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Allied Can Proceed With Lawsuit Against HUD

Federal judge rules on three motions

Aug. 13, 2012

By staff

After it was suspended as an approved mortgagee for the Federal Housing Administration, Allied Home Mortgage Corp. filed a lawsuit and successfully obtained an injunction temporarily reversing the suspension. But now a federal judge has lifted the injunction, though he did rule in Allied's favor on two other motions.

The Department of Housing and Urban Development expedited motion to transfer venue in a lawsuit filed by Allied against the housing agency was denied by a federal judge on Wednesday. In addition, HUD's motion to dismiss was granted in part and denied in part.

The government intervened in a fraud lawsuit against Allied Home Mortgage Corp. in November 2011. At the same time, HUD suspended the company as an approved FHA mortgagee.

The suspension was the result of fraud on FHA-insured loans, failure by the corporate entity to pay branch expenses and inadequate quality controls, HUD alleged. In addition, Allied allegedly submitted false reports to HUD and employed a suspended principle officer.

In its lawsuit against HUD, Allied sought declaratory and injunctive relief to challenge HUD's suspension.

The former branching giant questioned how it could be cited for employing a suspended principle, Allied President and Chief Executive Officer James C. Hodge, when he was suspended the same day they received the notice. It also complained that HUD gave Allied no opportunity to respond to the FHA suspension and caused the company to lose warehouse lines with Wells Fargo Bank, N.A.; Customer Bank; and Texas Capital Bank -- though Texas Capital subsequently restored the warehouse line to 10 percent of its former level.

FHA loans accounted for 70 percent of Allied's originations, but the loss of the warehouse lines also impacted conventional mortgage production.

In May, HUD reversed the suspension as required in a preliminary injunction obtained by Allied. But HUD advised Allied that its Mortgagee Board was considering taking administrative action and seeking monetary penalties and providing notice of the proposed debarment of Hodge.

HUD asked the court to transfer the case to U.S. District Court for the Southern District of New York where the government's lawsuit against Allied was filed. Allied said that the New York was substantially dissimilar and, in fact, raised distinct issues.

U.S. District Judge Gray H. Miller agreed with Allied and denied HUD's request to transfer the case to New York. In addition, HUD's motion to dismiss Allied's declaratory relief claim was denied, enabling Allied to continue with its action.

But the judge lifted the injunction against HUD's suspension because the agency had provided the necessary notices.

Judge Rules for Allied in Lawsuit Against HUD
A federal judge has granted Allied Home Mortgage Corp.'s motion for a preliminary injunction preventing its suspension as an approved Federal Housing Administration mortgagee. Allied successfully argued that the mortgagee that caused FHA losses was separate from the current operating entity and that its suspension would have consequences that can't be reversed.

Net Branching at Issue in Allied's FHA Suspension
Allied Home Mortgage Corp., which claims to be the "the nation's largest privately held mortgage banker and broker," has lost its ability to originate and securitize loans insured by the Federal Housing Administration and has been sued by the government over allegations of fraud. Claims on FHA loans funded by Allied are on track to exceed $1 billion. The company is accused of operating its offices as net branches in violation of FHA requirements.

Allied Home Mortgage Corp. and James C. Hodge, Plaintiffs, v. Shaun Donovan, Secretary, United States Department of Housing and Urban Development, and The United States Department of Housing and Urban Development, Defendants.
Case 4:11-cv-03864, Nov. 2, 2011 (U.S. District Court for the Southern District of Texas).

United States of America, Plaintiff-Intervenor, -against- Allied Home Mortgage Corp., Allied Home Mortgage Capital Corp., Jim C. Hodge, and Jeanne L. Stell.
Case No. 11 Civ. 05443 (VM), Nov. 1, 2011 (U.S. District Court for the Southern District of New York).

Allied Home Mortgage profile

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