Fraud and Prevention

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A federal court in Newark has rescheduled next week's sentencing for U.S. Mortgage President Michael McGrath in the $140 million fraud at CU National Mortgage until April, when the one-time mortgage executive is expected to be given a long prison sentence. Prosecutors and McGrath have agreed to a sentence of 12 to 20 years in prison, according to sources familiar with the case. The sentence must be accepted by the judge. Meantime, two more of the 28 credit unions defrauded in the scheme, TCT FCU in Ballston Spa, N.Y., and Velocity Community CU of Palm Beach Gardens, Fla., have settled their claims with Fannie Mae, which bought their mortgages from McGrath under false pretenses. That makes at least three credit unions that have settled with Fannie, as they join Educational Systems FCU in Maryland. But several other credit unions, some with large claims, are vowing to continue to contest the ownership of their mortgages and of money with Fannie Mae. McGrath pleaded guilty last June to selling as much as $140 million of credit union mortgages to Fannie Mae without the credit unions' authorization and keeping the money. Under his plea agreement, McGrath has agreed to forfeit about $13 million in assets. He apparently lost the remaining funds in the stock market, leaving as much as $125 million of credit unions funds missing. At least two more executives in the company, an accountant and the head of servicing, are also expected to plead guilty in the coming days to being accomplices to the fraud.

The Federal Home Loan Bank of San Francisco has sued nine securities dealers that sold the government sponsored enterprise nearly $20 billion in private-label mortgage backed securities. The San Francisco bank, like other FHLBs, suffered losses due to its investment in AAA-rated private-label MBS. The complaint filed in Superior Court in the County of San Francisco, alleges that the dealers made "untrue or misleading statements" about the characteristics and quality of the mortgage loans underlying the securities. The San Francisco FHLB is seeking to rescind those MBS purchases, which originally cost $19.1 billion. In February, the Seattle FHLB filed a similar lawsuit against issuers to compel them to buy back $4 billion in private-label MBS.

A federal judge has dismissed a shareholder lawsuit against Canadian Imperial Bank of Commerce and four executives for allegedly misleading investors about the bank's exposure to securities backed by subprime mortgages. Dow Jones reported that in an order Wednesday, U.S. District Judge William H. Pauley III in Manhattan threw out the case, saying a number of major financial institutions failed to anticipate a meltdown in the mortgage market and the plaintiffs failed to demonstrate that CIBC and its executives received information that was contrary to their public statements. "Looking back, a full turn of the wheel would have been appropriate. That CIBC chose an incremental measured response, while erroneous in hindsight, is as plausible an explanation for the losses as an inference of fraud," the judge said. "CIBC, like so many other institutions, could not have been expected to anticipate the crisis with the accuracy plaintiff enjoys in hindsight." A lawyer for the lead plaintiff didn't immediately return a phone call seeking comment.

Nationwide, one in every 200 funded residential loans is fraudulent, according to new figures released by First American CoreLogic. FACL analyzed 80 million loans provided through its "Mortgage Fraud Consortium" and identified trends, according to a report in The Orange County Register. The company's findings will come out at the end of this month, but in the meantime, the firm has released some key findings, including figures showing that the fraud rate has been decreasing since 2007 and is now about 25% lower than when it peaked in the third quarter of that year. Since then, lenders have been more aggressive in curtailing mortgage fraud. "In 2010, 2011 and 2012 you won't see nearly the amount of (fraud) reports that you're seeing today," said Tim Grace, senior vice president of fraud analytics. The states where the highest number of fraudulent loans were found include California, Florida, Georgia, North Carolina and South Carolina.

Appraisers are raising alarms that the Treasury Department's decision to use broker price opinions (BPOs) for its new short sales program will exacerbate mortgage fraud and property "flopping." Three appraiser groups are urging Treasury to review the Home Affordable Foreclosure Alternatives program guidelines and prohibit the use of BPOs for property valuations on short sales. Their letter to Treasury secretary Timothy Geithner points to a new trend in sales of distressed properties: "flopping," whereby the value of a home is artificially deflated using a BPO and sold to a related party of the real estate agent who quickly sells that property for a profit. "Generally speaking, real estate agents and brokers are not independent or properly trained valuation specialists. They have an inherent bias toward quick results which produce a fee for themselves, irrespective of whether the lender/servicer/property owner/borrower gets a fair return on a short sale," the March 8 letter says. The Appraisal Institute, American Society of Appraisers and National Association of Independent Fee Appraisers signed the letter. Property "flipping" (as opposed to "flopping") usually involves the quick sale of real estate using straw borrowers (and payoffs to these borrowers) to artificially inflate a home for quick profit or some type of equity stripping scheme. Inflated appraisals play a key role in flipping schemes.

Defunct FHA lender Lend America and its "chief business strategist," Michael Ashley -- who controlled the company -- have effectively been barred from the mortgage industry, according to newly released court documents. The ban springs from a civil suit brought by the Justice Department on behalf of the FHA against the Melville, N.Y.-based nonbank and Mr. Ashley. Amid investigations against the company, LendAmerica closed its doors in early December. FHA found that the company had violated numerous underwriting guidelines and according to interviews conducted by NMN the company was refinancing some loans without paying off the prior liens. In agreeing to a ban from mortgage banking, Mr. Ashley, 44, did not admit liability, according to the agreement filed recently in federal court in Central Islip. In return, anything tied to federal-related loans is off limits -- from appraising properties and marketing mortgages to working as a consultant or housing counselor, Newsday reported. "I'm beyond thrilled to be done with the mortgage business," Mr. Ashley said. "I've had it with the mortgage business. I'm done with everybody chasing me around."

Two subsidiaries of the government-owned AIG have agreed to pay at least $6.1 million to resolve charges that they discriminated against African American borrowers by failing to monitor loan brokers that charged excessive fees. The loans in question were funded through the wholesale channel by AIG Federal Savings Bank, and an affiliate, Wilmington Finance Inc. Neither is still active in wholesale lending. According to the Department of Justice, AIG FSB and WFI "failed to supervise or monitor brokers in setting broker fees. This practice had a disparate impact on African American borrowers, who were charged higher broker fees than white, non-Hispanic borrowers on thousands of such loans from July 2003 until May 2006." American International Group - whose empire includes mortgage firms and a mortgage insurance company - was placed under government control in the fall of 2008. It has received upwards of $150 billion in financial aid and guarantees. The settlement, brought under the Fair Housing and Equal Credit Opportunity Acts, was filed Thursday in conjunction with a complaint made by DOJ in U.S. District Court in Delaware. The settlement, which is subject to court approval, stipulates that the AIG affiliates will pay up to $6.1 million to African American customers who were charged higher broker fees than similarly-situated, non-Hispanic white customers. The two also will invest at least $1 million in consumer financial education efforts. AIG is in the process of liquidating its $20 billion nonprime whole loan portfolio.

The Mortgage Bankers Association says the new good faith estimate disclosures should be given enough time to affect market behavior before the Federal Reserve Board moves ahead with a rule restricting certain forms of lender compensation. The Department of Housing and Urban Development's redesigned GFE went into effect Jan. 1, providing mortgage applicants with new disclosures on lender and originations fees. "We need to give it a chance to work," said MBA regulatory counsel Ken Markison. "The right move is for the Federal Reserve, at this time, to let nature takes its course," he said, speaking at a broker conference. Fed officials are currently reviewing 4,000 comment letters on its Truth in Lending Act proposal to curb abusive yield spread premiums and prevent loan officers and brokers from steering borrowers into more expensive loans. If the Fed decides to move ahead with its TILA rule, prime mortgages should be exempt from the new restrictions on commission-based compensation, Mr. Markison said. In addition, "We don't think the FHA and VA markets need or require" these new TILA regulations, he said.

A second insurer - a Lloyd's of London syndicate - is trying to escape liability in the massive U.S. Mortgage/CU National Mortgage fraud for which almost 30 credit unions are seeking recompense of as much as $125 million. The Lloyd's syndicate has filed suit in federal court in Newark seeking to block any potential insurance claims against it by three CUs: Picatinny Federal Credit Union, Suffolk Federal Credit Union and Sperry Associates Federal Credit Union. The CUs were swindled out of more than $50 million by U.S. Mortgage President Michael McGrath. The syndicate claims the fidelity bond it held for U.S. Mortgage and McGrath should be rescinded because of the fraud McGrath has confessed to. The group is the second insurer seeking to block claims in the case. The first was CUNA Mutual Group, which is seeking 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 counter-suing 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 as much as $140 million of mortgages he held on behalf of credit unions to Fannie Mae and keeping the funds. After almost $15 million in assets to be forfeited by McGrath, credit unions are still out almost $125 million.

At least 1,000 victims have lost more than $100 million in cases of real estate fraud — including loan modification scams — referred to a special unit of the Orange County District Attorney's office, according to a new report. "The number of referrals has been overwhelming, with more than 346 referrals to date," says a report issued by the DA's office. (The unit that investigates RE fraud was launched last year.) The report's findings were first published by The Orange County Register. The DA says a "vast majority" of referrals have come directly from victims of real estate fraud directly to its office. A "significant number" of cases involve loan modification schemes, it said. Several cases were cited, including one in which three men were charged with 101 counts of fraud in a loan modification scheme.