PINE BROOK, N.J. – 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.
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, which was reviewed by The Credit Union Journal.
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.
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 this 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 The Credit Union Journal.
Among the victim credit unions are: British Airways Employees FCU, ADP FCU, Delaware First FCU, Educational Systems FCU, First Florida CU, Jersey Trades Financial CU, JM Associates FCU, Lassen County FCU, Miami Firefighters FCU, Novartis FCU, Penn East FCU, Picatinny FCU, Sperry Associates FCU, Pinnacle FCU, Rutgers FCU, Suffolk FCU, Treasury Department FCU and Piedmont Advantage CU.
