Complaint Takes Aim at Escrow Practices On Government Insured Apartment Loans

Four apartment investors have sued Fannie Mae, alleging the giant mortgage company improperly profited from the escrow accounts set aside for their Federal Housing Administration-insured multifamily loans.

The plaintiffs claim the Federal National Mortgage Association (known as Fannie Mae) breached its fiduciary duty and unjustly enriched itself.

"FNMA did so behind the plaintiffs' backs and without notifying the plaintiffs," according to Medlock Southwest Management Corp. vs. FNMA.

The lawsuit, filed in a U.S. District Court in Texas, also notes that Fannie owns or services 2,000 FHA-insured multifamily loans and those mortgagors could be members of the class-action lawsuit.

Fannie Mae declined to comment on the lawsuit when asked about it by this newspaper.

Department of Housing and Urban Development regulations require servicers of FHA multifamily loans to obtain permission from the FHA commissioner before dipping into escrows, the lawsuit says. The plaintiffs claim Fannie did not get that permission.

In March 2003, Alfred and Jean Porkolab discovered that Fannie was investing funds from the escrow account of their apartment complex in Lorain, Ohio.

They demanded an accounting of Fannie's earnings on the escrow funds, but Fannie officials failed to respond, the lawsuit says. "[Fannie Mae] responded by asking for additional time to respond, then shuffling the project to a different employee, and then requiring the Porkolab's counsel to chase down that employee. Nothing at all has been heard from FNMA since June 2003."

The plaintiffs are Medlock Southwest Management Corp., Lubbock, Texas; Jasper (Texas) Housing Development Co.; the Porkolabs of Maineville, Ohio; and a trustee of the Porkolab family estate.

The lawsuit claims the dispute involves more than $75,000. Attorneys for the plaintiff could not be reached for comment.

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