The FHA withdrew its authorization of Lend America and its parent company, Ideal Mortgage Bankers, from underwriting future single family home loans.
The move was effective immediately.
In addition, Lend America was barred from issuing mortgage-backed securities through the Government National Mortgage Association, known as Ginnie Mae.
The FHA imposed fines of $512,500 on Lend America based on what the agency cited as violations of rules for documenting borrowers' income and creditworthiness.
"We have no tolerance for lenders who abuse their FHA-approval," FHA Commissioner David Stevens said in a written statement.
"The evidence in this case points to a disturbing pattern of senior officials and underwriters, either not knowing what they were doing, or not caring," Stevens said.
Federal prosecutors in the Eastern District of New York are also pursuing a civil fraud case against Lend America and one of its principal officers, Michael Ashley, alleging at least 40 instances of mortgage fraud.
In a written statement, Lend America said it was "surprised and disappointed by today's action" and that it was "reviewing all possible options and remedies."
The company, which has 600 employees at its headquarters in Melville, N.Y., has 30 days to contest the FHA's punitive moves.
Since its inception after the Great Depression, the FHA has traditionally catered to low-to-moderate, first-time home buyers by permitting down payments as low as 3.5 percent on 30-year fixed rate mortgages.
But under the tight credit of the current recession, prospective home buyers across all income levels are flocking to FHA-insured loans for home purchases and refinancing. This year alone 1.8 million FHA-insured loans were issued, quadrupled the number in 2006 and 2007.