NEWARK, N.J.-In the latest legal salvo over the $140 million fraud at U.S. Mortgage/CU National Mortgage, Suffolk FCU, the biggest victim in the case, filed suit in federal court last week against Fannie Mae for return of some $42 million the secondary mortgage market giant bought under false pretenses from the failed mortgage company.
The suit, filed in the district of the New Jersey-based CU National, claims Fannie Mae should have known that mortgages sold to it by the company's CEO Michael McGrath were not valid and that the constant pipeline of mortgages from 28 credit union clients to Fannie Mae was beneficial to both sides.
"We have a large loss, larger than the other credit unions," Suffolk's attorney, Gary Meyerhoff, a partner with Sonnenschein Nath & Rosenthal, LLP., in New York, told Credit Union Journal.
Guilty Plea Could Be Used To Prove Fault
The suit by the $875 million Long Island credit union claims that McGrath's guilty plea to the fraud should establish that the sales to Fannie Mae were fraudulent, according to Meyerhoff. "They claim that they did not know that the sales were fraudulent. If they did not know does that mean they get to keep the stolen property," he said.
Fannie Mae representatives did not return a request for comment.
Suffolk is the fourth credit union to file suit against Fannie Mae in the case. A suit brought by Picatinny FCU in New Jersey, which claims it is owed some $15 million, is scheduled for trial any day. The mortgage giant has settled claims brought by other fraud victims.
McGrath, who is scheduled to be sentenced in July, confessed last June to selling the CU mortgages to Fannie Mae without authorization and using the funds for personal or corporate purposes. In some cases he signed sales agreements purportedly on behalf of the CUs. In the case of Suffolk he represented to be a vice president. As part of his plea deal McGrath has agreed to forfeit assets that estimated at $15 million, leaving almost $125 million still missing.
Losses Could Have Serious Impact
The losses could have serious impacts on some credit unions. Suffolk, lost $1.3 million in 2008, before rebounding to a net of $1.9 million for 2009, but has strong capital of more than 10%. "While this incident has caused some financial constraint, it's not the kind of constraint that puts Suffolk in any kind of threat to solvency or to member services," said Meyerhoff.
