very long. Through a process called securitization, massive numbers of mortgages were pooled and then small slices of those pools, called residential mortgage backed securities (RMBS), would be sold to investors. The level of risk investors were taking on was often downplayed, with the full extent of subprime lending unknown to the investing public. As a result of securitization, the lenders who issued the mortgages rarely carried the risk of default and that risk was a shift to investors, including many large, institutional investors. When the housing bubble burst and prices fell, many subprime borrowers defaulted on their payments, rendering RMBS nearly worthless, and sending ripple effects through the global economy.
The Allegations against Guild Mortgage Company
The federal government, though rarely a lender, is deeply involved in the mortgage market. The Department of Housing and Urban Development, through the Fair Housing Administration, insures millions of mortgages, reimbursing lenders losses on certain mortgages in case of borrower defaults. In a public-private partnership to promote homeownership, the FHA allows certain, pre-approved lenders to issue FHA insured loans without government review of each individual loan, providing that these loans meet certain, specific requirements. Guild is a participant in this Direct Endorsement program.
According to the government’s allegations, Guild issued FHA insured loans to unqualified, and high-risk, borrowers from 2007-2011. Specifically, Guild allegedly issued loans to borrowers that its own models predicted would default on mortgages. For other borrowers, the company simply failed to do the due diligence required to determine a borrower’s creditworthiness.
This behavior, like much of what led to the Great Recession, was driven by greed. The more loans Guild issued, the more money they made. Because these were FHA insured loans, the federal government was stuck holding the bag when these high-risk borrowers defaulted on their loans. FHA ended up paying out claims under insurance policies that should have never been issued, costing taxpayers millions.
Despite agreeing to pay nearly $25 million to resolve these allegations, Guild continues to deny liability.
The Whistleblower who Revealed the Scheme
The case was filed under a law called the False Claims Act (FCA), a law that allows private citizens to sue in the name of the government and alleged that the government was defrauded in some way. Because the federal government paid out insurance claims through FHA, the FCA applied. If a case under the FCA is successful, the whistleblower generally stands to receive 15-30% of the recovery as an award.
Kevin Dougherty, Guild’s former Quality Assurance manager, filed this case in 2016. In 2010, Dougherty was hired to audit Guild’s mortgages, a role in which he discovered this fraud. He will receive a whistleblower award of $4.8 million.
The Latest in a Trend
This settlement is only the latest in a trend of the Justice Department using the FCA to go after mortgage fraud, with most cases being brought by whistleblowers like Dougherty. This April, Guaranteed Rate agreed to pay $15 million to resolve similar allegations; in April 2019, Morgan Stanley agreed to pay $150 million to settle allegations of impropriety in selling RMBS to California’s public unions; that same month, GE paid $1.5 billion to resolve their own RMBS-related allegations. There was a notable lack of accountability coming out of the 2008 financial crisis, these settlements at least provide a semblance of one.
If you are aware of fraud against the FHA mortgage insurance program, or fraud against other government mortgage programs (including the mortgages issued to veterans by the VA), you can contact a whistleblower lawyer at Constantine Cannon today.
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