By Brian Grow and Zachary A. Goldfarb
Washington Post Staff Writer
Thursday, December 10, 2009; A01
This report is a collaboration between the Center for Public Integrity and The Washington Post.
The trouble signs surrounding Lend America had been building for years. A top executive was convicted of mortgage fraud but still helped run the company. Home loans made by its headquarters were defaulting at an extremely high rate. Federal prosecutors alleged in a civil suit that the company falsified loan documents and committed fraud.
Yet despite these red flags, a little-known federal agency continued giving its blessing to Lend America, allowing it to do business in the name of the U.S. government. The Government National Mortgage Association, known as Ginnie Mae, authorized the firm to bundle its mortgages into securities and sell them to investors around the world -- all backed by U.S. taxpayer money.
Until last week, federal housing officials said that Lend America met requirements for participating in the program run by Ginnie Mae, an agency in the Department of Housing and Urban Development, and allowed the firm to sell more than $1 billion in mortgages via Ginnie Mae securities.
Lend America is hardly the only lender with a troubled record that Ginnie Mae has endorsed. The agency has provided taxpayer backing to at least 36 other mortgage companies with a history of reckless lending, fines or other sanctions by state and federal regulators or civil lawsuits, according to an analysis of government records, court documents and statistics in a HUD database.
Ginnie Mae's ongoing relationship with these firms allows them to swap the home loans they've made for new cash so they can make more loans, which can then be traded for even more cash to make even more loans. Housing experts say this dynamic turbocharges the type of bad mortgage lending that first helped trigger the financial crisis that battered global markets over the past two years. And ultimately, taxpayers are on the hook for the troubled mortgages.
"Ginnie is like an accelerant to a fire," said Anthony Sanders, professor of real estate finance at George Mason University.
More than a dozen lenders with Ginnie's endorsement have made loans that are now delinquent at rates far in excess of what regulators consider acceptable. And some of these lenders have been accused of misleading both borrowers and the government about these loans.
Created more than four decades ago to help expand homeownership, Ginnie Mae works in the guts of the financial system, offering a secondary layer of government insurance that helps make it easier for mortgage lenders to provide financing for home buyers. The first layer of government backing comes primarily from the Federal Housing Administration, which principally seeks to help first-time home buyers who have impaired credit or little money for down payments. The FHA insures the mortgages made to these borrowers, promising that the lender will ultimately be repaid if the borrower defaults. The FHA has the primary responsibility for monitoring the lenders.
Then Ginnie Mae enters the picture. Mortgage lenders often want to bundle the loans they've made into securities and sell them to investors. Ginnie Mae guarantees those securities, ensuring that investors continue to get their principal and interest without interruption if any of the loans go bad or lenders are otherwise unable to make payments to investors. This additional insurance makes the securities easy to sell, generating new cash for lending.
In the past year, nearly one in five new mortgages -- both good loans and bad -- were put into securities guaranteed by Ginnie Mae.
Ginnie Mae officials said that the average delinquency rate on all their loans is lower than that of the overall market, which has suffered mortgage defaults and foreclosures on a scale unseen since the Great Depression. These officials added that they have never needed taxpayer money to meet their obligations and have enough money in reserve to cover foreseeable losses.
To limit losses, Ginnie Mae often plucks delinquent mortgages from its securities and makes lenders take them back. But even if the agency is successful at protecting the securities, this practice does little to choke off the stream of money that troubled lenders get to keep making new loans.
HUD Inspector General Kenneth Donohue said Ginnie Mae is too accommodating of problem lenders, adding that the agency has put its highest priority on ensuring that money is pumped into the mortgage market.
"Ginnie Mae is in the business of trying to bring in business," he said.
But Mary K. Kinney, who took over running Ginnie Mae last month as its executive vice president, defended the steps the agency has taken to improve oversight.
"We will leave no stone unturned to protect the integrity of our programs," she said. "Ginnie Mae has already taken strong steps to tighten risk management. But let me be clear that we will continue strengthening our controls until we can be satisfied that we're airtight."Bit player to big time
Only a few years ago, Ginnie Mae was a bit player in the mortgage market, backing just 4 percent of new mortgages. Then the housing market melted down, and many of the banks and other lenders that had made risky but highly popular loans got out of the business. So did the financial firms that had bundled these loans into mortgage-backed securities. A reinvigorated Ginnie Mae helped fill the void as part of government efforts to stabilize the market.
In the past two years, the total value of Ginnie Mae's guarantees for principal and interest on home loans jumped 43 percent, to $826 billion. While many of these loans were made by the nation's big banks, dozens of smaller lenders rushed to obtain the government's endorsement because this type of business was one of the few remaining opportunities for lending amid the mortgage meltdown.
Ginnie Mae officials said the agency carefully evaluates firms that apply to its program and monitors their performance. Officials said they look at each company's financial condition, its track record, and its ability to ensure that its loans meet government standards and do not put taxpayers at risk.
Ginnie Mae reports there are about 300 firms approved to issue the securities it guarantees, including 68 that started in the past two years. About 90 companies were rejected during that period, the agency said.
Despite this screening, recent entrants and veteran firms alike show signs of trouble, according to a review of filings and reports issued by HUD and its inspector general, federal and state banking regulators and federal court records, as well as statistics in government databases. Lenders with spotty histories and poor financial health have sold nearly $100 billion in loans packaged into Ginnie Mae-guaranteed securities in the past two years, according to calculations based on data provided by Inside Mortgage Finance, a trade publication.
Housing experts say that Ginnie Mae should be providing a second level of defense against questionable lenders, on top of oversight performed by the FHA. Ginnie Mae said it does not rely on the FHA to vet firms.
"If Ginnie Mae as a separate watchdog looks at issuers and cracks down, then that is going to independently crimp the ability of fraud artists to operate," said Ed Pinto, a mortgage industry consultant and former senior executive at Fannie Mae. "If they are not cracking down, they are giving them access to the capital markets with the full faith and credit of the U.S. government."
Sixteen mortgage lenders endorsed by Ginnie Mae have been cited by various federal regulators for unsafe banking practices, insufficient capital or other violations. Thirteen firms have been fined, sanctioned or ordered by HUD auditors to cover the cost of bad loans. Eight firms have FHA loan portfolios that are defaulting at double the rate of their principal competitors, which can be grounds for suspension from the FHA program. Another eight companies have FHA default rates more than 50 percent higher than the average in their area.
Premium Capital Funding of Jericho, N.Y., for example, is the subject of several lawsuits in federal court alleging that it misled borrowers about the terms of both traditional and FHA loans. Its default rate on FHA loans made in the past two years is 14.3 percent, or more than double that of other lenders in its area. The company's default rate has more than tripled in the past year, yet Premium was allowed to sell $78 million of Ginnie Mae securities from January to September, according to Inside Mortgage Finance.
Andrew Pennacchia, vice president of legal affairs at Premium, said Ginnie Mae has not raised concerns about the company's FHA default rate. Pennacchia said that Premium believes the suits filed against it lack merit. He also noted that some of the claims have been dismissed.
MVB Mortgage of Southfield, Mich., was faulted by the Federal Deposit Insurance Corp. in a 2007 order for allegedly helping a bank founded by one of its owners violate federal banking laws. Moreover, MVB has an FHA default rate on loans made in the past two years of 11 percent, nearly twice the average in its area. Still, MVB was allowed to sell $110 million in Ginnie Mae securities from January to September, according to Inside Mortgage Finance.
MVB president MaryAnn Tomczyk said Ginnie Mae officials have not been concerned about the FDIC cease-and-desist order, which is the subject of an ongoing FDIC investigation and a federal lawsuit. But Tomczyk said Ginnie Mae last year required the company to lower its FHA default rate to 7.5 percent and capped the volume of securities MVB can issue at $5.5 million per month.
According to court documents, MVB disagreed with the FDIC's finding and has sued the agency to reclaim seized funds.
The most expensive blow to Ginnie Mae came this summer with the bankruptcy of the giant Florida mortgage lender Taylor, Bean and Whitaker. The firm not only made mortgage loans but bought loans from hundreds of other lenders that didn't have Ginnie Mae status and converted the loans into securities.
More than a dozen of such lenders had previously been sanctioned -- for instance, fined or put on probation -- for violating FHA rules. In July, Ginnie Mae discovered inconsistencies in filings Taylor, Bean and Whitaker made with the agency, prompting an investigation. A month later, HUD accused the company of providing false information to the department and failing to file required reports and notify officials about transactions that could put the FHA at risk of fraud.
An attorney for the lender could not be reached for comment, despite several attempts.
Ginnie Mae declined to say how much the lender's failure will cost the agency.
Ginnie Mae officials said they have required many issuers to take corrective actions, which often aren't publicly disclosed. The officials said they closely evaluate the lenders, looking at metrics such as payment defaults, staffing levels and other measures of financial health. "We consider all sources of information and take the appropriate actions, working closely with the office of the general counsel within HUD," said Stephen L. Ledbetter, vice president for mortgage-backed securities at Ginnie Mae.
But in November, Ginnie Mae's outside auditor reported a "significant deficiency" in Ginnie's internal controls: The agency could not adequately track whether loans sold to investors had been insured by the FHA and therefore met government requirements. The auditors noted they first identified the problem in 2007.
Joe Murin, who recently left as head of Ginnie Mae to return to the private sector, acknowledged that the enormous growth of Ginnie Mae's portfolio has increased the risk for the agency. He said the main problem is that the agency doesn't have the staff needed to track the growing number of issuers. Despite the huge increase in issuance, Ginnie Mae's staffing has hovered at just over 60 employees.
Additional hiring "never really took place," Murin said. "It taxed the hell out of those Ginnie Mae employees."Red flags
When Lend America, based on Long Island, N.Y., was approved as a Ginnie Mae issuer in June 2008, there were already reasons for caution. HUD's database shows that nine months before that approval was granted, FHA loans made by one of the firm's branches had a default rate far higher than is deemed acceptable by the FHA. The company's chief business strategist, Michael Ashley, had been convicted of fraud, including for falsifying loan applications, and been subject to multiple investigations into his business practices.
A federal fraud complaint filed by the Justice Department alleged that Ashley urged his employees to "imagine" a world in which they "couldn't say no," creating an environment in which loan officers were willing to make loans to most anyone who applied.
Yet for the past 18 months, nearly all of Lend America's 6,500 new loans have been turned into Ginnie Mae securities, giving the company additional cash flow and putting taxpayers at risk. A spokesman for Lend America said neither the company nor Ashley would respond to questions for this report.
Lend America's conduct also allegedly endangered borrowers. In seven states, borrowers with loans refinanced by Lend America have alleged that the company is not paying off their old mortgages, forcing them to face potential foreclosure, according to interviews with borrowers and filings by regulators.
On Oct. 1, Walter Westbrook used Lend America to refinance the mortgage on his Erwin, N.C., home into an FHA loan but found that Lend America didn't uphold its end of the bargain, he said in an interview. Even as he made payments on his new loan to Lend America, the company didn't pay off the old first mortgage owed to CitiMortgage until more than a month after the closing and still hasn't paid off the second mortgage owed to SunTrust, which continues to demand a $312 monthly payment from Westbrook. "I refinanced so my bills would go down, but now my bills are higher," he said.
Ginnie Mae has stood on the sidelines as the Justice Department -- and, at times, HUD itself -- tried to crack down on the company's business practices. Last week, federal officials removed Lend America from the FHA program altogether, shutting down the firm's government-backed lending. That triggered an immediate suspension of the company by Ginnie Mae.
Center for Public Integrity staff writers Katherine Aaron and Laura Cheek contributed to this report. The Center for Public Integrity is a nonprofit, nonpartisan organization dedicated to producing original investigative journalism on issues of public concern.