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FHA Pronounces Budget Problems Gone, Thanks to Foreclosure Fraud Settlement

The Administration’s FY 2013 budget predicts a large shortfall for the Federal Housing Administration, which has predictably suffered during the housing crisis. But the FHA’s Acting Director (what a surprise, an acting director at a key regulatory agency) says that shortfall has been wiped away by the foreclosure fraud settlement deus ex machina:

A budget plan sent to Congress today projected that the FHA would require as much as $688 million from the U.S. Treasury Department. It would be the first cash draw in the agency’s history.

That estimate is “obsolete,” (Carol) Galante said in an interview, because five of the nation’s largest banks last week agreed to inject about $1 billion into the agency’s capital reserve fund to settle fraud and foreclosure claims.

Pardonez? This is a case where it really hurts not to have settlement terms. Because the total amount in the foreclosure fraud settlement that gets delivered to the federal government, and that includes every agency, is $750 million.

Nick Timiraos pointed me to this separate settlement with the FHA from Bank of America on Countrywide underwriting claims:

As part of the global resolution between the United States of America and the five largest mortgage servicing banks in the country, which will bring much needed relief to financially distressed homeowners nationwide, Loretta E. Lynch, United States Attorney for the Eastern District of New York, today announced that the government will also resolve its claims against the Bank of America, Countrywide Financial Corporation and certain Countrywide subsidiaries and affiliates (Countrywide) for underwriting and origination mortgage fraud.

Since 2009, the office has been investigating the Bank of America’s lending practices to determine whether the bank, through Countrywide, which the bank acquired in 2008, knowingly made loans insured by the Federal Housing Administration (FHA) to unqualified home buyers. To date, the FHA has incurred hundreds of millions of dollars in damages as a result of this conduct. The investigation also encompassed allegations that the bank and Countrywide defrauded the FHA insurance fund by originating mortgage loans that were based upon inflated appraisals. During the investigation, the office determined that the bank’s conduct provides a basis for affirmative civil enforcement under, among other legal remedies, the False Claims Act, 31 U.S.C. §§ 3729-33.

As part of the global settlement, Bank of America will pay $1 billion to resolve the wrongdoing uncovered during the office’s investigation. The settlement will entail an immediate payment of $500 million to provide a recovery for the harm done to the FHA by Countrywide’s conduct. Payment of the second $500 million will be deferred to fund a loan modification program for Countrywide borrowers across the nation with underwater mortgages. Under the terms of the program, Bank of America will solicit all potentially eligible borrowers and provide a loan modification to anyone with an eligible mortgage who accepts the offer. If, after the expiration of three years, the bank has not met its obligation to apply the full $500 million to provide such relief, any remainder will be paid directly to the United States.

Is this the $1 billion Galante’s talking about? Because it really only resolves half of it. The other half doesn’t go to the FHA, but to a loan modification program, with money going to the government only if the $500 million in the mod program doesn’t get paid down.

Also confusing is whether or not this $1 billion deal is considered part of the $25 billion settlement, or an add-on (which would explain why some news outlets call it a “$26 billion” settlement).

But even if we assume $500 million comes to the FHA from the Countrywide part of the settlement, then we’re still talking about Galante claiming that $500 million more would come to her from the settlement. That would be 2/3 of all the money due to the federal government under the settlement, and given that DoJ, HUD, the FTC, OCC, the Fed, the FHFA and plenty of other agencies would want some money for their time and effort on investigations and negotiations, that’s not a very realistic claim.

But here again is why the lack of settlement terms is so infuriating. We cannot make out what Galante is talking about with respect to the FHA, because we don’t have the terms spelled out. Attorneys General and federal regulators feel free to throw out numbers when no real numbers exist yet. WSJ has their best guesstimate, but that’s not official. It’s really a travesty.

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David Dayen

David Dayen