NEWARK, N.J. – Hours after last week’s guilty plea in the $140 million fraud at U.S. Mortgage Corp., insurers for the bankrupt mortgage company moved to cancel the company’s surety bond, which would foreclose one potential source of recompense for some 30 credit unions victimized in the biggest fraud ever to hit the industry.
In a motion filed with the U.S. Bankruptcy Court, Zurich American Insurance Co. and its Fidelity & Deposit Co. unit asked the court to allow it to cancel the bond it held for U.S. Mortgage and its CU National Mortgage subsidiary because the companies have ceased originating loans. "As such, U.S. Mortgage no longer requires the surety bonds to support or guarantee its business operations," the company said in a filing with the bankruptcy court on Friday.
In addition, U.S. Mortgage stopped paying premiums on the bond after it filed for bankruptcy, voiding the policy, the insurer asserted.
The filing came the day after Michael McGrath, the 46-year-old owner of US Mortgage pleaded guilty in federal court to siphoning $140 million from credit union customers by selling their loans to Fannie Mae and pocketing the funds. McGrath has agreed to forfeit $13 million, leaving more than $125 million of credit union funds unaccounted for.
Among the credit unions victimized by the fraud and the amount of claims they filed with the bankruptcy court: Suffolk FCU ($33.8 million); Picatinny FCU ($15 million); Proponent FCU ($21.6 million); Sperry Associates FCU ($9.2 million); Treasury Department FCU ($8.7 million); Novartis FCU ($3.1 million); Educational Systems FCU ($3.1 million); County Educators FCU ($2.8 million); Energy FCU ($2.6 million); Rutgers FCU ($2.2 million)_ Piedmont Aviation FCU ($2.1 million); Pinnacle FCU ($1.8 million); Velocity County FCU ($1.5 million); TCT FCU ($1 million); Lassen County FCU ($832,000); JM Associates FCU ($502,000); Miami Firefighters FCU ($490,000); First Florida CU ($448,000) and Newark Board of Education Employees CU ($440,000).
Authorities said last week they believe McGrath gambled away those funds in the market over the last year, leaving virtually nothing for credit unions to recover. During that time, McGrath used the credit unions’ funds to buy one million shares of Fannie Mae common stock; almost three millions shares of Home Solutions of America; preferred shares in a troubled undisclosed New Orleans entity and a Hoboken, N.J., property, among other things.
"McGrath lost it in the market," said David Stein, a New Jersey attorney who is representing the unsecured creditors committee, which represents the credit unions in the bankruptcy.
Last week’s plea by McGrath will set of the lengthy and expensive process of seeking recoveries for the credit unions, Stein told The Credit Union Journal.
Several credit unions victimized in the fraud have filed bond claims with CUNA Mutual Group, which has denied coverage.
CUNA Mutual would only confirm that it has received the claims and issued this statement. "CUNA Mutual has received Bond claims from several credit unions relating to the activities at CU National Mortgage. Although we have to maintain confidentiality to protect the interests of our customers, we actively work with all of our insureds in resolving any of their specific open-claim matters."
The next step will be for the creditors in the bankruptcy case to move to convert the Chapter 11 reorganization into a Chapter 13 liquidation, then to seek recompense fro third-parties, such as the insurers, said Stein. "Claims have been made over the past month or so," he said. "No one has offered to write a check."
James Forte, a New Jersey attorney representing Picatinny FCU, one of the victim credit unions, said they are negotiating with Fannie Mae on the return of the mortgages to the credit unions but have met with resistance so far. "We’ll be filing papers for discovery soon," said Forte.
Fannie Mae representatives did not return phone calls seeking comment last week.
