Final Civil Action: Shea Mortgage, Inc., Settled Allegations of Making False Certifications Regarding Federal Housing Administration Loans

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-09-28.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                  U.S. DEPARTMENT OF
                                 HOUSING AND URBAN DEVELOPMENT
                                          OFFICE OF INSPECTOR GENERAL

                                             September 28, 2016
                                                                                                MEMORANDUM NO:

TO:             Dane M. Narode
                Associate General Counsel, Office of Program Enforcement, CACC

FROM:           Tanya E. Schulze
                Regional Inspector General for Audit, 9DGA

SUBJECT:        Final Civil Action: Shea Mortgage, Inc., Settled Allegations of Making False
                Certifications Regarding Federal Housing Administration Loans


The U.S. Department of Housing and Urban Development (HUD), Office of Inspector General
(OIG), audited 1 Shea Mortgage and found that it did not follow HUD requirements when it
underwrote loans that had executed and recorded agreements containing prohibited restrictive
covenants. These restrictive covenants violated Federal Housing Administration (FHA)
regulations and made the loans uninsurable. OIG referred the violations to HUD’s Office of
Program Enforcement for action under the Program Fraud Civil Remedies Act.


FHA, created by Congress in 1934, is the largest mortgage insurer in the world. FHA mortgage
insurance also encourages lenders to approve mortgages for otherwise creditworthy borrowers
that might not be able to meet conventional underwriting requirements by protecting the lender
against default. Lenders are responsible for complying with all applicable HUD regulations and
are protected against default by FHA’s Mutual Mortgage Insurance Fund, which is sustained by
borrower premiums. The insurance fund pays claims to lenders in the event of homeowner

Shea Mortgage, a nonsupervised direct endorsement lender headquartered in Aliso Viego, CA,
was approved to participate in the FHA mortgage insurance program in April 2002. Its affiliate
builder, Shea Homes, was the seller of the properties discussed in the audit memorandum.
    OIG audit memorandum 2012-LA-1801, issued on September 26, 2012
                                                 Office of Audit (Region 9)
                            300 North Los Angeles Street, Suite 4070, Los Angeles, CA 90012
                                        Phone (213) 894-8016, Fax (213) 894-8115
                            Visit the Office of Inspector General Web site at www.hudoig.gov.
                                  RESULTS OF REVIEW

Based on our audit and civil referral memorandum, HUD’s Office of Program Enforcement
reviewed additional mortgage loans that were underwritten by Shea Mortgage and insured by
FHA. On November 17, 2015, HUD issued a demand letter to Shea Mortgage for 10 loans that
HUD believed violated the Program Fraud Civil Remedies Act of 1986, 31 U.S.C. (United State
Code) 3801-3812, as implemented by 24 CFR (Code of Federal Regulations) Part 28. Shea
Mortgage denied HUD’s allegations; however, HUD maintained that Shea Mortgage was liable
under the Act for claims relating to three FHA loans.

On June 24, 2016, Shea Mortgage entered into a settlement agreement with HUD. To avoid
further expense and administrative proceedings and to reach a satisfactory resolution of the
matter, Shea Mortgage agreed to pay HUD $133,231 for alleged violations concerning three
loans. Of this amount, HUD was to receive $119,336 for losses incurred on the loans and the
remainder was to be provided to other Federal entities. The settlement agreement did not
constitute an admission of liability or fault by any party.


OIG recommends that HUD’s Office of General Counsel, Office of Program Enforcement,

1A.    Acknowledge that the attached settlement agreement for $119,336 represents an amount
       due HUD.

       As of the date of this memorandum, the settlement amount due HUD had been paid in
       full. Therefore, no further action is required by the Office of General Counsel. At
       issuance of this memorandum, OIG will enter a management decision into HUD’s Audit
       Resolution and Corrective Tracking System, along with the supporting payment
       information to show that final action was completed.