M&T Mortgage Corp. is involved in litigation over its alleged participation in a scheme that defrauded the U.S. Department of Housing and Urban Development out of millions of dollars. But in court documents, M&T says it was a victim — and not a perpetrator.
Fraudulent HUD 203(k) mortgages are at issue in two ongoing lawsuits, one where M&T is a plaintiff and another where it is a defendant accused of participating in the fraud and fraudulently receiving funds under the HUD insurance program.
“M&T unwittingly purchased hundreds of loans originated by corrupt HUD-approved lenders — and paid a premium to do so,” wrote M&T counsel Todd Marcus in a June 29 letter to U.S. District Court Judge Joanna Seybert, who is overseeing M&T’s foreclosure suit against St. Stephens Baptist Church Corp., a California based not-for-profit HUD-approved lender. In that suit M&T is defending accelerating one of the mortgages and demanding a $268,706.60 balance due, which the defendant is fighting, in part, on the grounds that this and other loans were “fraudulently originated.”
The Clifton Park, N.Y.-based company , “having paid a premium for each of the 203 (k) loans,” Marcus pointed out in his letter, “is a victim of the alleged fraud.” Further, M&T received from HUD only “partial reimbursement and recoupment of its losses.”
“M&T was not aware of any fraudulent activity when M&T purchased the St. Stephens loans,” he stressed. “M&T purchased the St. Stephen loans, and hundreds of other HUD-insured loans, on the secondary market in 1998-99 and relied solely on the fact that the loans were made by HUD-approved lenders and were insured by HUD.”
The suit against M&T charges that it fraudulently made claims against HUD for reimbursement and received “many millions of dollars” in insurance payments on the HUD 203(k) loans.
The loans should not have been insured by HUD for “any deficiencies arising from foreclosure proceedings” because neither of the two New York-based St. Stephens affiliates who originated the loans, St. Stephens Community Development Corp. and St. Stephens Bible College Real Estate Management Corp., were “authorized to participate in the HUD 203-k mortgage insurance program,” the suit states. And those affiliates’ participation was carried out not by a legitimate board of directors but a false board and board secretary, who fraudulently used the HUD authorization number of St. Stephen Baptist Church Corp. and to whom M&T turned over a portion of the HUD 203(k) rehabilitation escrow funds.
Thus, the suit alleges that the mortgage company not only should not have received HUD insurance benefits but, in effect, participated in the fraud scheme, by, after purchasing the loans, accepting fraudulent documents and forwarding rehabilitation escrow funds to participants in the fraud. Further, there are grounds for HUD to recover the funds it paid to M&T, the suit maintains.
But Marcus, in his letter to the court, maintains that “St. Stephens ratified each of the St. Stephens loans by accepting the benefits thereof.”
The HUD 203 (k) program combines a purchase mortgage with funds for the rehabilitation of the property being purchased. It has been problem-plagued for more than a decade and at one point HUD halted investor use of the program because of fraudulent use.
“HUD,” M&T Bank Administrative Vice President and Corporate Communications Manager C. Michael Zabel told MortgageDaily.com, “has upheld their guarantees on these loans and, by their actions, have repeatedly indicated that M&T had no involvement in nor awareness of any alleged wrongdoing related to the origination of these mortgages. After purchasing the loans and discovering that many had been fraudulently originated, M&T worked with HUD to resolve these issues in a way that protected both taxpayers and tenants.”
The loans apparently were sold and purchased before the rehabilitation was completed, a practice that has been permitted.
HUD did not respond to a MortgageDaily.com request for comment on the St. Stephens loans.
At least some of the St. Stephens loans, which were for inflated amounts, were purchased from St. Stephens by Huntington Station, NY-based Mortgage Lending of America, Inc. and then sold to M&T, according to court documents. On August 17, 2000, HUD sanctioned Mortgage Lending of America with $533,500 in civil penalties and a five-year withdrawal of authority to originate FHA-insured loans for its failures relating to 97 loans with an unidentified nonprofit mortgagor, according to HUD directives.
In a January 11, 2001, letter, two to three years after M&T had purchased the St. Stephens loans, HUD identified the loans “as being part of a large-scale fraudulent scheme,” according to Marcus.
The loans in question, according to M&T’s Zabel, numbered at least 47.
Peter S. Gordon, attorney for the plaintiffs, told MortgageDaily.com that the two New York organizations were St. Stephens’ first efforts outside California and were taken over by fraudsters. The plaintiffs in the suit against M&T Mortgage are three managing agents and a director of the two St. Stephens affiliates. They maintain that, through the fraud, the mortgages on the affiliate-owned properties were forgeries and that neither affiliate received any of the 203(k) funds that were intended for the repair and rehabilitation of those properties.
All court records of that suit were sealed upon inception, finally being unsealed last January, 17 months after the original suit was filed. The sealing of the complaint against M&T and all related court filings was done to allow time for the U.S. Attorney’s office of the Eastern District of New York to “elect to intervene in this qui tam action involving complex allegations of mortgage fraud,” according to a now unsealed letter from Assistant U.S. Attorney Thomas A. McFarland. No federal intervention was ever undertaken and the case was then unsealed.
M&T Mortgage, a subsidiary of 150-year-old Buffalo-based M&T Bank, has been an active purchaser of 203(k) mortgages and similar GSE loan products for more than a decade.
