This case has been odd from the start. Rather than simply declining to intervene in the lawsuit, as it is permitted to do under the False Claims Act, the government has actively sought to kill it.
Why? The answer may lie in the murky world of federally insured mortgages.
Following the money
It may be useful to consider that when the lawsuit was first filed in 2016, the financial crisis of 2008 was still fresh in the minds of many. The crisis was fueled, in part, by wild speculation in mortgage-backed derivative securities.
Gwen Thrower worked as an underwriter for Academy Mortgage. In her Complaint she alleged that the company “encouraged practices that led underwriters to break HUD rules and to approve ineligible loans.” The loans in question were direct endorsement loans. These are generally approved for FHA insurance without direct government review. The evaluation process is fast and largely automated.
The mortgage lender has a financial incentive to make as many loans as quickly as possible. More lending means more money for lending. If the borrower defaults on the loan, the lender is not at risk. Neither is any institutional investor, who may have bought the loan. This is the charm of a federally-insured mortgage.
Guarantors such as Fannie Mae, Freddie Mac, the VA and FHA (the insurers) anticipate that a small percentage of loans will default, and they price their premiums to cover that risk. Only the taxpayers are ultimately on the hook, but they tend to be largely unaware of the costs being passed through.
The whole scheme appears to work, until the day it suddenly implodes. An independent underwriter, with no financial incentive to approve loans, is essentially the last bulwark against folly (or, maybe fraud) – the last guarantee of integrity in the approval process.
When Gwen Thrower tried to decline loans as too risky, she was reportedly overruled. In 2016, she filed a whistleblower lawsuit under the False Claims Act.
False Claims Act -- basics and process
The False Claims Act (FCA) provides that any person who knowingly submits false claims to the government may be liable for double the government’s damages plus a penalty of $2,000 for each false claim. The law also provides that violators are liable for treble damages plus a penalty that is indexed to inflation.
In addition to allowing the United States to pursue perpetrators of fraud on its own, the FCA allows private citizens to file suits on behalf of the government (called “qui tam” suits) against those who have defrauded the government. Private citizens who successfully bring qui tam actions may receive a portion of the government’s recovery.
Qui tam lawsuits are initially filed under seal. The U.S. Attorney for the judicial district where the complaint is filed has 60 days to review the complaint. At that point, the government may decide to intervene, essentially taking over the lawsuit, or it can decline to intervene. In the latter situation, the initial complainant (termed the “relator”) can pursue the lawsuit individually. That is the way things usually go.
But, that is not the way things went in U.S v. Academy Mortgage. That may be the real story. It’s difficult to tell in the swamp of financial incentives.
Why has the government been trying to kill the lawsuit?
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Thereafter, the government appealed to the Ninth Circuit. The argument is a highly technical one involving jurisdiction. The Ninth Circuit denied the government’s motion to dismiss again. In the latest iteration of this whistleblower lawsuit, Academy Mortgage has moved for summary judgment, alleging that Thrower has failed to argue that it had the intent, required by the statute, to defraud the government.
The California court system has, so far, refused to let this lawsuit slip quietly beneath the waves. We can only guess what will happen next.