Prosecutors sued a large U.S. mortgage broker and two top executives for an alleged decade-long fraud that cost the government hundreds of millions of dollars on risky home loans.

The lawsuit seeks triple damages and civil fines against Allied Home Mortgage Capital Corp, which once billed itself as the largest privately held U.S. mortgage broker; Jim Hodge, its founder and chief executive; and Jeanne Stell, an executive vice president and compliance director.

It contended that Allied violated the federal False Claims Act by misleading the government into believing its loans qualified for federal insurance, when its mortgages were so poor nearly one in three went into default.

This reckless lending, it said, cost the Department of Housing and Urban Development (HUD) $834 million in insurance claims and forced thousands of homeowners out of their homes.

The losers here were American taxpayers and thousands of families who faced foreclosure because they could not make payments on mortgages that were doomed to fail, U.S. Attorney Preet Bharara in Manhattan said at a news conference. Today, Allied's business as usual comes to an end.

Reached by telephone at his Houston office, Hodge called the government's allegations so absurd. A spokesman for the company had no immediate comment.

The government said 35,801, or nearly 32 percent, of 112,324 HUD-insured mortgage loans that Allied made from 2001 to 2010 defaulted. It said 2,509 more defaulted loans could result in $363 million of further payouts. The default rate reached a staggering 55 percent in 2006 and 2007, it added.

CRACKDOWN ON LENDERS, EXECS

Tuesday's announcement is part of a government crackdown on some lenders and executives it believes contributed to the housing crisis by originating risky home loans that should not have been made, insured or sold.

Six months ago, the government accused Deutsche Bank AG in a similar, $1 billion fraud lawsuit of misleading it into insuring risky mortgages. Deutsche Bank has sought to dismiss that lawsuit.

Bharara said that the government expects to bring more lawsuits of this type. He said the case against Allied is not finished, and in response to reporters' questions left the door open for criminal action.

If and when we have sufficient evidence to bring a criminal case, we will bring it, Bharara said.

In the complaint, the government also accused Allied of making many loans through hundreds of shadow branches that had not received HUD approval and had poor quality control.

It is seeking triple damages on a variety of defaulted loans and a permanent ban on FHA loans made through branches that lacked HUD approval. Allied was an FHA loan correspondent until HUD shut that program last year, the complaint said.

WHISTLEBLOWER

The lawsuit was filed in U.S. District Court in Manhattan, and expands upon a whistleblower lawsuit filed in May by Peter Belli, a former Allied branch manager in Massachusetts.

Belli oversaw a half-dozen Allied branch offices before being fired in 2007 after nine years at the company, court papers show. He is in other litigation with Allied over alleged unpaid commissions and expense reimbursement.

Tuesday's lawsuit is a chance to make up what they stole from him, Belli's lawyer Joe Bird said in an interview. It is also a chance for the government to make a statement to the mortgage industry that ignoring rules and harming the economy is not going to be tolerated.

Belli declined to comment when reached by phone.

The government also accused Hodge of having encouraged a culture of corruption by eliminating other management, intimidation, and silencing former employees by suing them.

Its lawsuit included an email that the government said Stell sent to a former Allied employee soon after a February 2009 HUD audit report faulted Allied branches.

Jim has to be the biggest target personally for his disregard for the regulations, Stell wrote, referring to Hodge. Serves him right never listening and thinking he didn't have to play by the rules.

The government said Hodge and his wife, Kathy, own 99 percent of the company, while their son Jamey owns 1 percent.

The case is U.S. ex rel. Belli v. Allied Home Mortgage Capital Corp, U.S. District Court, Southern District of New York, No. 11-05443.

(Reporting by Jonathan Stempel in New York; editing by Gerald E. McCormick, Andre Grenon and Bernard Orr)

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