NEWARK, N.J.-Fannie Mae told a federal court it should dismiss claims over fraudulent CU 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 CUs 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.
U.S. Mortgage Corp. CEO Michael McGrath, who pleaded guilty to fraudulently selling some $140 million of CU 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 still missing.
Smallest Victims Settle, Biggest Victims Still Fighting
The smallest CU victims have settled claims with both Fannie Mae and 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. Four have filed suit against Fannie, including New York's Suffolk FCU and Sperry Associates, New Jersey's Picatinny FCU and Proponent FCU.
James Forte, an attorney representing Picatinny, said the CU 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 court filings show that Fannie Mae was notified as early as 2005 that U.S. Mortgage may be commingling clients' funds. 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. 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.
