Compliance

Hours after last week's guilty plea in the $140 million fraud offense at U.S. Mortgage Corp., insurers for the bankrupt mortgage firm moved to cancel the company's surety bond, which would foreclose one potential source of recompense for some 30 credit unions victimized in the biggest fraud ever to hit the industry. In a motion filed with the U.S. Bankruptcy Court, Zurich American Insurance Co. and its Fidelity & Deposit Co. unit asked the court to allow it to cancel the bond it held for U.S. Mortgage and its CU National Mortgage subsidiary because the companies have ceased originating loans. "As such, U.S. Mortgage no longer requires the surety bonds to support or guarantee its business operations," the company said in a filing with the bankruptcy court on Friday. In addition, U.S. Mortgage stopped paying premiums on the bond after it filed for bankruptcy, voiding the policy, the insurer asserted. The filing came the day after Michael McGrath, the 46-year-old owner of U.S. Mortgage, pleaded guilty in federal court to siphoning $140 million from CU customers by selling their loans to Fannie Mae and pocketing the funds. McGrath has agreed to forfeit $13 million, leaving more than $125 million of CU funds unaccounted for. Authorities told The Credit Union Journal last week they believe McGrath gambled away those funds in the stock market over the past year, leaving virtually nothing for credit unions to recover. One stock he invested in was Fannie Mae, which now trades for less than 70 cents a share.

Ryan Keith Miller of Lee's Summit, Mo., has pleaded guilty to mortgage fraud charges in U.S. District Court in Kansas City. Kansas. . According to Lanny Welch, U.S. attorney for the District of Kansas, Miller admitted to conspiring with others to fraudulently obtain mortgage loans on properties in Kansas and Missouri by submitting fraudulent loan applications and property appraisals to lenders to obtain money and then transferred the proceeds to bank accounts they controlled for their own use. Sentencing is set for Sept. 14.

The founder and owner of U.S. Mortgage Corp. has pleaded guilty to a massive fraud that siphoned almost $140 million in funds from almost 30 credit union customers of the company's CU National Mortgage unit. Michael McGrath Jr. pleaded guilty late this past week to federal mail and wire fraud charges and money laundering, according to a report in The Credit Union Journal. Some of the money he took was invested in Fannie Mae common stock, the newspaper reported. Under his plea agreement, he faces between 12 to 20 years in prison when he's sentenced later this year. He also must 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 unraveled and sold all of its mortgage servicing rights. Roughly 400 employees lost their jobs.

The Department of Housing and Urban Development has suspended three lenders from originating Federal Housing Administration single-family loans while the agency completes investigations of their lending practices. HUD's Mortgagee Review Board placed Golden First Mortgage Corp. of Great Neck, N.Y., Great Country Mortgage Bankers, Inc. of Coral Gables, Fla., and Beneficial Mortgage Corporation of San Juan, P.R., on suspension. The board cited Golden First Mortgage and Beneficial Mortgage for failing to notify HUD of investigations of their operations by other regulators. Golden First Mortgage's president David Movtady is the subject of an Office of Thrift Supervision investigation, HUD said. Mr. Motvady, who is also the chairman of Golden First Bank, a $27.4 million-asset thrift, said the OTS allegations are "unfounded" and he continues to contest them. However, Golden First Mortgage has surrendered its FHA license and will suspend lending operations "until further notice," he said. Beneficial Mortgage failed to notify HUD of an investigation and sanctions imposed by the Puerto Rico commissioner of financial institutions, including revocation of license to originate mortgages, HUD said. In an audit of Great Country Mortgage Bankers, HUD said it discovered multiple violations of FHA requirements, including failure to ensure that employees worked exclusively for GCMB; failure to disclose business affiliations between GCMB and real estate and title service providers; and failure to properly verify key credit information in 55 FHA-insured mortgage loans. Executives from Beneficial Mortgage and GCMB did not return phone calls.

After pleading guilty to participating in a complex fraud scheme in which he filed and foreclosed on false mortgages in Florida, Sergej Tews was sentenced to 33 months in prison. He also was sentenced to three years of supervised release following the prison term and ordered to pay $636,000 in restitution. According to R. Alexander Acosta, U.S. attorney for the Southern District of Florida, Tews induced homeowners to transfer their properties to him in exchange for his promise to assume their mortgage payments and caused the homeowners to execute warranty deeds, which gave the appearance that the properties were sold to a third party instead of being transferred to Tews. He then fabricated the amount paid for each property, paid the filing taxes based on the false amount and filed fraudulent mortgages on each property. At the foreclosure sales, third-party purchasers were deceived into believing that there were no pre-existing mortgages on the properties and bid on and bought the properties at auction. After the third-party purchasers paid for the properties, the court issued checks to Tews in the names of his purported foreclosing lenders.

New York attorney general Andrew Cuomo is joining other state crime fighters that are going after what they believe are foreclosure rescue scams targeting vulnerable homeowners. The New York AG this week filed a civil complaint against American Modification Agency Inc. and its owner and president, Salvatore Pane Jr., for allegedly charging illegal up-front fees and engaging in consumer fraud. The Uniondale, N.Y.-based firm markets itself as a foreclosure rescue company. It operates in all 50 states. The AG's office says American Modification targets homeowners facing foreclosure by claiming it can save their homes, but often fails to provide the services promised. In a statement released late Tuesday AMA — also known as "Amerimod" — said it is compliant with state foreclosure assistance laws and regulations. "Amerimod has been and will remain a frontrunner for compliance as well as a reliable source for distressed homeowners and consumer advocacy groups," the company said. Meanwhile, the New York AG's office has subpoenaed 14 other loan modification-related firms. Other large states that are investigating and filing charges against loan mod firms include California, Florida, and Georgia.

Former real estate broker Kathy Chen, her ex-boyfriend Richard Salgado Gonzalez and his brother Daniel Gonzalez have been charged with running a $17.5 million mortgage fraud scheme by the Orange County District Attorney's Office. The trio allegedly recruited and paid straw buyers to obtain mortgage loans for the purchase of multiple properties. Between 2005 and 2007, the defendants allegedly obtained 47 fraudulent loans in excess of $17.5 million on 35 California properties, including 13 in Orange County, 16 in San Bernardino County and six in Kern County. The defendants, none of whom were available for comment, allegedly acquired licenses for nonexistent businesses under the pretense that straw buyers owned the businesses to make them eligible for higher income loans. They are accused of fabricating loan applications to reflect higher incomes for the straw buyers, forging the names and signatures of straw buyers on various deeds and loan documents and forging the seal and notary stamp on notarized documents and deeds, which were filed with the Orange County Clerk-Recorder's Department. The defendants used the straw buyers' credit information on several occasions without their knowledge or consent, prosecutors say. After initially making monthly payments on the loans, they defaulted and kept the excess money, according to investigators. Ms. Chen was arrested on June 1 on a $3 million warrant. A warrant has been issued for the Gonzalez brothers, who may be living in Puerto Vallarta, Mexico.

Mortgage companies are scrambling to implement an over-looked Truth-in-Lending Act rule that goes into effect July 30 requiring timely delivery of the good faith estimate on home purchases, refinancings, and home equity loans. On applications taken after July 29, lenders must deliver the GFE to the borrower within three business days and they cannot collect any fees before delivery — except for the credit report. The TILA rule also requires lenders to "wait seven business days after they provide the early disclosures before closing the loan," according to the Federal Reserve Board. If the financing charges or annual percentage rate changes, the lender must provide a new disclosure with the revised APR "and wait another three business days before closing the loan," the Fed says. Consumers can waive this three-day waiting period in emergency situations such as a foreclosure. The Fed approved the rule on May 8. The FDIC recently reminded lenders about banks about the rule.

Angelo Mozilo, the founder and former chairman/CEO of Countrywide Financial Corp. — and an icon in the industry for many years — was slapped with a massive civil fraud complaint by the Securities and Exchange Commission on Thursday afternoon, accused of deliberately misleading investors in the company's stock and engaging in insider trading. David Siegal, Mr. Mozilo's attorney released a statement calling the SEC charges "baseless," adding that the lender's risks "were well disclosed to and understood by the marketplace." The SEC also sued former CFC executives David Sambol and Eric Sieracki, accusing them and Mr. Mozilo of "falsely assuring investors" that Countrywide was funding "primarily" prime quality loans and had avoided the excesses of its competitors. The two men could not be reached for comment. Last summer Bank of America bought CFC for a few dollars a share compared to a one-time high of $40. The agency released a memo that Mr. Mozilo wrote in April 2006 where he refers to Countrywide's subprime business as "the poison of ours." According to figures compiled by National Mortgage News Countrywide was the nation's largest subprime lender and servicer during its final years of operation, but had not made a serious run at A- to D lending until the early 2000s. The agency accuses him of selling $140 million of stock from November 2006 until August 2007 while "he was aware of material, non-public information concerning Countrywide's increasing credit risk." In past interviews with NMN Mr. Mozilo maintained that his stock sales were legal and followed the rule of law. In March 2007 he told this newspaper that he was selling the stock in question, noting, "I have almost all my personal net worth tied up in the company." He defended the sales, saying "I have created $25 billion in value for the shareholders. It's been one of the best performing stocks on the New York Stock Exchange. I gave them 98% of the value and took 2%. And they [the shareholders] didn't have to do the work. I did it for them."

In charging former Countrywide CEO Angelo Mozilo with fraud, the Securities and Exchange Commission is zeroing in on the lender's payment option ARM business, a controversial product that Mr. Mozilo initially embraced and then later cursed. According to figures collected by National Mortgage News Countrywide Financial Corp. was the nation's largest POA lender in 2006, a year in which Mr. Mozilo wrote several memos cited by the SEC in its complaint. (CFC was also the largest POA funder in 2007, originating a record $86 billion in these notes which eventually can become negatively amortizing.) In one memo Mr. Mozilo laments that CFC has "no way, with reasonable certainty, to assess the real risk of holding" POAs on its balance sheet. He adds that by putting so many loans on CFC's books "we are flying blind on how these loans will perform in a stressed environment." One loan broker who funded POAs for CFC told this newspaper that the loans were hugely profitable for the company because of all the points it charged on them. When CFC was eventually sold to Bank of America last year it had $80 billion in loans on its balance sheet -- including POAs and second liens. The SEC accuses Mr. Mozilo of knowing how risky these products were but without sharing his opinions with investors. "Concealed from shareholders was the true Countrywide, an increasingly reckless lender assuming greater and greater risk," said SEC director of enforcement Robert Khuzami. During CFC's last year of operations, the lender began sending out warning letters to borrowers who were choosing the 'neg am' option on POAs, telling them of the risks.

After pleading guilty to facilitating the fraudulent sale of seven residential properties through straw buyers, U.S. District Court Judge Marcia Cooke has sentenced Jose G. Martin to 65 months in federal prison, followed by three years of supervised release. Judge Cooke also ordered a restitution hearing to determine the identity of the victims to be paid by Martin in connection with the $3.2 million in losses that resulted from his participation in the scheme. According to R. Alexander Acosta, U.S. attorney for the Southern District of Florida, Martin was arrested in January 2009 for his involvement in a mortgage fraud scheme that resulted in more than $6.6 million in fraudulent loans and pleaded guilty in April. At closings, Martin submitted fraudulent invoices for construction work on these properties and received hundreds of thousands of dollars as payment for construction work that was never performed. Martin then distributed these proceeds to himself, the straw buyers and other co-conspirators. After closings, Martin and the straw buyers failed to make payments on the mortgages to the victim lenders and the properties went into foreclosure. In one instance, Martin flipped a property in Coral Gables, Fla., three times in two years, more than doubling the price of the property to $1.2 million from $550,000. In the course of the Coral Gables property flips, Martin diverted to himself $450,000 for construction work purportedly performed on this property. In addition, Martin paid off three straw buyers of this property, none of whom ever intended to live in the property or pay the mortgages. Ultimately, the Coral Gables property went into foreclosure, resulting in significant losses to the lender.

Maria Sanchez, a real estate agent and loan officer from El Monte, Calif., was found guilty of fraud and money laundering charges for scheming with her sister to falsify home loan applications. The evidence presented during Maria's trial showed she submitted loan packages to purchase residential real estate in the names of family members. Those applications contained false statements and forged signatures. When the loans were funded, Maria fraudulently obtained more than $1 million in loan proceeds from financial institutions and mortgage lenders. She financially benefited from this scheme by flipping one of the properties, as well as collecting points, fees and commissions from the loan transactions. In three of the deals, Maria's sister Beatriz Sanchez, Los Angeles, was identified as the buyer of the property. Beatriz also has pleaded guilty, specifically to charges that she filed false documents with the IRS. Beatriz is scheduled for sentencing on Aug. 17. Maria is scheduled for sentencing on September 10.

The Federal Trade Commission is seeking public comments on how it should address foreclosure and loan modification scams and whether it needs to engage in further rule making with regard to unfair and deceptive mortgage lending and servicing practices. FTC has taken legal actions to stop several foreclosure rescue scams where consumers have paid fees up-front for bonus services. The consumer protection agency is considering drafting regulations that would ban advance fees for loan modification and foreclosure rescue services. The comment period ends July 15. In a separate "Mortgage Act and Practices Rulemaking," the FTC is soliciting comments on whether it needs to issue regulations to stop deceptive practices dealing with mortgage advertising and marketing, loan underwriting and terms, appraisals and servicing. "The FTC is particularly interested in receiving comments about mortgage servicing," the agency said. The advance notice of proposal rulemaking specially asks if FTC should prohibit or restrict servicers from charging fees that are not authorized under the mortgage contract or servicing agreement, such as late fees. Or charging "estimated" attorney fees or other fees for services not rendered. The comment period ends July 30.

Thirteen New York state residents have been charged with conducting a subprime mortgage fraud scheme involving loans on residential properties in Long Island and the New York City area, totaling more than $10 million. The defendants are: Micah Meyers, Stephen Caputo, Dawn Hughes, Fnu Lnu, Jakob Gearwar, Brian Urraro, Michael Didio, Daniel Hampton, Jennifer Moschitta, Victor Avendano, Adrian Avendano, Janet McGuinness and Liam Leavey. According to the indictment, from 2005 through 2007, the defendants — many of whom were worked at Bridgewater Funding, an Islip-based brokerage firm — targeted residential properties in Long Island and the New York City area that could be flipped or the homeowners were facing foreclosure. Bridgewater says the defendants are former employees who have not worked with the company for three years. The defendants were unavailable for comment. The defendants allegedly convinced troubled homeowners that selling their properties to the defendants would pay off their debts and "save" their homes. To purchase the properties, the defendants allegedly submitted mortgage loan applications that contained false information. The loans exceeded the actual purchase price of the property, producing a "spread" from which the defendants profited.

Interthinx has integrated its fraud prevention system with MortgageDashboard's loan origination system. The integration enables MortgageDashboard to offer customers an interface with automatic screening for potential fraudulent activity, according to the Agoura Hills, Calif.-based company. BenchMark Mortgage was recently introduced to MortgageDashboard's expanded loan origination system.

The Department of Housing and Urban Development issued guidance that opens the door for FHA-approved lenders to provide short-term loans — with restrictions — to borrowers who are eligible for the $8,000 first-time home buyer tax credit. Borrowers must still come up with the required minimum 3.5% down payment using their own funds. But after that, they can use the short-term liens to increase their down payments, cover their closing costs or buy-down their mortgage rate. Calling the tax credit advance "another step towards accelerating the housing market," HUD secretary Shaun Donovan told the National Association of Home Builders' annual spring board meeting in Washington that the initiative is a "real win for everyone." The NAHB estimates the advance will lead to 160,000 more sales — 101,000 to first-time buyers and 59,000 to move-up buyers who are selling their current residences to first-timers. Tax credit loans made by state and local housing finance agencies, government agencies and certain nonprofit groups can be used to cover the minimum 3.5%. However, non-profits that receive fees from sellers cannot provide downpayment assistance under this program. HUD didn't want to do anything that would allow "these seller-funded schemes back in," a senior HUD official said. The department has issued a mortgagee letter (2009-15) with guidance on acceptable interest rates and fees. "We are putting in place the necessary safeguards and consumer protections, and if monitored the right way, tax credit loans can be used efficiently and safely," secretary Donovan said.

A Detroit man who obtained numerous fraudulent mortgage loans, pleaded guilty before Judge Julian Abele Cook, Jr., to related fraud and conspiracy charges. According to Terrence Berg, U.S. Attorney for the Eastern District of Michigan, Myron L. Hooker conspired with others to obtain money from lending institutions, banks and individuals through fraudulent means. Hooker obtained fraudulent mortgage loans on numerous properties in the Detroit metropolitan area and arranged to have the illegal profits from those loans split between himself and his co-conspirators. Beginning in January 2003, Hooker orchestrated the fraud by coordinating the activities of loan officers, straw buyers, collusive sellers, real estate appraisers and closing agents. He obtained falsely inflated appraisals on real estate and paid straw buyers to act as purchasers of the property. To bolster the straw buyer's creditworthiness, he provided false income and asset documentation. Relying on the falsely inflated appraisals and fraudulent documentation, lenders approved the loans, most of which subsequently went into default, leaving them with losses in excess of $1 million. Sentencing is set for Aug. 20.

A trio of men have pleaded guilty to charges related to a $12.6 million mortgage fraud case involving 25 upscale residential properties in Missouri. Steven M. Salas of Hacienda Heights, Calif.; James F. Simpson of Lee's Summit, Mo.; and Willie Charles Cadenhead of Grandview, Mo., are among nine of 17 indicted defendants who have pleaded guilty to a scheme to buy and sell new homes built by Jerry R. Emerick at inflated prices, obtaining mortgage loans for more than the actual sale price by providing false information to mortgage lenders, then keeping the extra proceeds. According to the U.S. attorney's office for the Western District of Missouri, in the scheme, buyers created shell companies for the purpose of receiving kickbacks from Emerick (who pleaded guilty in April) of up to $125,000 on each house. During the course of the conspiracy, mortgage lenders approved loans for 25 homes totaling more than $12.6 million. From that total, buyers received approximately $2.3 million without the lenders' knowledge. Sentencing for the defendants will be scheduled after the U.S. Probation Office completes a pre-sentence investigation.

Milton H. Ohlsen III, of St. Louis, pleaded guilty before U.S. District Judge Henry Autrey to bank fraud after overstating his income on his home mortgage application. In 2000, Ohlsen originally financed his North Ballas Road residence with two loans totaling $302,000. In 2002, Olsen refinanced with Merrill Lynch Corp. for $307,000, and in 2006 obtained another loan from Merrill Lynch for $150,000 for the same home. In 2007, Olsen again refinanced the home with two loans, one for $470,000 from Countrywide and $175,000 from Guaranty Bank, which paid off the previous Merrill Lynch loans. On both of the June 2007 loans Ohlsen falsified the loan applications to Countrywide and Guaranty Bank, stating that his monthly income was $15,000, when in fact it was substantially less. In August 2007, Countrywide assumed the total line of credit from Guaranty Bank. Shortly after, Ohlsen became delinquent in his monthly payments on the original Countrywide and Guaranty loans. In May 2008 Ohlsen was in default on these loans, and in June 2008, he filed bankruptcy. Separately, Ohlsen also pleaded guilty to an illegal firearms charge. Sentencing is scheduled for August 11.

A federal jury found Richard N. Garries of Newport News, Va., guilty of all 24 charges against him related to an elaborate mortgage fraud scheme. According Dana J. Boente, U.S. attorney for the Eastern District of Virginia, Garries conspired with others to make money through the flipping of residential properties. He brought in buyers through false promises that the properties had been renovated, renters had been arranged for the properties, buyers would not have to spend their own funds and that buyers would be provided with cash back at closing. To secure mortgage loans for buyers, Garries inflated the buyers' income on applications and provided them with money to make it appear they had more funds available to qualify for a loan. At the time of the offense, Garries was on probation from a previous federal conviction for wire fraud for which he received a 25-month sentence. Following his release, Garries made numerous false statements to his probation officer concealing income and assets while on probation. Sentencing is scheduled for late summer.