Taylor, Bean & Whitaker Mortgage Corp.'s former chairman, Lee Farkas, ordered data sent to Colonial Bank for nonexistent loans in an effort to cover up growing deficits, an ex-president said.

Raymond Bowman, testifying Tuesday for the government in federal court in Alexandria, Va., said that in 2003 Farkas said selling "dummy" loans, known as Plan B, was necessary to keep Taylor Bean in business. "I told him I didn't think it was a good idea," said Bowman, who pleaded guilty last month to conspiracy and making false statements. Bowman said he thought the plan was unethical and "possibly illegal."

Bowman said the plan was put in place by Farkas and Catherine Kissick, the head of Colonial's mortgage warehouse lending division. "Lee said we had two options," Bowman said. "Not do it, and shut the company down. Cathy would lose her job and probably go to jail. Or borrow money … pay her back, and move forward."

Farkas is charged with orchestrating a $1.9 billion scheme that duped some of the largest financial institutions, targeted the U.S. bank bailout program and contributed to Colonial's failure. (Kissick pleaded guilty to conspiracy in March.) Bowman is among those to admit to conspiracy and agree to testify against Farkas, who is charged with 14 counts of fraud. Farkas faces up to 30 years in prison if convicted of the one conspiracy charge.

Bruce Rogow, a lawyer for Farkas, challenged the testimony, noting that Bowman had admitted to lying to federal investigators.

Bowman said problems began in 2002, around the time Fannie Mae said it would no longer buy loans from Taylor Bean, of Ocala, Fla., because the company was considered to be an "operational risk." Fannie Mae represented about 80% of the company's business. Bowman said the relationship ended when Fannie Mae found that six loans Taylor Bean had sold to it defaulted before the first payment was made. The loans were in Farkas's name and were loans that Fannie Mae had rejected once before, he said.

Bowman said officials from Freddie Mac, which in 2002 consisted of about 5% to 10% of Taylor Bean's business, visited Ocala. "We explained what happened and they decided to keep us," Bowman said. From that point, he said Freddie Mac accounted for 80% of the company's overall business.

Taylor Bean was having trouble with operating expenses, prosecutors said. With help from Colonial officials, daily shortfalls of about $15 million were covered by moving money from another Taylor Bean account into its master account, then returning the funds later in the day, according to a lawsuit from the Securities and Exchange Commission.

By late 2003, Taylor Bean was overdrawing daily by about $150 million, and by late 2007, the scheme consisted of about $500 million in fake residential mortgage loans and about $1 billion in unmarketable residential mortgage loans and securities, the SEC said in court papers.

The conspirators moved cash from Ocala Funding LLC, a funding vehicle Taylor Bean controlled, to cover losses, according to court papers. Ocala issued asset-backed commercial paper to institutions including Deutsche Bank AG and BNP Paribas, according to court papers. By August 2009, the deficit had grown to $1.5 billion, prosecutors said.

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