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U.S. can pursue mortgage fraud case versus Texas broker: judge

By Jonathan Stempel

(Reuters) - A judge has rejected the former Allied Home Mortgage Capital Corp's effort to dismiss a lawsuit accusing it of defrauding the U.S. government into insuring tens of thousands of risky mortgage loans, hurting taxpayers and forcing thousands of homeowners from their homes.

In decisions made public on Tuesday, U.S. District Judge George Hanks in Houston said Allied, now known as Americus Mortgage Corp, should face claims it misled the U.S. Department of Housing and Urban Development into believing its loans qualified for insurance by HUD's Federal Housing Administration.

The judge also ruled that the government could pursue similar civil claims against Allied's chief executive, Jim Hodge, and compliance director Jeanne Stell.

But Hanks also dismissed the U.S. case against AllQuest Home Mortgage Corp, which bought many Allied assets and is also run by Hodge, citing Texas law on liability of successor companies.

He gave the government 14 days to amend its complaint. It is unclear how a dismissal might affect the recovery of damages.

Bruce Alexander, a lawyer at Weiner Brodsky Kider who represents the defendants, did not immediately respond on Wednesday to requests for comment.

AllQuest is based in Houston, as was Allied, which prior to the lawsuit had once called itself among the largest privately-held U.S. mortgage brokers.

The lawsuit was filed in November 2011, and sought civil fines and triple damages on various defaulted loans.

It is among several brought by the U.S. Department of Justice against lenders and executives it believes fueled the nation's housing crisis by creating risky home loans that should not have been made, insured or sold.

Quality Control Questioned

According to the government, Allied, which once had more than 600 branches, "operated with impunity for many years due to a culture of corruption created by Hodge."

It said Allied's problems included falsifying records, poor quality control, intimidation, the silencing of former workers with lawsuits, and representations that loans made by "shadow" branches that lacked HUD approval were eligible for insurance.

The government said 35,801, or 32 percent, of the 112,324 insured loans that Allied made from 2001 to 2010 defaulted, causing HUD to pay more than $834 million of insurance claims.

It said Allied even employed quality control staff in St. Croix, U.S. Virgin Islands who did not know what a mortgage was.

"The government has adequately alleged a fraudulent scheme by the defendants to deceive HUD through the use of shadow branches and induce it to insure loans that it otherwise would not have insured, and that HUD had to pay out on those loans," Hanks wrote. "The complaint further supports an inference of fraud by outlining the level of control Hodge maintained."

A spokeswoman for U.S. Attorney Kenneth Magidson in Houston did not immediately respond to requests for comment. Jennifer Queliz, a spokeswoman for U.S. Attorney Preet Bharara in Manhattan, who first announced the case, declined to comment.

FIRREA

The case was originally brought by whistleblower Peter Belli, a former Allied branch manager in Massachusetts.

It alleged violations of the federal False Claims Act and the Financial Institutions, Reform, Recovery and Enforcement Act, a 1989 law passed after that decade's savings-and-loan crisis.

FIRREA has a longer statute of limitations and lower burden of proof than other laws targeting financial fraud.

Americus had argued it was not covered by that law but Hanks disagreed, saying FIRREA's plain text made clear that it applied to "whoever" was "connected in any capacity with" HUD.

In 2012, the government settled False Claims Act mortgage cases for $1 billion with Bank of America Corp, $202.3 million with Deutsche Bank AG, $158.3 million with Citigroup Inc and $132.8 million with Flagstar Bancorp Inc. Another case is pending against Wells Fargo & Co.

The government is also pursuing a FIRREA lawsuit accusing Bank of America of fraud over the sale of billions of dollars of risky loans to Fannie Mae and Freddie Mac. That case is scheduled to go to trial in New York on September 24.

The case is U.S. ex rel. Belli v. Americus Mortgage Corp et al, U.S. District Court, Southern District of Texas, No. 12-02676.

(Reporting by Jonathan Stempel in New York; Additional reporting by Nate Raymond; Editing by Carol Bishopric)

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