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Texas Mortgage Firm Survives and Thrives Despite Repeat Sanctions

Despite repeated regulatory sanctions across more than a dozen states, Allied Home Mortgage Capital Corp. continues to be a major FHA lender. Borrowers in Louisiana, West Virginia allege that Allied brokers misled them and diverted funds. 

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Jim Hodge, the founder of Allied Home Mortgage Capital Corp, a mortgage firm with a long trail of alleged misconduct and government sanctions.

As his competitors imploded one by one, Jim Hodge, the folksy founder of Allied Home Mortgage Capital, touted his sprawling Houston firm as a survivor.

Not only was Allied still standing, Hodge told employees in a company newsletter in December, it was thriving. "The good news," Hodge wrote, "is that even though we are all having to work harder, most branches are making lots of money."

But an examination of Hodge's mortgage company by ProPublica found that its prosperity has come at a price for dozens of customers who claim Allied brokers have put their homes at risk, lied to them or improperly siphoned money from their deals.

The firm has left behind a trail of alleged misconduct and piecemeal government sanctions spanning at least 18 states and seven years. Yet Allied chugs along unimpeded, aided by access to the government-backed Federal Housing Administration loan program.

Over the past year, the FBI and federal prosecutors have made mortgage fraud a priority, filing criminal charges across the country. Regulators, such as the U.S. Department of Housing and Urban Development, also say they are getting tough. But Allied's history shows how even repeat offenders can fall through gaps in the fragmented safety net meant to protect mortgage borrowers.

Consider:

  • Allied has the highest serious delinquency rate among the top 20 FHA loan originators from June 2008 through May.
  • Nine states have sanctioned the firm in the last 18 months for such violations as using unlicensed brokers and misleading a borrower.
  • Federal agencies have cited or settled with Allied or an affiliate at least six times since 2003 for overcharging clients, underpaying workers or other offenses.
  • At least five lenders have sued, claiming Allied tricked them into funding loans for unqualified buyers by falsifying documents and submitting grossly inflated appraisals, among other allegations.

"Everything is just a nightmare for me," said Cheryl Stewart, who is suing Allied alleging that its Hammond, La., office misrepresented her income to qualify her for a loan, then deposited money from her closing into the branch manager's bank account. Stewart said she is on the brink of losing her home as a result. Allied has successfully argued that the case should be moved out of state court and into arbitration.

Despite these repeated complaints, no single agency is investigating the sweep of the company's actions and whether they represent a pattern or, as Hodge maintains, are to be expected for a company of Allied's size. It bills itself as the nation's biggest privately held mortgage broker-banker with some 200 branches.

William Black, an associate professor of economics and law at the University of Missouri-Kansas City, said Allied's record exemplifies the failings of a regulatory system that has teeth but seldom bites.

"It's a wonderful example of the overall crisis," said Black, who has testified before Congress about financial fraud. "What would it take before somebody would take serious action?"

Federal housing officials would not discuss Allied's performance or their own negative audits of the firm. But after a recent review, the FHA has recommended that the Mortgagee Review Board take action against Allied. The board can fine companies or revoke their access to the FHA market, which has caused firms to close.

Separately, the Secret Service, which conducts criminal investigations for the Treasury Department and Federal Deposit Insurance Corp., confirmed that it is looking into allegations of fraud and wrongdoing at Allied's now-shuttered branch in Hammond.

Although Allied is dwarfed by Wells Fargo, Bank of America, Quicken Loans and JPMorgan Chase, the nation's largest mortgage firms, it remains a big player in FHA-insured loans.

In the last two years, Allied Home Mortgage Capital originated more FHA mortgages than all but 15 of the more than 10,000 firms that handled such loans. Since 2005, it has processed nearly 40,000 FHA loans worth nearly $5.85 billion, according to the FHA. Those loans now account for at least 70% of Allied's business, Hodge said.

Allied differs from most other FHA players in that it is both a broker and a lender. It has an affiliated company with a nearly identical name that has been the lender on about 30% of its FHA loans in the last two years.

Since the collapse of the subprime market, the volume of FHA-insured loans has boomed, rising from about 5% of all home loans in 2007 to 20% in 2009. When these loans fail, an insurance fund supported by FHA borrowers picks up the tab.

Both as a broker and a lender, Allied's rate of seriously delinquent loans is nearly 60% higher than the national average for the past two years. And the FHA paid out more than $500 million from 2005 to 2009 for claims on defaulted loans brokered by Allied, statistics show.

In an interview, Hodge said the delinquency rates reflect more on the lenders that funded the loans than on his brokers.

The $500 million in claims FHA paid out, he said, were covered in part by insurance premiums paid by Allied borrowers — who largely do not default. "They didn't have a complete loss of a half a billion," he said.

Hodge said the problems experienced at some of Allied's branches should not tarnish his firm's overall record. "If you look at the volume that we did or do," he said, "it's not significant."

Broken trust

Sal and Ashley DePaula said they had more reason than most people to trust their broker: The manager of Allied's Hammond branch was a tenant in one of their rental houses.

Over the course of 2006 and 2007, Allied's staff helped them sell that property to an acquaintance of the manager and refinance several others.

It wasn't until months later, the DePaulas allege, that they realized they'd become pawns in a scam.

The buyer of the property the couple sold for $93,000, had actually paid $47,000 more than that, according to a lawsuit in state court by the couple and documents they provided. The cash ended up in the account of Shane Smith, the branch manager, a wire-transfer record shows.

Then, after a tornado hit one of the DePaulas' refinanced rental homes in 2008, they learned they'd never been signed up for the insurance Allied said it had arranged — even though they'd paid for it every month. The couple said they expect to spend more than $36,000 on repairs.

"Had somebody robbed me and stole $50 out of my purse, they would be in jail," said Ashley DePaula, who said she is "bitter" that no one has been punished.

Last year, the couple learned that Allied had put another borrower's name on Sal DePaula's retirement account statement and submitted it in a loan qualification packet.

That other borrower, Louisiana state criminal investigator Terry Apple, said he only realized he was part of an alleged scam when ProPublica showed him a copy of the statement.

"I'm now finding out that I'm just a small part of a very large puzzle," Apple said.

At least four lawsuits, including one by the DePaulas, have been filed against Allied over the conduct of its Hammond branch. Other borrowers, some of whom are mentioned in legal filings, allege they, too, were defrauded but can't afford to sue.

"You know how your body can be quivering?" said Franklin Morgan, 62, a disabled Vietnam veteran who faces losing his home. "That's what my body's been doing every day."

In towering stacks of legal documents, attorneys allege that the Hammond office deceived their clients from 2005 through 2007 by misrepresenting loan terms, falsifying records, failing to pay off prior mortgages and diverting hundreds of thousands of dollars. A title lawyer who worked closely with the Allied branch also stands accused — and has been sued by Allied.

The alleged victims include friends and relatives of Allied staff and the birth mother of the assistant manager's adopted daughter. That assistant manager's past — including an arrest warrant for allegedly stealing $24,000 from a previous employer — has come to light.

The lawsuits are proceeding, but Ashley DePaula says Allied has offered a small settlement that has not been finalized.

In an interview, Hodge conceded that "serious fraud" had taken place at the branch, which closed in 2008. He also acknowledged personally hiring branch manager Smith even though Smith previously had lost a home to foreclosure and declared personal bankruptcy. Smith and his attorney could not be reached for comment.

Hodge said the Allied corporate office does not appear to be a target of any criminal probe.

"I don't know all the details," he said. "It's a pretty bizarre situation."

Customers' stories

Around the country, other Allied borrowers tell similar tales.

Pete Pauley, pictured with his wife Mary Ellen, sued Allied in W. Va. state court alleging that a broker misled him about a low-interest loan in 2004. In Charleston, W.Va., businessman Pete Pauley sued Allied in state court alleging that a Weirton, W.Va., broker misled him into signing for a low-interest loan in 2004 whose rate began rapidly rising after one month.

As part of the loan approval process, the branch submitted a letter from a local accountant verifying Pauley's ownership of his company. That accountant later testified he didn't know Pauley or write the letter.

Pauley, who runs an oil and gas company, said the experience was humiliating. He and his wife, Mary Ellen, a nurse, learned of other complaints.

Four other couples alleged similar betrayals by another Weirton loan officer, the sister of Pauley's broker.

Allied settled for $240,000, Pauley said. But Hodge said Allied did so only after the judge strongly encouraged it.

"We ended up buying that guy a house," he said.

Allied also settled with the other four couples. In addition, it agreed to pay $12,000 in education and restitution costs after the West Virginia attorney general found it had misled borrowers about their loans.

Lenders, too, have felt aggrieved. AmericaHomeKey sold loans brokered by Allied to a secondary investor. After four borrowers failed to make even the first payments on their loans, the investor demanded the lender make good.

AmericaHomeKey then sued Allied in Harris County, Texas, alleging that it had misrepresented the self-employment status of three of the borrowers and failed to check out other basic facts.

"Clearly, these borrowers lacked the financial means and/or the intent to make the payments on these mortgage loans," the lawsuit said.

Allied disputes the allegations and will defend itself "with vigor," Hodge said.

In South Carolina, Charleston title attorney Elizabeth Stuckey Murphy testified in a deposition that she became so concerned about possible fraud at Allied's Goose Creek branch that she complained to the FHA and law enforcement agencies in 2005.

The branch manager, Murphy claimed in a letter to authorities, had padded closing statements with invoices for contracting work by her husband that was never performed — nearly $30,000 in one case alone.

In a deposition two years later, Murphy was asked about her complaint to the FHA hotline. "To date," she said, "I haven't received any response."

Frequent troubles

Every year since 2003, Allied has landed in trouble somewhere.

It's a streak that began with twin wallops from the U.S. Department of Housing and Urban Development totaling $420,000 in settlements — a significant sum for the agency. HUD oversees the FHA program, which insures mortgages for buyers who can't afford big down payments.

In all, regulators and attorneys general in at least 18 states have acted against the firm or its brokers. Most of the matters have been settled without any admission of wrongdoing by Allied.

Washington state banned a former broker in Allied's Spokane office after he was convicted of 10 felonies for stealing Allied clients' money and laundering it. Arizona denied a broker's license to a firm owned by Allied's Tucson branch manager because she had previously been convicted of embezzling from a bank.

State regulators say they must limit their actions to what happens within their borders. Federal officials say they don't generally look into state actions unless a mortgage company's conduct may also violate federal rules.

Although HUD and FHA have recently stepped up oversight of the mortgage industry, they have long had tools to police it.

Using data collected on every loan, housing officials can statistically track whether mortgage firms are putting borrowers into FHA loans they can't or don't pay on. According to this data, Allied for several years has had a serious delinquency rate well above the national average.

Over the last two years at one Houston branch, some borrowers mustered only a few payments or none at all. The serious delinquency rate within one year of closing was 12%, compared with 4.2% nationwide.

Gary Lacefield, a former HUD investigator, said the numbers are an obvious red flag about Allied that regulators should have acted upon. "I see no reason," he said, "why they shouldn't have been hammered."

ProPublica director of research Lisa Schwartz contributed to this story. USA TODAY editors assisted in preparing it for publication.

I have no idea whether this is a good company or not, but PLEASE don’t tell the Obama administration about this. We’ll wind up with two dozen new laws even though there are 100 ways already on the books to “hammer” a misbehaving company . How about we get the bureaucrats to just do their jobs? That would be a good trick.

Having said that, you might want to look into how many similar complaints rain down on the Big 3 at BAChaseFargo. My guess is there’s plenty to look at, they just hide it better and buy their way out when needed.

I think that this a very one sided article to say the least. Allied is a large company, and nobody has been imuned in the financial crisis from the effect of fraud or any other issue. I am having a hard time understanding why you fail to discuss any due dilligance on the part fo the lender. Brokers did not and can not make any decisions to lend money. While we all can agree that there were bad brokers everywhere, and that almost every company big and small was subjected to “bad brokers” It is irresponsible to state that the sole blame lies only in a broker or a company that a broker independantly worked for. Big Banks, Wall Street and Investors of these so called risky loans all had a roll in the financial metdown far beyond any broker. These firms created products that were designed to fail, and did so knowing that they were going to fail. They completely turned a blind eye to any type of quality control, due dilligence or any other system of checks and balances that should have caught a major portion of fraud. They repeatedly funded loans knowing they were not good loans or that the borrower did not really have the ability to pay and used unscrupulous brokers as the pawns in their schemes. The real story here would be more about that, and not a company who was victimized by fraudelent activities of employees or independent operators. I have yet to see any media outlet lay blame with firms who made all the funding decisions and had the resposibility to control loan quality.

It would seem from this article that Allied is an easy target by the various government agencies to either bring prosecution to bare or by refusing further access to FHA loans thereby forcing closure of their doors and seizing their assets to reimburse its victims.

To poster “Fight4Right”....do you work for Allied?  If not, you should.

ProPublica is one of the few sources of unbiased information about the goings-on that we rarely hear about.

Don’t you think it strange that the same pattern of fraud and deceit has occurred at numerous Allied branches? 

And why are so many other brokerages operating without the same issues that are occurring at Allied?

You are clearly a shill for Allied.  Take your comments to Beck’s website with all the other outright mistruths posted there.

Thank you Pro Publica once more for your outstanding reporting.  You are a bright light in a sea of mediocre journalism.

@Fight4Right “I am having a hard time understanding why you fail to discuss any due dilligance on the part fo the lender.”

As explained in the story, Allied has a separate company with an almost identical name that acts as the lender in many of its loans.  That’s layered with its funneling of FHA money, but it’s a very typical corporate scheme to run two corporations that work in concert and then pretend that one has no connection to the other when someone catches you playing the shell game.  It’s how every fraudulent concern from ENRON to Bernie Madoff carried out their crimes - albeit with different kinds of entities and different arrangements.  It’s like Putin declaring that he’s not running Russia because, hey, I’m only the Prime Minister!

This section seems to hint at that obvious connection, but it looks like the reporters don’t want to state the obvious or ask the pointed question of Hodges:

—————————————-
*Both as a broker and a lender, Allied’s rate of seriously delinquent loans is nearly 60% higher than the national average* for the past two years. And the FHA paid out more than $500 million from 2005 to 2009 for claims on defaulted loans brokered by Allied, statistics show.

In an interview, *Hodge said the delinquency rates reflect more on the lenders that funded the loans than on his brokers.*

The $500 million in claims FHA paid out, he said, were covered in part by insurance premiums paid by Allied borrowers — who largely do not default. “They didn’t have a complete loss of a half a billion,” he said.
—————————————-

The only fact we’re missing there is whether Hodge is referring to his own lenders.

@Fight4Right “The real story here would be more about that, and not a company who was victimized by fraudelent activities of employees or independent operators.”

The story about the major firms and credit agencies is a real one, but it’s also been heavily covered and if you click around the site you’ll see the story about the Magnetar trade, which is exactly about this topic.  If you haven’t seen the stories about the credit agencies, major banks or anyone else then you may just be watching TV, which is mostly garbage, Frontline aside.  Everyone from McClatchy to Matt Taibbi to Pro Publica has done great work on the Wall Street and government end of this chicanery and there are a number of great books on the issues you cite, including 13 Bankers, The Big Short and others. 

The story you’re commenting on here is about a company that is acting dishonestly today, right now, not just historically.  That’s why it’s relevant.  I cannot see how ProPublica is at fault for doing great journalism on a story that needs telling instead of a story that you wish they had written that, while important, has been covered heavily in the responsible media.  Journalism isn’t a zero sum game.

The overarching tale of all this nonsense isn’t just one of a group of horrible people at the top of the food chain and a few bad apples regionally down below, it’s the story of an industry that at every level distorts the behavior of the next person down the chain either through incentivizing bad decisions (bribery in any other situation) or by simple fraud.  In many cases it starts at the top, but here you have a company that’s acting as a lender and backing itself with FHA loans.  As covered in the story strongly, our neutered government’s unwillingness to punish corporate fraud too much of the time and to act as the lapdog to industry that it is leaves it grossly negligent - though the actor deserving the most blame is the firm engaging in fraud, followed by the industry who lobbies for lax regulations and de-funding of enforcement then followed by the political ideology which preaches “the market” while in the backroom ushering in a neutered form of government that purposefully cannot interfere in “the market”.  This is the end result of all that lobbying and ideological gibberish and fraud - an industry run amok and a government unable and/or unwilling (who cares which) to do anything about it.

These paragraphs alone tell you all you need to know from a 30,000 foot view:

—————————————-
- Allied has the highest serious delinquency rate among the top 20 FHA loan originators from June 2008 through May.
- Nine states have sanctioned the firm in the last 18 months for such violations as using unlicensed brokers and misleading a borrower.
—————————————-

That’s in very recent history - post-crash.  That tells you that this isn’t strictly about what happened with the CDO and CDS nonsense, but yet another form of the same old game using slightly different strategies.

That is why this story’s relevant, because it’s ongoing and because that much fraud doesn’t happen by accident at honest companies.

Pgillenw is correct.  Allied is an easy target. Allied was probably unable to get their money to the highest officials and lawmakers in DC and relied upon paying off and intimidating the local elected criminals and judges to protect them. BUT they are still a good target to go after anyway, they are just the small time example of what has been going on in all form of government and its relationship with big business in the US since the 1980’s.

Thanks for this article. Maybe the local papers in the towns you cite will follow through with their own reporting. I hope you’ll do a follow up. I’d like to know if the administration acts on this information.

Florida private lender (seller finance deal) regretted to sale the property at low price in the late 90. She accepted payments for few years, accepted cashier checks payments for over $20,000.00 dollars. when property values moved upward almost 400 per cent. Lender stopped cashing checks, hold on the money and file for foreclosure to steel the property back.
I almost forgot the best part, the lender took advantage of the chaos after hurricane Wilma, rushed the case, abused the court system right after hurricane Wilma, when I am without phone or electricity. Thanks to Margaret and Frank.

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