A bankruptcy trustee seeks to set aside liens held by mortgage lenders including Washington Mutual and National City for their alleged negligent underwriting of fraudulent loans from a now bankrupt company that bilked 490 investors of $40 million.
Washington Mutual, National City, Countrywide Home Loans and several other lenders are facing court scrutiny over the loans they made to NJ Affordable Homes.
Bankruptcy trustee Charles Forman has filed about 250 complaints in bankruptcy court against the lenders who approved loans to NJ and against the investors who allowed NJ to put properties in their names.
According to court documents, the lenders involved issued more mortgage loans arranged by a mortgage broker or acquired mortgage loans from companies that had “extensive” involvement with NJ, aiding in the creation of a massive fraud upon NJ’s investors.
The trustee wants the court to determine whether the liens on the properties can be set aside. If the court rules in the trustee’s favor, the properties can be included in NJ’s bankruptcy estate.
Washington Mutual reportedly holds about 100 of the mortgages, while National City holds about 40 of the loans.
Both Washington Mutual and National City declined to comment.
The complaints against the mortgage companies allege they ignored numerous warning signs in the lending process and failed to conduct due diligence.
Eager to profit, the lawsuit asserted, the lenders ignored red flags concerning the mortgage application, the underwriting process and NJ.
In issuing the mortgages, the lenders knew or should have known that the mortgage broker or initial mortgage lender did not adhere to prudent lending practices as described by HUD and FHA and as contractually required by private mortgage insurance companies. Among other things, underwriting deficiencies such as debt-to-income ratios that exceeded FHA/HUD standards, inadequate documentation and the imposition of ineligible or unsupported fees occurred in the financing process for a number of the properties.
The lenders are also accused of violating their own internal guidelines in making the loans.
The mortgage holders have filed motions to dismiss the trustee’s complaints. The court has not yet ruled on those motions.
Securities regulators sued NJ Affordable Homes and its owner Wayne Puff in September 2005, alleging that from 1999 until their court filing, he operated a mortgage financing scam that took in 490 investors in New Jersey and other parts of the country. NJ principals promised investors as much as 20 percent returns on their investment in residential real estate based on promises the company would purchase, renovate and resale real property.
The SEC filed an emergency action to halt the “fraudulent unregistered offerings of securities and an ongoing Ponzi scheme” orchestrated by NJ, according to a written statement the federal agency issued at the time.
According to court documents, a court-appointed receiver discovered that NJ had a negative cash flow and that a monthly infusion of about $265,000 in investor funds were needed to fund ongoing operations. The receiver then filed a Chapter 7 bankruptcy petition on behalf of NJ.