WASHINGTON (MCT) — Federal officials unleashed a series of legal assaults on the financial industry, targeting actions they said helped trigger the housing market collapse and then attempted to take advantage of desperate homeowners left in its wake.
The U.S. attorney's office in Manhattan accused Wells Fargo of defrauding a government-backed mortgage insurance program of hundreds of millions of dollars over more than a decade by improperly underwriting more than 100,000 home loans.
At the same time, Attorney General Eric Holder and other officials announced the results of a yearlong effort to attack mortgage assistance scams. The Distressed Homeowner Initiative led to criminal charges against 530 people accused of defrauding about 73,000 underwater homeowners nationwide of an aggregate $1 billion.
The initiative also led to 110 federal civil cases against more than 150 defendants who allegedly bilked an additional 15,000 victims out of $37 million in financial losses through phony mortgage-assistance schemes.
"Put simply, these comprehensive efforts represent an historic, governmentwide commitment to eradicating mortgage fraud and related offenses around the country," Holder said Tuesday at a news conference.
In answering a question, Holder said the timing of the announcements wasn't designed to boost President Barack Obama's re-election effort. Obama has said that his administration will hold accountable those who led the nation into the Great Recession and those who took advantage of the victims.
The accusations against Wells Fargo represent the fifth such mortgage fraud case against a major lender launched by U.S. Attorney Preet Bharara. A separate mortgage fraud task force led by the New York attorney general brought an unrelated lawsuit against JPMorgan Chase & Co. last week.
"As the complaint alleges, yet another major bank has engaged in a long-standing and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance," Bharara said.
The suit seeks "hundreds of millions of dollars" in damages for claims the Department of Housing and Urban Development has paid to cover defaulted loans "wrongfully certified" by Wells Fargo. The San Francisco banking giant is accused of falsely certifying loans insured by HUD's Federal Housing Administration.
Adding "accelerant to a fire," Bharara said, was a Wells Fargo bonus system that rewarded employees based on the number of loans approved.
The lawsuit alleges the bank failed to properly underwrite more than 100,000 loans it certified to be eligible for FHA insurance. When Wells Fargo discovered problems with the loans, it failed to notify HUD, as required, the suit said. The action alleges more than 10 years of misconduct.
"The extremely poor quality of Wells Fargo's loans was a function of management's nearly singular focus on increasing the volume of FHA originations — and the bank's profits — rather than on the quality of the loans being originated," Bharara's office said.
Denying the allegations in the government suit, Wells Fargo said in a statement that it believes it acted "as a prudent and responsible lender" and in compliance with federal rules. It said it would vigorously defend its actions.
"Many of the issues in the lawsuit had been previously addressed with HUD," Wells Fargo said. The bank said its FHA delinquency rates have been as low as half the industry average.
The lawsuit seeks triple damages on about $190 million in insurance claims paid by FHA on 6,320 defaulted mortgages, bringing part of the damages sought to $570 million. Penalties could add as much as $200 million more to the award sought, one analyst estimated.
Wells shares lost 70 cents, or 2 percent, to $35.10 on Tuesday.
Arthur Wilmarth Jr., a law professor at George Washington University who was a consultant to the Financial Crisis Inquiry Commission that investigated the causes of the mortgage meltdown and the economic collapse, praised the U.S. attorney's lawsuit but questioned why the government hasn't gone further with such actions.
"This is a positive step," Wilmarth said. "But it still doesn't address the underlying question: What about the senior executives who caused these institutions to engage in this type of behavior? Are they being held responsible?"
The same question has loomed over mortgage assistance scams. Jon Leibowitz, chairman of the Federal Trade Commission, described the people who operate the scams as "carrion that circle homeowners in financial distress to take the last dollar out of their pockets."
Separately from the Wells suit, federal officials spent the last year pursuing criminal and civil charges against mortgage assistance providers. The largely unheralded operation, which used undercover agents and secret wiretaps, occurred during the federal government's fiscal year, which ended Sept. 30.
John Taylor, president of the National Community Reinvestment Coalition, which promotes access to affordable housing, said he doesn't care why federal officials have ramped up their efforts.
"It's a big number," he said of the 530 people charged. "But given the magnitude of the problem and how many people this happened to and how often, it's probably a small percentage."
Though many of the cases had been announced as individual prosecutions, officials for the first time revealed they were part of a concerted effort to use teams of investigators and prosecutors to combat the swindling of homeowners desperate to reduce their mortgage payments.
"Shameless con artists seeking to prey on homeowners in financial distress need to know that law enforcement is on their trail," said U.S. Attorney Andre Birotte Jr., the top federal prosecutor in Los Angeles.
Last month, his office took action against two companies allegedly involved in mortgage schemes.
On Sept. 12, federal agents arrested 11 defendants connected to 21st Century Real Estate Investment Corp., a Rancho Cucamonga, Calif., business suspected of offering bogus loan modification programs. More than 4,000 homeowners, the U.S. attorney's office said, lost at least $7 million in fees paid to the company, and some still lost their homes in foreclosures.
Two days later, authorities arrested two top managers of a mortgage brokerage house in the Westwood area of Los Angeles, Direct Money Source, in connection with a suspected equity-skimming scheme that allegedly tricked several mortgage lenders into disbursing more than $15 million in loan proceeds, of which $7 million was lost.
(Los Angeles Times staff writer Jim Puzzanghera contributed to this report. He and Richard Serrano reported from Washington; Andrew Tangel, from New York; and Scott Reckard, from Orange County, Calif.)