HOUSTON (CN) - A mortgage lender is "stonewalling" Uncle Sam's requests for mortgage documents and undermining a program that is "the bedrock for the American dream of homeownership," the government claims in court.
Uncle Sam sued AllQuest Home Mortgage Corp. and its CEO Jim C. Hodge on March 30 in Federal Court.
This isn't Hodge's first go-round with the U.S. government, which intervened in a whistleblower lawsuit against Hodge and AllQuest's predecessor Allied Home Mortgage Corp. in November 2011.
In that lawsuit , which is set for jury trial on May 11, federal prosecutors claim Allied Home Mortgage issued federally insured loans to unqualified buyers who defaulted, costing taxpayers $834 million in insurance payouts.
The new complaint involves the Government National Mortgage Association, aka Ginnie Mae or GNMA, part of the Department of Housing and Urban Development that administers mortgage-backed securities.
Ginnie Mae guarantees payment of home loans that are pooled and sold by lenders to investors, a product known as mortgage-backed securities, or MBS.
Such securities and lack of government oversight of them were pegged as the catalyst for the 2008 financial meltdown.
Ginnie Mae says its guaranty program is essential for giving poor Americans a shot at the American dream of homeownership.
"The Ginnie Mae guaranty allows mortgage lenders to obtain a better price for their mortgage loans in the secondary mortgage market. The lenders can then use the proceeds to make new mortgage loans available," the agency says on its website.
Uncle Sam adds in the lawsuit: "The purpose of the MBS Program is to attract new sources of private capital into federally insured or guaranteed residential lending programs, thereby increasing funds available for the purchase of low- and moderate-income housing."
The program works like this: A mortgage company, or issuer, pools home loans and conveys "right, title and interest in the mortgages" to Ginnie Mae.
The mortgage company keeps nominal title to the mortgages and is tasked with collecting the loan payments and forwarding those to the security holders.
"It is critical to the success of the MBS Program that regular and timely payments be made to the investors," Uncle Sam says in the lawsuit.
If the loan payments collected are deficient, the lender has to make up the difference and ensure that investors get paid.
"To protect the investors from the risks associated with borrower and Issuer defaults, GNMA guarantees the timely payment of principal and interest on the securities," the 21-page complaint states.
AllQuest was an issuer of Ginnie Mae-backed securities until it admitted to the agency in that February it wouldn't be able to make payments on its securities, triggering a default notice from the feds, which automatically terminates a lender's involvement in the program.
The law requires Ginnie Mae to take over servicing of the loans immediately upon default, and the lender must turn over all records needed to transfer the mortgage pools to Ginnie.
The records transfer, or lack thereof, is what led Uncle Sam to sue AllQuest and Hodge.
"Although Mr. Hodge, on behalf of AllQuest, voluntarily notified GNMA of the default and agreed to give 'full cooperation,' this cooperation has not been provided," the complaint states.
On March 17 the government sent a six-person team, including two attorneys and two mortgage banking analysts, to AllQuest's Houston office to deliver a notice of violation and collect documents.
Hodge went from cooperative to "stonewalling" the minute the federal regulators stepped into his office, the government says.
He didn't have the documents boxed and ready to go, as he said he would, and he told the investigators that everything Ginnie Mae needed was on AllQuest's computer servers, according to the complaint.
"Rather than provide GNMA complete access to the servers as dictated by the guaranty agreement, Mr. Hodge insisted that he would only allow access to the electronic system through AllQuest's IT resource provider Don Malone of the technical firm called 'Beyond I.T.,'" the lawsuit states.
Then Hodge "revoked his permission" for the federal team to look around his office for documents, the lawsuit states.
On day two of the investigation, Hodge said he and his staff would look around their Houston office and locate any hard copies that Ginnie Mae needs, the feds say.
However, "The GNMA team observed Mr. Hodge reading the newspaper and other AllQuest staff members sitting at their desks. Despite the repeated promises made by Mr. Hodge, there did not appear to be a good-faith effort made by AllQuest to comply with its contractual obligations," the lawsuit states.
After nearly a week of nosing around AllQuest's office, the government has a meager haul: two loan lists and "some documents," but no direct access to AllQuest's computer system.
Without the records, Ginnie Mae will have to do a painstaking and expensive "reconstruction" of the loans, Uncle Sam says.
"AllQuest's portfolio of GNMA-backed securities has a principal balance of approximately $47 million and consists of 343 mortgages," the complaint states.
"Accordingly, GNMA's reconstruction efforts would include a search of the records to determine the mortgagors names and addresses at the inception of the pool, a search of separate records to determine which of these mortgages have been paid in full or partially prepaid, a search of the county records for all counties in which secured property is located to determine if any foreclosure actions are pending, and an inquiry to the insuring and guarantying agencies to determine whether any claims are pending."
Hodge's stonewalling has exposed Ginnie Mae to potentially several million dollars in losses, which would fall on taxpayers, and raised the possibility that MBS investors will not be paid, the feds say.
Ginnie Mae's program "supplies more than 98 percent of the funding for FHA-insured and VA-guaranteed mortgages" so any loss of confidence in the program, and diminished investment, could increase the cost of home loans for poor and middle-class families, the government says.
It seeks an injunction ordering Hodge and AllQuest to immediately turn over the documents and an accounting of all payments on loans backing Ginnie Mae-guaranteed securities.
Hodge was not available for comment Wednesday.
Read the Top 8
Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.