A division of MetLife has agreed to pay $123.5 million to put an end to an investigation into allegations that it issued government-backed mortgages to borrowers even though they didn’t meet federal requirements. The allegations claim that MetLife certified ineligible mortgages between 2008 and 2012, well after a number of financial institutions brought the economy to its knees using similar loan practices.
MetLife Bank (now MetLife Home Loans) was a Direct Endorsement Lender in the Federal Housing Authority (FHA) insurance program. As such, it had the authority to originate, underwrite and certify loans for FHA insurance. If a loan were to default, MetLife Bank could file an insurance claim with the government for reimbursement on the losses of the defaulted loan. The FHA does not review the underwriting of a loan, so it relies on lenders to ensure that loans they submit for FHA insurance are actually eligible to be insured.
The Justice Department announced yesterday that MetLife Bank knew it was handing out loans that were not eligible for FHA insurance coverage. MetLife Bank continued to allow these loans to be issued even though its own internal quality control findings showed that a significant amount of loans on its books had “significant” deficiencies.
The quality control findings were known to senior managers at the company, including the CEO and members of the board of directors. While the rate of loans considered significantly deficient went down between 2010 and 2011, the Justice Department claims that quality control managers frequently downgraded loan deficiencies from “significant” to “moderate.”
In an internal MetLife email discovered by the Justice Department, a quality control employee remarked to a fellow employee: “Why say Significant when it feels so good to say MODERATE?” MetLife internal quality control personnel found 1,097 FHA mortgage loans that had been labeled with significant deficiencies between 2009 and 2011. Of that total, the company only reported 321 mortgages to the Department of Housing and Urban Development (HUD). As a result of MetLife’s alleged deception, the FHA sustained substantial losses paying out insurance claims on defaulted loans.
News of the MetLife settlement was issued the same day that the Justice Department announced a $2.6 billion settlement with Morgan Stanley. To say that the Justice Department had a good week would be an understatement.
Make room JPMorgan Chase, Bank of America and CitiGroup; Morgan Stanley is the latest Wall Street firm to reach a settlement with the government to “resolve certain claims” related to the mortgage bubble and subsequent financial collapse in 2008. The Justice Department announced today that Morgan Stanley will pay $2.6 billion to settle claims related to the bank’s mortgage division.
According to CNN, Morgan Stanley packaged bad loans into mortgage-backed securities, and then misrepresented their risk to investors. The settlement represents the largest sum the financial institution has paid in connection with the 2008 financial crisis. Morgan Stanley had previously reached a smaller settlement in 2014 when it agreed to pay the Federal Housing Finance Committee $1.25 billion over mortgages it sold to Fannie Mae and Freddie Mac.
Today’s settlement has not yet been finalized, and according to a Morgan Stanley regulatory filing, the deal could still fall through. Earlier this year, the New York bank reported that it had earned $2.95 per share for the full previous year. The settlement with the government will eat into roughly half of what Morgan Stanley made last year, on a per-share basis.
Several Wall Street banks have reached settlements with the government over the last two years over claims that they grossly misrepresented the volatility of subprime mortgage bonds to investors. Bank of America reached a massive settlement with the Justice Department last year worth $16.7 billion, while JPMorgan Chase settled in 2013 for $13 billion.
Goldman Sachs, another large financial institution, is still in the process of working out settlement terms with the government. Like Morgan Stanley, Goldman reached a settlement with the Federal Housing Finance Committee last year over claims that it misrepresented the quality of mortgages sold to Fannie and Freddie. That settlement came in at $3.15 billion.
Last week, Attorney General Eric Holder gave federal prosecutors 90 days to decide whether they can bring charges against individuals who played roles in the 2008 financial collapse.
One can only hope that justice will be done …
In fiscal year 2014, the Justice Department obtained roughly $3.1 billion in recoveries stemming from the housing and mortgage fraud claims, the most ever recovered in a fiscal year for that sector. The government has now recovered $4.65 billion over the last five years from financial institutions whose misconduct contributed to housing and mortgage crisis.
Below are the top four housing and mortgage fraud claims settled in 2014:
- Bank of America – $1.85 Billion: BofA acknowledged that it submitted false claims to Freddie Mac, Fannie Mae and the Federal Housing Administration (FHA) in connection with the underwriting, origination and quality control of residential mortgages. The $1.85 billion was just another part of the settlement that included a $5 billion fine under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and $7 billion in relief for BofA consumers who lost their homes due to the alleged fraud. BofA’s global resolution was worth $16.65 billion total.
- JPMorgan Chase – $614 Million: JPMC allegedly submitted false claims through the origination and underwriting of non-compliant mortgages that were submitted for insurance coverage through the Department of Housing and Urban Development (HUD), the FHA and the Department of Veterans Affairs (VA). These non-compliant mortgages led to substantial losses for the FHA and VA.
- SunTrust – $418 Million: Between 2006 and 2012, SunTrust allegedly originated and underwrote non-compliant mortgages to be insured by the FHA. It also failed to use effective quality control measures to identify non-compliant mortgages, and failed to report the non-compliant loans the company did identify to FHA. SunTrust also paid out $500 million in relief to consumers, $40 million to state governments and $10 million to the federal government in addition to the $418 million to settle civil mortgage fraud charges, bringing the total paid under the settlement to $968 million.
- U.S. Bank – $200 Million: Between 2006 and 2011, U.S. Bank effectively ignored lending requirements by originating and underwriting mortgages that didn’t meet FHA requirements. U.S. Bank acknowledged that its conduct caused the FHA to insure thousands of bad loans that later resulted in substantial losses.
The financial sector of the nation’s economy continues to be a hotbed for misconduct and fraud. Now more than ever the government is relying on whistleblowers to expose any wrongdoing by financial institutions. In a successful case, a whistleblower is eligible to receive a share of any recoveries as well as the gratitude of the nation for helping save taxpayer dollars.
The Justice Department’s case against JPMorgan Chase & Co. formally came to a close last week with the announcement that whistleblower Keith Edwards will receive a reward of $63.9 million. Edwards worked for JPMorgan or its predecessors between 2003 and 2008 as an assistant vice president supervising a government insuring unit. He provided valuable tips to the U.S. Justice Department, which in turn led to the $614 million settlement between JPMorgan and the government which was announced on February 4. The settlement resolves charges that J.P. Morgan defrauded the government into insuring bad home loans.
JPMorgan admitted in the settlement that for over 10 years, the company had submitted thousands of mortgages for insurance through the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA) that were not eligible to receive government guarantees. JPMorgan also admitted in the settlement that the company did not tell either of the government agencies about internal reviews that had unearthed problems with mortgages that inevitably went sour, leaving the government to cover millions of dollars in losses at a time when thousands across the country were losing their homes through eviction and foreclosure.
Edwards initially filed suit against his former employer in 2013 under the False Claims Act. The Justice Department joined his lawsuit, and with the announcement of his reward, the case has formally come to a close. According to Reuters, roughly $56.5 million of Edwards’ whistleblower reward comes from the FHA portion of the case, and $7.4 million comes from the VA portion.
The case is U.S. ex rel. Edwards v. JPMorgan Chase Bank NA et al, U.S. District Court, Southern District of New York, No. 12-00220.