Fannie Mae: Possession Of Fraudulent CU Mortgages Is Nine-Tenths Of The Law

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NEWARK, N.J. – Fannie Mae told a federal court yesterday it should dismiss millions of dollars in claims over fraudulent credit union mortgages its bought from defunct U.S. Mortgage Corp. and its CU National unit because it holds legal right to the loans.

But lawyers for four credit unions suing for the return of some $60 million of their mortgages sold by CU Mortgage to the secondary mortgage giant told the court their claims should not be dismissed because Fannie Mae obtained the mortgages under a massive fraud perpetrated by the company’s founder, Michael McGrath.

McGrath, who pleaded guilty to fraudulently selling some $140 million of credit union loans to Fannie Mae he used to keep his company afloat, is expected to be sentenced later this month to as many as 20 years behind bars. Prosecutors expect to recover about $15 million from the sale of McGrath’s assets, leaving about $125 million of credit union money still missing.

The smallest credit union victims have settled claims with both Fannie Mae and their bond insurer, CUMIS Insurance Society, amounting to recoveries of as much as 90%. Under the settlements, Fannie has agreed to give back the mortgages to the smaller claimants. But the larger claimants, who stand to lose far more than their $5 million CUMIS coverage limit, continue to fight the mortgage giant. Four have filed suit against Fannie, including New York’s Suffolk FCU over $34 million of its mortgages it says Fannie still holds, New Jersey’s Picatinny FCU over $14 million, New York’s Sperry Associates $9 million, and New Jersey’s Proponent FCU. Treasury Department FCU in Washington, D.C., also has a $17 million claim, but is not party to the suit.

James Forte, an attorney representing Picatinny, said yesterday the credit union expects new disclosures in the suit to dissuade the judge from dismissing the case and even prompt a verdict in its favor.

Fannie Mae lawyers did not return phone calls seeking comment.

The latest filings in the two-year-old legal battle show that Fannie Mae was notified as early as 2005 that U.S. Mortgage may be commingling clients’ funds. An early audit showed that U.S. Mortgage had failed to pay as much as $2 million it had owed to Cross Valley FCU. The results of its audits prompted Fannie to characterize U.S. Mortgage as “red” or “high risk” in March 2005, some four years before the fraud scheme was uncovered, prompting the February 2009 bankruptcy of the mortgage company.

“In March 2005, Fannie Mae conducted an audit of U.S. Mortgage that revealed ‘U.S. Mortgage poses a significant risk to Fannie Mae due to misuse of custodial funds and commingling of Fannie Mae and other investor funds, which violates Real Estate Settlement Procedures Act and Fannie Mae guidelines,’” according to the suit.

High risks such as that were ignored by Fannie Mae because of the growing business, as much as $250 million a year by 2008, it had with the credit union mortgage bank, according to the suit.

The suit asserts the failure to detect such business risk, even after it was properly flagged, was part of years of mismanagement at Fannie Mae, which led to its 2009 federal takeover.

 

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