PINE BROOK, N.J. — As evidence against CU National Morgage Chief stacks up, Congress is ratcheting up the pressure to settle approximates $125 million is claims made by more than two dozen credit unions in the case.
Evidence is mounting that U.S. Mortgage/CU National Mortgage chief Michael McGrath frittered away an estimated $140 million of his credit union clients' money trading in Fannie Mae securities - mostly mortgage-backed securities - as a last-ditch effort to save his foundering company.
Fannie Mae is contesting efforts by 26 credit unions for the return of their funds and mortgages and has given the credit unions until Nov. 16 to accept the terms of a settlement that would pay them about $25 million, or about 20 cents on the dollar for their outstanding claims.
Fraud Began as Far Back as 2000
McGrath, who has confessed to the massive fraud, told examiners in the case he began fraudulently selling millions of dollars in credit union mortgages to Fannie Mae without authorization as far back as 2000 as his company began to experience cash flow problems. "As the growth of the company continued, the cash needs and the level of fraudulent activity increased," said the examiner's report.
Among the ways McGrath tried to "fill the hole," as he put it, was to invest millions of dollars in mortgage-backed securities issued by Fannie Mae and its trading desk. To do this, he would sell "to be announced" mortgage bundles, which would commit the company to buy a group of loans from his credit union customers with designated terms on a given date. By 2008, McGrath was trading as much as $3 billion worth of MBS through Fannie, according to the report. In October of 2008, Fannie cut him off because his company could not meet a capital call.
The MBS trading shows a symbiotic relationship between Fannie and McGrath, who sat on the company's credit union advisory board. McGrath, the report shows, realized tens of millions of dollars of losses on at least 1 million shares of Fannie Mae common stock he held.
Fannie Mae representatives declined to comment on the case.
Examiner's Report Scrutinized
The examiner's report was part of the record in the U.S. Mortgage bankruptcy plans approved by the bankruptcy court last week. Anthony Calascibetta, the court-appointed examiner in the case, said yesterday the liquidation of U.S. Mortgage and restitution agreed to by McGrath will leave about $17 million for the credit union victims of the fraud to share, after a resolution of the Fannie Mae dispute.
The examiner's report was based on documents obtained from the company, from the Department of Justice in its prosecution of the McGrath fraud, and two days of interviews with McGrath himself, according to Calascibetta.
Earlier last week, NCUA Chairman Deborah Matz said a failure by Fannie Mae to provide a more equitable settlement could push several of the credit union victims below the agency's minimum capital standards.
Throughout the massive fraud it appears no credit union members have realized any losses, according to Howard Brownstein, a New Jersey work-out specialist who has been winding down U.S. Mortgage/CU National. "Not a single credit union member has defaulted on their deposit or failed to close on their loan," Brownstein told Credit Union Journal.
Congressional scrutiny comes as Fannie Mae, run under federal conservatorship since last September, is offering to settle the claims for as little as 20 cents on the dollar, an offer rejected by credit union victims of the huge fraud.
CU victims in the case are not only balking at the size of the settlement but also at a condition that would require them to waive any potential suit on behalf of the bond insurer - CUNA Mutual Group - according to sources familiar with the negotiations.
