U.S. Sues Wells Fargo for Mortgage Fraud

Updated to include Wells Fargo statement

NEW YORK ( TheStreet) -- The U.S. government is suing Wells Fargo ( WFC) for hundreds of millions of dollars in a civil fraud lawsuit targeted at the lender's underwriting of Federal Housing Administration-backed (FHA) mortgages issued over a decade that eventually defaulted.

The U.S. Attorney for the Southern District of New York's filed a civil fraud suit in Manhattan Tuesday arguing that the U.S. government paid hundreds of millions of dollars in insurance on FHA-backed loans Wells Fargo improperly underwrote. The U.S. Attorney and the U.S. Department of Housing and Urban Development are seeking to prove Wells Fargo fell short in its underwriting standards and should refund provide taxpayers with a refund.

"As the complaint alleges, yet another major bank has engaged in a longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance," Manhattan U.S. Attorney Preet Bharara said in a statement. Bharara also argues Wells Fargo - the nation's fourth largest lender by assets - misaligned bonus incentives and didn't report internal concerns on its underwriting practices, exacerbating government losses.

"Today's complaint and others like it are necessary, not only to deter future improper acts, but to recover damages on behalf of the FHA mortgage fund and the American taxpayer," said HUD general counsel Helen Kanovsky, in a statement released with the civil suit.

In a statement responding to the suit, Wells Fargo argues it was compliant with FHA and HUD underwriting standards and that it's already settled many of the allegations outlined on Tuesday in previous lawsuits settled with HUD.

"Wells Fargo denies the allegations and believes it acted in good faith and in compliance with Federal Housing Administration (FHA) and Department of Housing and Urban Development (HUD) rules," said Wells Fargo, in a statement that also highlighted the banks FHA delinquency rates have been as low as half the industry average. "The Bank will present facts to vigorously defend itself against this action," the bank added.

Wells Fargo is the largest originator of home mortgages in the U.S. and has been a participant in the FHA's Direct Endorsement Lender program since 1986. In the program, lenders like Wells Fargo approve a new mortgage for FHA insurance and are able to recover claims from the FHA if the loan eventually defaults. Because the FHA and the HUD don't look at loans before doling out FHA insurance, lenders are required to ensure certain underwriting standards and controls.

In Tuesday trading, Wells Fargo shares fell nearly 2% to $35.10. Bank of America ( BAC), another large lender to FHA insured programs fell nearly 1% to $9.21.

-- Written by Antoine Gara in New York

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