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Secondary Scam Netted Exec Over $100 mil

Former U.S. Mortgage president pleads guilty

June 12, 2009

By staff

The former president of mortgage lender that collapsed earlier this year has admitted to fraudulently selling mortgages to Fannie Mae in a scheme that netted him more than $100 million.

U.S. Mortgage Corp. announced in February that it ceased business operations. The decision was based on "unforeseen circumstances." Bankruptcy proceedings were commenced on Feb. 23.

The closing followed the collapse of subsidiary CU National Mortgage LLC one week earlier. CU National commenced bankruptcy proceedings on April 1.

One month after U.S. Mortgage closed, Picatinny Federal Credit Union filed a lawsuit in U.S. Bankruptcy Court for the District of New Jersey alleging that more than $14 million in mortgages it owned were fraudulently sold to Fannie by third-party servicer U.S. Mortgage -- which kept the proceeds and also sold the servicing rights.

Picatinny had confirmed directly with Fannie that eight loans it owned for $2 million had in fact been sold to the secondary lender without its knowledge. U.S. Mortgage eventually came clean -- issuing a letter acknowledging that instead of the 281 loans for $47 million reported on the trial balance, only 228 loans for $34 million were still on the books.

But Picatinny was just one of many credit unions that were among McGrath's victims.

In an announcement Thursday, U.S. Attorney Ralph J. Marra Jr. announced that former U.S. Mortgage president and controlling shareholder Michael J. McGrath Jr. plead guilty to one count of mail and wire fraud conspiracy in connection with the company's collapse. The admission followed a Jan. 27 raid by dozens of federal law enforcement officers at U.S. Mortgage's Pine Brook, N.J., headquarters.

The defendant admitted he conspired with several others to sell loans serviced by U.S. Mortgage but owned by various credit unions to Fannie between January 2004 and January 2009. The funds, $139 million in all, were used for McGrath's personal expenses, the purchase of 1 million shares of Fannie and U.S. Mortgage's operations.

U.S. Mortgage
was facing cash flow problems caused by bad investments in mortgage-backed securities. As the deterioration worsened, McGrath sold the loans to Fannie without the knowledge of the credit unions. He fraudulently claimed to be an officer of the credit unions on the assignment documentation.

In some cases, the same loans were sold more than once.

The scheme went unnoticed by credit unions -- who received fraudulent reports reflecting that they still owned the mortgages.

The servicing manager, referred to in court documents as "L.H.," allegedly altered the reports and servicing system data. The chief financial officer, identified only as "G.H.," is accused of falsifying documents and making monthly payments to the credit unions as if the loans had not been sold. Both executives, who acted under the direction of McGrath, were identified as co-conspirators but not named as defendants.

McGrath's plea agreement calls for the forfeiture of personal assets, restitution for victims and a prison sentence of between 150 and 240 months -- though the judge in the case is not bound by the agreement. McGrath was released on a $1 million bond, ordered to electronically monitored confinement and faces sentencing on Oct. 1.

United States of America v. Michael J. McGrath Jr.
Criminal No. 09 (U.S. District Court District of New Jersey).

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