US sues Quicken Loans over mortgages

The US Department of Justice has sued Quicken Loans, one of the nation’s fastest-growing mortgage lenders, claiming that it knowingly flouted rules when making loans insured by the Federal Housing Administration.

The government claims that, for about four years until December 2011, Detroit-based Quicken submitted claims for hundreds of improperly underwritten government-insured loans — in part from systematically getting new appraisals for homes after initial estimates were too low, failing to properly verify income or overlooking poor credit histories.

That led to big payouts for the FHA, an 81-year-old agency which provides lenders with protection against losses, as long as the mortgages meet certain requirements.

In one case, claims the DoJ, a Quicken director skirted those requirements for a non-US citizen to obtain an FHA-insured loan, writing in an email that the borrower “does not have the FHA required docs but we are going to go with it”.

In another case, Quicken’s operations director was told by a senior FHA staffer that a particular loan would be uninsurable. He then wrote in an email that “whenever we bump into utterly stupid underwriting guidelines like this, we have to push back hard …I’ll put the exception in on this one”.

Principal deputy assistant attorney-general Benjamin Mizer, of the DoJ’s Civil Division, said: “Those who do business with the United States must act in good faith.

“To protect the housing market and the FHA fund, we will continue to hold responsible lenders that knowingly violate the rules.”

Numerous big banks across the US have fallen foul of the DoJ in recent years, as it attempts to clean up industry practices in the wake of the 2008-09 financial crisis. But this is a rare entanglement for privately held Quicken, a relative newcomer, which last year ranked third in mortgage originations with a 5 per cent share, behind only Wells Fargo (15 per cent) and JPMorgan Chase (8 per cent).

[The DoJ] has gone from lender to lender asking for money, and we are the first one saying no

The action comes less than a week after Quicken pre-emptively sued the DoJ, claiming that it tried to twist its arm to pay an “inexplicable” penalty and to make public admissions that were “blatantly false”.

After three years of discussions, hundreds of hours of depositions and the exchange of more than 85,000 documents, the DoJ inquiry had resulted in the threat of a lawsuit based on “faulty analysis of a minuscule number of cherry-picked mortgages”, Quicken said, noting that it had closed almost a quarter of a million FHA loans since 2007.

In a statement on Thursday in response to the DoJ’s action, it described the three-year probe as a “witch-hunt”.

“[The DoJ] has gone from lender to lender asking for money, and we are the first one saying no,” Jay Farner, president of Quicken, told the FT. “For anyone concerned about the overreaching of the DoJ, they are excited about the fact that we are willing to stand our ground on this.”

The suit and countersuit is a symptom of the upheaval in America’s residential mortgage market since the financial crisis, said Christopher Whalen, senior managing director at Kroll Bond Rating Agency, noting that many big banks have pulled in their horns.

Last year non-banks accounted for a record 38 per cent share of the $1.2tn mortgage origination market, according to Inside Mortgage Finance, an industry newsletter, rising from 27 per cent the year before.

“Rapid growth among all the non-banks has tended to be a red flag for the regulators,” said Mr Whalen.