

A U.S. senator known for taking to task regulators and federal authorities over lax settlements with big banks wants answers about one component of the landmark $25 billion deal reached last year to settle foreclosure abuses.

Sen. Elizabeth Warren, D-Massachusetts, on Wednesday asked the U.S. Department of Justice to explain how the five big banks under the National Mortgage Settlement were able to circumvent claims that they defrauded the Federal Housing Administration with only a $225 million payment.

In a letter to Attorney General Eric Holder, Warren said that the $225 million payment represented less than 1 percent of the approximately $37 billion in potential liability that the five largest mortgage servicers were facing before the settlement.

According to Warren’s calculations, the number of total insurance claims submitted by the banks between October 2008 and September 2010 would have subjected the banks to $37 billion in total liability — assuming every claim had been fraudulent.

“First, I am troubled because I believe there needs to be a clearer and more public accounting of the damages FHA incurred from the servicers’ fraudulent conduct,” Warren writes in her letter to Holder. “There are a number of contributing factors to FHA’s current financial difficulties, but the potential failure of DOJ to get adequate compensation for fraud committed against FHA is a serious issue.”

The FHA, which guarantees loans with as low as 3.5 percent down, has $1.1 trillion in insurance that’s currently in force on U.S. mortgages.

Nonetheless, the Obama Administration projects the FHA will need its first bailout ever in the amount of $943 million. The FHA needs to replenish reserves at the end of fiscal year 2013 for future losses. A final decision likely will not be made until the fiscal year ends Sept. 30.

Last month, the Senate Banking Committee approved legislation to reform the FHA and stabilize the agency’s beleaguered reverse mortgages program. The Senate bill would increase the cap on premiums the agency charges to borrowers. It would give the FHA more authority to go after lenders that break its rules and more power to require them to absorb losses on improperly underwritten loans.

In her letter Wednesday, Warren seeks details as to how DOJ arrived at the $225 million payment amount to resolve potentially tens of thousands of violations of the False Claims Act by the servicers affiliated with the five banks in the settlement: JPMorgan Chase, Bank of America, Citi, Wells Fargo and Ally Financial.

“Settlements are important and play a necessary role in any enforcement regime, but it is critical that the government take steps to maximize its leverage and avoid settling on the cheap,” Warren writes. “Rushed and inadequate settlements fail to fully compensate victims and taxpayers and insufficiently deter future misconduct.”