U.S. Mortgage Founder Pleads Guilty To $140 Million Fraud At CU National

NEWARK, N.J. – The founder and owner of U.S. Mortgage Corp. pleaded guilty yesterday to a massive mortgage fraud that siphoned almost $140 in funds from almost 30 credit union customers of the company’s CU National Mortgage unit.

Michael McGrath Jr. pleaded guilty to federal charges of mail and wire fraud and money laundering. Under his plea agreement, he faces between 12 1/2 to 20 years in prison when he's sentenced Oct. 1 and will have to pay restitution. However, authorities say they have only been able to track about $15 million of the missing money.

CU National once provided origination and servicing for more than 120 credit unions. The company filed for bankruptcy in February as the fraud scheme was unraveling and has sold off all its servicing rights and laid-off all 400 of its employees as it winds down business.

The funds represent mortgages CU National was servicing for the credit unions but that McGrath sold without their knowledge to Fannie Mae. He used the proceeds to fund operations of U.S. Mortgage and to make personal investments.

McGrath, 46, admitted that the scheme started with the diversion of funds that should have been paid to various credit unions for mortgage loans they had made and authorized CU National to sell to Fannie Mae. McGrath explained that he began withholding these funds to help U.S. Mortgage address cash flow problems caused by losing investments in mortgage-backed securities he had made on the company's behalf.

McGrath said when U.S. Mortgage's financial condition continued deteriorating, he sold hundreds of mortgage loans to Fannie Mae without the knowledge and consent of the credit unions that owned the loans. "This was truly a massive fraud, a giant shell game by McGrath," Acting U.S. Attorney Ralph Marra Jr. The goal of the fraud, Marra said, "was to prop up his own company, which instead sunk deeper into trouble as his scheme grew larger and ultimately collapsed."

As his company’s finances began to erode, McGrath began trading in mortgage-backed securities to improve the company’s condition, said his attorney, John Vazquez. But McGrath lost "tens of millions of dollars" in the market, according to Vazquez. This raises doubts on whether the missing $120 million of credit unions funds are available or lost for good.

"In an attempt to cover his losses, Mr. McGrath engaged in misconduct concerning the purchase and sale of mortgages," Vazquez said. "He also attempted to enter into private business dealings in an effort to cover the losses, but losses were too severe."

At the hearing, Assistant U.S. Attorney Mark Coyne said McGrath began helping U.S. authorities recover assets after search warrants were executed Jan. 27 on his business and house in Montclair, New Jersey. Authorities have recovered $13 million traceable to the fraud.