For four years during Treasury Secretary Steven Mnuchin’s tenure as chair of OneWest Bank, its reverse-mortgage subsidiary Financial Freedom ripped off the government by receiving unlawful federal insurance payments on reverse mortgages, according to an $89 million Justice Department settlement made public today.
Financial Freedom serviced thousands of government-insured reverse mortgages from 2011 to 2016. According to the settlement, the company repeatedly filed insurance claims with the Federal Housing Administration (FHA), and received interest payments, without following program guidelines. This gave Financial Freedom a critical backstop for reverse mortgages that often harmed borrowers.
“This lender failed to comply with FHA servicing requirements and sought to receive financial gains that it was not legally entitled to,” said Inspector General for the Department of Housing and Urban Development David Montoya, in a statement accompanying the settlement.
Misconduct stemming from Mnuchin’s OneWest tenure has dogged the treasury secretary since President Trump nominated him last November. Prosecutors in the California attorney general’s office recommended suing OneWest over widespread violations of state foreclosure practices. And numerous foreclosure victims have accused OneWest of treating them unfairly and wrongfully foreclosing on their homes.
The Financial Freedom unit appears to have been a particular trouble spot. Reverse mortgages, where seniors borrow against the value of their homes, are intended to give the elderly a source of income at end of their lives to make ends meet. But they can turn harmful amid unscrupulous lenders.
Seniors remain responsible for property taxes and homeowner’s insurance, and when they fail to pay, Financial Freedom often moved quickly to foreclose, without granting repayment options to the borrower. Financial Freedom also reportedly engaged in “widow foreclosures,” evicting a spouse from the home after the borrower on the title died. Data obtained by the California Reinvestment Coalition showed that Financial Freedom was responsible for 39 percent of all reverse mortgage foreclosures since April 2009, yet only 17 percent of all reverse mortgages.
Some of the worst horror stories about OneWest’s foreclosure practices involve Financial Freedom reverse mortgages. A 103-year-old, Myrtle Lewis, slipped into foreclosure after a one-month lapse in homeowner’s insurance coverage. A 92-year-old widow from Florida was evicted over a 27-cent underpayment.
In this settlement, which resolves a Department of Housing and Urban Development investigation into Financial Freedom’s accounting practices, the victim was the FHA.
Reverse mortgage loans come due when the home becomes vacant or the owners die; at that point, the family of the borrowers repay the debt, or lenders sell the property to recoup costs. The FHA guarantees repayment to the lenders, including legacy costs of servicing and maintenance. They even collect interest while the claim is being processed, which often takes years. All lenders have to do is follow the guidelines of the program and they cannot lose.
Financial Freedom, according to the settlement, did not meet those regulatory requirements. Specifically, they did not hit deadlines for appraising the property, submitting claim forms, and initiating sales of the homes. And then they falsely claimed to the FHA they met the deadlines, to collect interest payments.
In other words, Financial Freedom didn’t spend the money required by the reverse mortgage insurance program, but still recouped interest payments from the FHA. Stealing from the program reduces its solvency and the viability of the reverse mortgage program. “We are pleased that Financial Freedom agreed to accept financial responsibility for these failures,” said Acting U.S. Attorney Stephen Muldrow of the Middle District of Florida, who prosecuted the case.
The period of Financial Freedom’s misconduct covers a period that began shortly after Mnuchin became chair of OneWest and ended shortly after he and his fellow investors sold the company. He was either unaware of the breakdown in controls at Financial Freedom, or aware of the misconduct and allowed it to continue.
Other OneWest officials have claimed that criticism of their reverse mortgage practices “are really criticisms of the regulations.” But victims and their families contend that Financial Freedom had wide latitude over reverse mortgage foreclosures, not FHA. And the settlement suggests that OneWest, under Mnuchin and afterwards, gamed the regulations to collect unlawful government payments. This suggests Financial Freedom was both ruthless toward borrowers and deceitful toward the FHA.
The treasury secretary who presided over this behavior is now in charge of regulating substantial parts of the U.S. financial system.
Sandra Jolley, a whistleblower who fought Financial Freedom over a reverse mortgage taken out by her parents and then became a consultant for other families, first notified the Justice Department of the violations. Under the terms of the $89 million settlement, Jolley will receive $1.6 million for her service. An initial assessment of Financial Freedom’s liability put the cost of the violations at over $200 million, so the lender likely got off easy.
Financial Freedom did not have to admit nor deny wrongdoing. In a statement to The Intercept, CIT, the current owners of OneWest, said they were “pleased to have resolved” the situation. They stressed that Financial Freedom has discontinued the troubled lender from originating new mortgages. “CIT continues to evaluate strategic options for the Financial Freedom business,” said spokesperson Gina Proia.
CIT may not be out of the woods. New York Attorney General Eric Schneiderman subpoenaed documents about Financial Freedom’s loan business within the past couple months, according to the company’s financial disclosures.