Freedom Mortgage Fraud Case: Early-Default Reviews and Unreported FHA Defects

Freedom Mortgage agreed to pay $113 million to resolve a mortgage fraud case involving ineligible Federal Housing Administration loans, missed early-default reviews and unreported underwriting defects. The company admitted that its own reviews found problems while findings failed to reach production and underwriting management, and disclosures to HUD barely followed. If you worked in underwriting or quality control, the gap between what the review found and what the company did with it is the heart of this case.

The Justice Department announced the settlement on April 15, 2016. This page follows Freedom’s review and reporting decisions, from the loan file to the government insurance payment. Our broader mortgage whistleblower questions cover the connections among defective loans, government claims and an insider’s evidence.

Why FHA Relied on Freedom’s Loan Reviews

Freedom participated as a direct endorsement lender, with authority to originate, underwrite and endorse mortgages for FHA insurance. FHA did not review each loan for compliance before endorsement. The lender made the eligibility decision, and the Department of Housing and Urban Development, FHA’s parent agency, could later receive an insurance claim from the loan’s holder after a default.

That arrangement put the loan file and the lender’s certification at the front of the government’s risk. Application information passed through verification and underwriting before closing and endorsement, with servicing and any insurance claim coming later. The borrower supplied information, but the lender adopted the file when it certified eligibility for insurance.

The Justice Department’s account explains the controls that accompanied that authority: lenders had to follow underwriting requirements, maintain quality control that could prevent and correct deficiencies, and report deficient loans identified through that work. Freedom admitted that HUD insured hundreds of ineligible loans and suffered substantial losses when it paid claims on them. The review and reporting failures reached the public insurance fund.

Freedom’s Findings Stopped Short of Management

Freedom admitted that, from 2006 through 2008, it did not share its early-payment-default quality-control reviews with production and underwriting management. It also did not require production or underwriting staff to respond to those findings. A review could identify the underwriting problem without putting a response on the desk of the people responsible for originating and approving loans.

Staffing also restricted which loans reached review. From 2008 through 2010, Freedom’s staffing limitations meant it did not always review early defaults on time or audit all the early-default loans HUD required it to review. The company admitted both failures: incomplete review coverage and findings that did not travel through the management chain.

For someone inside a mortgage business, those are different records and different decisions. The review population shows which loans reached quality control. The distribution and response records show what happened after a reviewer found a problem. We connect those stages because a completed review has more to tell us when we can see who received it, what response followed and what the lender ultimately told HUD.

What Did Freedom’s Early-Default Reviews Find?

Freedom found defect rates exceeding 30% in the early-default loans it reviewed between 2008 and 2010. Staffing limitations left other required reviews undone.

In the Justice Department’s account of the historical requirements, an early payment default was a loan that became 60 days past due within its first six months. These were loans already showing trouble soon after origination. Reviewing them put the original underwriting decision beside the borrower’s early payment performance.

The finding mattered because the lender was learning about defects in loans it had already approved for government insurance. A quality-control employee could see the underwriting weakness, while production and underwriting managers were supposed to receive findings and respond.

What Did Freedom Mortgage Report to HUD?

Freedom admitted that it reported no improperly originated loan to HUD from 2006 through 2011, despite its reporting obligation. In 2012, after identifying hundreds of loans that potentially should have been reported, it reported only one. We call that a reporting system with very little to say.

The point for an insider is what happened to a finding after the company recognized it. Quality-control findings, management responses and self-reporting decisions connect the people reviewing the loans to the agency bearing the insurance risk. A report’s path through those decisions can explain how the lender kept information inside the business while HUD continued to bear the consequences of its certifications.

Freedom’s admissions also connect those failures to the money. According to the Justice Department, HUD would not otherwise have insured the ineligible loans and later incurred losses paying insurance claims on them. The case reached beyond a review backlog to the certifications and payments that followed the underwriting decisions.

The settlement agreement covered FHA direct-endorsement originations in the insurance period from January 1, 2006 through December 31, 2011, with claims submitted by June 15, 2015, excluding HECM originations and streamline refinances. HUD, its Office of Inspector General, the Justice Department’s Civil Division and the U.S. Attorney’s Office for the District of New Jersey conducted the joint investigation. Freedom admitted the underwriting, review and reporting facts as part of the settlement.

What a Freedom Mortgage Insider Could Explain

An underwriter may know what supported the original approval, while a quality-control reviewer may know which defects surfaced afterward. A manager may know where the findings went and how the company decided what to report. Someone handling claims may hold the part of the story connecting an insured loan to HUD’s payment.

We bring those views together around the same loans. The original underwriting file, the dated review, the management response, the lender’s certification and the claim each answer a different part of the case. Seeing which information reached which decision-maker is especially useful where the company had a review process but left findings out of its reporting.

If that describes what you saw, talk with us about reporting mortgage fraud and the decisions you witnessed. We work through the government-payment connection with you and bring in mortgage fraud whistleblower lawyers who understand FHA underwriting and quality control. You may know the part of the business that explains why the records diverge.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. Our page on mortgage whistleblower rewards explains how the recovery and the award fit together.

Guild’s Complaint Shows What Can Disappear From a Review

Guild Mortgage supplies a close comparison to Freedom’s reporting failures. In its complaint against Guild, the Justice Department alleged that a later review found a reportable violation that the original quality-control review had missed. The complaint quoted the response:

That allegation makes the record versions matter: an original finding, a later discovery and a decision about what would remain visible. Guild later settled allegations concerning ineligible FHA loans, quality control and self-reporting.

The Guild complaint also followed a loan through underwriting to payment. It alleged that the lender waived a rental-history condition, overstated qualifying income by failing to deduct business expenses, and approved the loan for FHA insurance. The borrower made only two payments before default, and HUD paid a claim of $317,233.

You Know Where the Findings Went

If you saw FHA defects disappear between the loan review and the report to HUD, tell our whistleblower experts what happened inside the lender. We develop your case around those decisions, select mortgage fraud whistleblower lawyers with the right underwriting experience, and stay beside you as the case moves forward.