Flagstar Bank Reaches FHA Settlement

by devteam February 27th, 2012 | Share

FlagstarrnBancorp, parent company of Flagstar Bank has settled claims with the Departmentrnof Justice over some of its underwriting practices as an FHA originator. Thernsettlement, which is projected to extend over an unspecified period of time,rnwill perhaps involve payment of some $133 million, and revision of its fourthrnquarter and full year 2011 financial results.</p

Informationrnon the settlement agreement is not yet available from either DOJ or FHA and thernannouncement from Flagstar this morning is in the form of a letter to its investors;rnthe scope of the settlement and the reasons for it are remarkably vague,rndescribed only as relating to “certain underwriting practices associated withrnloans insured by FHA.”</p

Underrnthe agreement, Flagstar agrees to comply with HUD and FHA rules related to itsrncontinued participation in the direct endorsement lender program and to make anrninitial payment of $15 million within 30 business days of the effective date ofrnthe agreement.  Then the bank, “Only uponrnthe occurrence of certain future events [will] become obligated to makernpayments of up to approximately $118 million,” i.e. Additional Payments.</p

ThernAdditional Payments are contingent on the following:</p<ul class="unIndentedList"<liThat the companyrngenerate positive income over a sustained period "such that part or all of itsrnDeferred Tax Asset (DTA) which has been offset by a valuation allowance (thernDTA Valuation Allowance) is likely to be realized," as evidenced by thernreversal of the Valuation Allowance in accordance with Generally AcceptedrnAccounting Practices.</li<liFlagstar is ablernto include capital derived from the reversal of the Valuation Allowance in itsrnTier 1 Capital;</li<liFlagstar'srnobligation to repay the $266.7 million owed to the Treasury Department underrnTARP "has been either extinguished or excluded from Tier 1 capital for purposesrnof calculating the Tier 1 capital ratio as described below"</li</ul

In addition to each of the abovernevents occurring and only if none of them violate rules of the Office ofrnComptroller of the Currency (OCC) and if the OCC does not object, the bank willrnbegin making the Additional Payments in amounts not to exceed $25 millionrnannually.  Further, no obligation arisesrnuntil the Bank’s call report is filed with OCC for the period ending at leastrnsix months prior to the payment.  EachrnAdditional Payment will reflect a minimum Tier 1 capital ratio, after excludingrnany un-extinguished portion of TARP of 11 percent or a higher ratio if requiredrnby regulators. </p

Flagstar said it is currentlyrnassessing what these payment will actually be based on its current expectationsrnof timing, applicable discount rates and other factors and is projecting thatrnit will have an increase in net loss of between $25.9 million and $34.3 millionrnfor the fourth quarter of 2011 after the initial payment of $15 million and anrnAdditional Payment ranging from 10.9 million to $19.3 million.  The company is reaffirming the 2012 guidancernit provided in its fourth quarter 2011 earnings call.</p

As part of the agreement Flagstarrnalso agreed to complete a monitoring period by an independent third partyrnchosen by the Bank and approved by HUD.

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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