Flagstar reaches settlement in FHA mortgage fraud claim

(TheNicheReport.com) Flagstar Bank, a residential mortgage lender that in the past was notorious for its subprime lending operations, recently acknowledged to investors that a settlement of a fraud claim with government authorities has been reached. The settlement focuses on allegations by the Department of Justice against Flagstar, in which the government claims that the Michigan-based lender may have improperly approved mortgage loans to be insured by the Federal Housing Administration (FHA).

News of the government's case against Flagstar came from the U.S. Attorney's Office for the Southern District of New York. Preet Bharara issued a statement that indicated Flagstar's admissions and commitment to exercise caution in matters of compliance with federal lending regulations. The amount of the settlement is in excess of $130 million, with $15 million to be paid in a month's time and the rest in increments adequate to the lender's financial reporting periods.

By settling the matter, Flagstar has essentially admitted to issuing certifications to mortgages that did not meet FHA criteria and were thus unsuitable to be guaranteed by the government. As these home loans were risky and not eligible for FHA insurance, they eventually defaulted at a loss to the borrowers, the federal government and the American taxpayers.

In addition to the monetary payouts that Flagstar has agreed to, the mortgage lender is ordered to retain a third party to supervise the bank's FHA lending operations and hold training sessions for employees involved in that capacity.

Flagstar is no stranger to lawsuits related to its mortgage operations. In July of last year, Flagstar unsuccessfully attempted to dismiss a claim in federal court against the sale of fraudulent mortgage-backed securities. The claimant in that case is Assured Guaranty Municipal Corp. of New York, a securities insurer that last year scored a billion dollar settlement from Bank of America over a similar matter.