FHA and Ginnie Mae punish troubled New York lender cited by Center probe

Introduction

A New York-based lender that was featured in a recent Center for Public Integrity investigation has been expelled from a government-insured mortgage program and denied the right to sell mortgage-backed securities to investors.

Citing rampant violations of federal lending rules, the Federal Housing Administration and mortgage guarantor Ginnie Mae took action Monday against Jericho, New York-based FHA lender TopDot Mortgage. TopDot, which is registered with the FHA as Premium Capital Funding, was featured in a Dec. 9, 2009, story by The Center for Public Integrity and The Washington Post. The piece focused on mortgage lenders with checkered pasts, which had nevertheless won approval from Ginnie Mae to sell FHA loans in the secondary mortgage market. Ginnie Mae guarantees payment on those securities to investors. As a result, TopDot was able to generate new cash, which the firm could use to make more FHA loans. According to the Department of Housing and Urban Development, TopDot had a portfolio of Ginnie Mae securities worth $181.2 million; that portfolio is now being transferred to another mortgage-payment manager.

The story identified 36 lenders with records of civil lawsuits, reckless lending, fines, and government sanctions that had Ginnie Mae approval, and found that TopDot was the subject of several lawsuits alleging the company had misled borrowers about the terms of both traditional and FHA loans. More significantly, as of last December, TopDot had a default rate on FHA loans issued in the previous two years of 14.3 percent, more than double that of other FHA lenders in its area. The company’s default rate has since risen to 14.9 percent. At the time, Andrew Pennacchia, TopDot’s vice president of legal affairs, said Ginnie Mae had not raised concerns about TopDot’s default rate, and claimed the lawsuits lacked merit.

Now, according to a press release issued by HUD (which oversees FHA and Ginnie Mae), TopDot’s problems may go further. TopDot allegedly engaged in “numerous and egregious violations of FHA requirements,” including failure to document borrowers’ incomes and creditworthiness, and approval of loans with an excessive debt-to-income ratio, according to the release. “This lender demonstrated a pattern of utter disregard for how we do business,” said FHA Commissioner David Stevens. “Ginnie Mae’s requirements are in place to protect both the borrower and the American taxpayer,” added Ginnie Mae executive vice president Mary Kinney.

FHA officials said they intend to seek a monetary penalty of $674,000. TopDot has 30 days to appeal FHA’s ruling. A new statement provided by TopDot’s Pennacchia said the company “is shocked and disappointed by the FHA’s announcement and fervently disagrees with the FHA’s decision.” The statement added that “the company is currently evaluating its options to respond to this matter.”

Since early December, six Ginnie Mae-approved issuers identified as troubled in the story by the Center and The Washington Post have now been either expelled from the FHA and Ginnie Mae programs, served with subpoenas as part of ongoing investigations or closed by federal banking regulators.

FHA and Ginnie Mae ended Melville, New York, mortgage firm Lend America’s right to participate in the programs. Lend America also had a high FHA default rate and a history of allegedly fraudulent mortgage lending. The same month, federal banking regulators closed two banks, New South Federal Savings Bank in Irondale, Alabama, and Peoples First Community Bank in Panama City, Florida, that were named in the story. The banks had received cease and desist orders from the Office of Thrift Supervision for unsafe banking practices. On Jan. 12, the FHA and Office of HUD’s Inspector General issued subpoenas to Pine State Mortgage Corp. in Atlanta and First Tennessee Bank in Memphis as part of an investigation into their high FHA default rates.