A division of MetLife has agreed to pay $123.5 million to put an end to an investigation into allegations that it issued government-backed mortgages to borrowers even though they didn’t meet federal requirements. The allegations claim that MetLife certified ineligible mortgages between 2008 and 2012, well after a number of financial institutions brought the economy to its knees using similar loan practices.
MetLife Bank (now MetLife Home Loans) was a Direct Endorsement Lender in the Federal Housing Authority (FHA) insurance program. As such, it had the authority to originate, underwrite, and certify loans for FHA insurance. If a loan were to default, MetLife Bank could file an insurance claim with the government for reimbursement on the losses of the defaulted loan. The FHA does not review the underwriting of a loan, so it relies on lenders to ensure that loans they submit for FHA insurance are actually eligible to be insured.
The Justice Department announced yesterday that MetLife Bank knew it was handing out loans that were not eligible for FHA insurance coverage. MetLife Bank continued to allow these loans to be issued even though its own internal quality control findings showed that a significant amount of loans on its books had “significant” deficiencies.
The quality control findings were known to senior managers at the company, including the CEO and members of the board of directors. While the rate of loans considered significantly deficient went down between 2010 and 2011, the Justice Department claims that quality control managers frequently downgraded loan deficiencies from “significant” to “moderate.”
In an internal MetLife email discovered by the Justice Department, a quality control employee remarked to a fellow employee: “Why say Significant when it feels so good to say MODERATE?” MetLife's internal quality control personnel found 1,097 FHA mortgage loans that had been labeled with significant deficiencies between 2009 and 2011. Of that total, the company only reported 321 mortgages to the Department of Housing and Urban Development (HUD). As a result of MetLife’s alleged deception, the FHA sustained substantial losses paying out insurance claims on defaulted loans.
News of the MetLife settlement was issued the same day that the Justice Department announced a $2.6 billion settlement with Morgan Stanley. To say that the Justice Department had a good week would be an understatement.