A Lloyd's of London syndicate is the second insurer trying to escape liability in the massive mortgage fraud for which more than 25 credit unions are seeking recompense of up to $125 million.

The Lloyd's syndicate sued in federal court in Newark, N.J., seeking to block any potential insurance claim against it by Picatinny Federal Credit Union, Suffolk Federal Credit Union and Sperry Associates Federal Credit Union.

The three credit unions were swindled of more than $50 million by Michael McGrath, formerly the president of the now bankrupt U.S. Mortgage.

The insurer syndicate asserts that the fidelity bond it held for U.S. Mortgage and McGrath should be rescinded because of the fraud to which McGrath has confessed.

The first insurer seeking to block claims in the case, CUNA Mutual Group, has requested a court order declaring that the bond it holds for 23 of the U.S. Mortgage credit union victims does not cover the McGrath fraud.

Four of the credit unions are countersuing CUNA Mutual to secure coverage for their losses.

The Lloyd's syndicate holds a "mortgage bankers and mortgage brokers professional liability" insurance policy and a mortgage bankers fidelity bond on U.S. Mortgage, which filed for bankruptcy a year ago in the face of the fraud probe into McGrath's actions.

Since then, McGrath has pleaded guilty to fraudulently selling to Fannie Mae as much as $140 million of mortgages he held on behalf of credit unions and keeping the funds. Almost $15 million of assets are to be forfeited by McGrath, leaving the credit unions out almost $125 million.

McGrath was scheduled to be sentenced for the fraud this month, but the sentencing was delayed until April 19.

The Picatinny, Suffolk and Sperry Associates credit unions are suing Fannie Mae for the return of their funds and their mortgages and have asked U.S. Bankruptcy Court to allow them to file claims against the Lloyd's syndicate.

Fannie Mae has been negotiating with the credit union fraud victims and so far has settled with one, Education Systems Employees Federal Credit Union in Greenbelt, Md.

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