Flagstar Bank Reaches FHA Settlement

Flagstar Bancorp, parent company of Flagstar Bank has settled claims with the Department of Justice over some of its underwriting practices as an FHA originator. The settlement, which is projected to extend over an unspecified period of time, will perhaps involve payment of some $133 million, and revision of its fourth quarter and full year 2011 financial results.

Information on the settlement agreement is not yet available from either DOJ or FHA and the announcement from Flagstar this morning is in the form of a letter to its investors; the scope of the settlement and the reasons for it are remarkably vague, described only as relating to "certain underwriting practices associated with loans insured by FHA."

Under the agreement, Flagstar agrees to comply with HUD and FHA rules related to its continued participation in the direct endorsement lender program and to make an initial payment of $15 million within 30 business days of the effective date of the agreement.  Then the bank, "Only upon the occurrence of certain future events [will] become obligated to make payments of up to approximately $118 million," i.e. Additional Payments.

The Additional Payments are contingent on the following:

• That the company generate positive income over a sustained period "such that part or all of its Deferred Tax Asset (DTA) which has been offset by a valuation allowance (the DTA Valuation Allowance) is likely to be realized," as evidenced by the reversal of the Valuation Allowance in accordance with Generally Accepted Accounting Practices.
• Flagstar is able to include capital derived from the reversal of the Valuation Allowance in its Tier 1 Capital;
• Flagstar's obligation to repay the $266.7 million owed to the Treasury Department under TARP "has been either extinguished or excluded from Tier 1 capital for purposes of calculating the Tier 1 capital ratio as described below"

In addition to each of the above events occurring and only if none of them violate rules of the Office of Comptroller of the Currency (OCC) and if the OCC does not object, the bank will begin making the Additional Payments in amounts not to exceed $25 million annually.  Further, no obligation arises until the Bank's call report is filed with OCC for the period ending at least six months prior to the payment.  Each Additional Payment will reflect a minimum Tier 1 capital ratio, after excluding any un-extinguished portion of TARP of 11 percent or a higher ratio if required by regulators.

Flagstar said it is currently assessing what these payment will actually be based on its current expectations of timing, applicable discount rates and other factors and is projecting that it will have an increase in net loss of between $25.9 million and $34.3 million for the fourth quarter of 2011 after the initial payment of $15 million and an Additional Payment ranging from 10.9 million to $19.3 million.  The company is reaffirming the 2012 guidance it provided in its fourth quarter 2011 earnings call.

As part of the agreement Flagstar also agreed to complete a monitoring period by an independent third party chosen by the Bank and approved by HUD.