Banks Took $6B in Reinsurance Kickbacks, Investigators Say

Mortgage & Real Estate

Many of the country’s largest banks received $6 billion in kickbacks from mortgage insurers over the course of a decade, according to a previously undisclosed investigation by the Inspector General of the Department of Housing and Urban Development.

Like what you see? Click here to sign up for a National Mortgage News free trial and daily newsletter to get the latest feature stories, news headlines, data, and in-depth analysis on the issues impacting the mortgage industry.

The allegations, since referred to the Department of Justice, stem from lenders’ demand that insurers cut them in on the lucrative business of insuring the mortgages they produced during the housing boom.

In exchange for the their business, companies such as Citigroup Inc, Wells Fargo Co, SunTrust Banks Inc. and Countrywide allegedly required reinsurance partnerships on generous terms that violated the Real Estate Settlement Procedures Act, a 1974 law prohibiting abusive home sales practices.

During a two-day presentation in the summer of 2009, HUD’s team presented DOJ attorneys with a thick binder of evidence that major banks had engineered a decade-long kickback scheme, people familiar with the investigation say.

Documents from the investigation show that the inspector general’s staff concluded that banks and insurance companies had created elaborate financial structures that had the appearance of reinsurance but failed to transfer significant amounts of risk to their bank underwriters.

Some of the deals were designed to return a 400% profit on a bank’s investment during good years and remain profitable even in the event of a real estate collapse.

Making matters worse, banks allegedly forced unknowing consumers to buy more insurance than they needed and failed to properly disclose the reinsurance agreements, another RESPA violation.

HUD’s acting inspector general, Michael Stephens, worked on the case before being appointed to head the inspector general’s office last year. He acknowledged the investigation’s existence and expressed frustration that the case had not yet produced a settlement or prosecution.

While Stephens said he was still “hopeful” that prosecutors would bring a case, “this thing has been going on for too damn long.” 

Market observers, analysts and ratings agencies long questioned the reinsurance deals, but banks and insurers publicly maintained they met the standard for arms-length transactions set out in a 1997 policy letter circulated by HUD. The deals, they said, were not the result of coercion.

What those companies may have believed in private is another matter.

Wells Fargo and Bank of America Corp. have settled class action cases alleging the same sort of misconduct flagged by HUD, and internal documents show that banks and insurers viewed the arrangements as a thinly veiled pay-to-play scheme. Even as insurers complained they couldn’t afford the escalating cost of the reinsurance payments, banks threatened or punished companies that balked at providing them, documents obtained by American Banker show. (American Banker is a sister publication to National Mortgage News.)

Wells Fargo Co told one insurer that it should consider giving Wells such deals if it wanted business referrals. After insurer MGIC Investment Corp. announced plans to cut back on banks’ share of premiums in 2003, Countrywide executives complained to an MGIC executive and told him that they were shifting Countrywide’s business to MGIC’s competitors.

“I think we should continue to decrease there [sic] share again,” former Countrywide business operations executive Mitch Turley wrote in an email to colleagues that was later obtained by investigators and reviewed by American Banker. (B of A bought Countrywide in 2008, after the alleged wrongdoing occurred; Turley no longer works for B of A and did not respond to an interview request from American Banker.)

Noting that the mortgage industry was in dire shape when investigators handed their case to prosecutors, the inspector general’s office proposed that much of the penalty should be stayed. Even still, the proposed settlement would be the most aggressive action ever pursued under RESPA, requiring banks to pay hundreds of millions of dollars in fines and restitution.

Although HUD’s investigation was referred to the Justice Department last year, people familiar with the case say that prosecutors have done little to advance it. Contacted by American Banker, a spokeswoman declined to discuss the case.

Prosecutors had agreed the case was well worth taking when it was first referred to them, said former HUD Inspector General Ken Donohue and others.

“I’m bewildered by why this wasn’t pursued on an aggressive basis,” Donohue said.

Daily Briefing | Wednesday, September 7, 2011

  • CFPB Nominee Argues that Agency has Checks Balances

    Congress has imposed numerous checks and balances on the Consumer Financial Protection Bureau’s powers, according to Richard Cordray, who has been nominated by President Obama to be the agency’s first director.

  • MBA: Despite Ultra Low Rates, Applications Off 5%

    Although mortgage rates continue to test new all-time lows, applications took a tumble last week, a sign that consumers continue to be spooked by uncertainty in the overall economy.

  • Should Mortgage Bankers Fear the Results of FHA Servicing Audits?

    As settlement talks continue between the states and the megabanks over the robosigning scandal, some of the nation’s largest servicers fear they may have a new item to add to their worry list: civil liability tied to the monthly processing of Federal Housing Administration loans.

  • FHFA: Investment Bankers Can’t Use ‘Sophisticated Investor’ Excuse

    The Federal Housing Finance Agency is pushing back against claims that Fannie Mae and Freddie Mac were sophisticated investors that should have done a better job of vetting their purchases of mortgage-backed securities.

  • SEC Proposal Could Hamper Revival of PLS Market

    MBS issuers have long enjoyed an exemption from onerous provisions of the Investment Company Act since the start of mortgage securitization in the early 1980s, but all that could change under a new proposal being weighed by the Securities and Exchange Commission.

  • Bad Housing Market Causing ‘Dirt Bond District’ Bankruptcies

    Some struggling development districts around Omaha have turned to Chapter 9 bankruptcy as a way to restructure debt as they wait out an ailing housing market.

  • Former Clayton Executive Hired by Collingwood

    The Collingwood Group Wednesday announced that it has hired industry veteran Tom Cronin as a managing director of the firm.

  • Pennsylvania HFA Readies $81M of Single-Family Bonds

    The Pennsylvania Housing Finance Agency is scheduled to sell $81.4 million of single-family mortgage revenue bonds on Thursday after a one-day retail period.

  • Mortgage Broker Charged In $5 Million Paragon FCU Loan Scheme

    A New Jersey mortgage broker has been charged with submitting false information to qualify for 13 multifamily loans with the help of a loan coordinator at Paragon Federal Credit Union, Montvale, N.J.

Leave a Reply