Litigating Secondary Trades

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Several recent lawsuits tied to secondary marketing involve criminal activity. The alleged schemes often involve selling loans that are lower quality than what is being marketed, while other cases involve trading mortgages that didn’t even exist.

A guilty plea was made on Oct. 14, 2011, by Manuel Garcia to a six-count indictment filed in an Albuquerque federal court, the Department of Justice announced. He was originally indicted on June 7, 2011.

From August 2009 through May 2010, Garcia allegedly deceived First Community Bank about a warehouse line of credit that was supposed to be used to finance new residential originations from his company, Keyworth Mortgage Funding Group. But instead of funding new business, Garcia is accused of using the credit line to pay down debt to Fannie Mae while submitting fraudulent files on former customers to First Community.

In all, $1,279,650 in bogus mortgages were financed through the credit line, though $535,450 was repaid by Garcia.

At his sentencing hearing, which has yet to be scheduled, Garcia faces up to 30 years in prison and $585,243.59 in restitution.

A lawsuit that was filed on Sept. 21, 2011, by Dallas County District Attorney Craig Watkins against Bank of America Corp., Mortgage Electronic Registration Systems Inc. and other parties alleges that the defendants illegally avoided millions of dollars in recording fees when they used MERS in the secondary sale of loans from one investor to another.

On Oct. 31, Watkins announced that the case was expanded to a class action representing all other Texas counties impacted by the loss of recording fees.

“MERS was established to act as a shadow recording system for the millions of mortgages in the United States, save its members money by avoiding filing fees in counties like Dallas County, and facilitate the buying and selling of mortgage rights as commodities,” the announcement said.

Christopher L. Peterson, an associate dean and professor at the University of Utah S.J. Quinney College of Law, was quoted by Bloomberg as saying that the Texas case, which could exceed $1 billion in liability, “is scary because if Dallas wins then there are a lot of other counties around the country that are going to follow.”

A federal judge in November granted BofA more time to respond to a complaint filed by U.S. Bank, N.A., as trustee for HarborView Mortgage Loan Trust Series 2005-10. The complaint was originally filed in U.S. District Court for the Southern District of New York on Aug. 29, 2011.

U.S. Bank hopes to force BofA to repurchase securitized loans that were issued by Countrywide Financial Corp. in 2005. U.S. Bank purchased more than 4,000 loans from Countrywide for $1.75 billion.

A civil lawsuit was filed by the Justice Department against Deutsche Bank AG and subsidiary MortgageIT on May 3, 2011, while an amended complaint was filed on Aug. 22. The government claims that MortgageIT generated Federal Housing Administration originations without regard to repayment ability, leading to hundreds of millions of dollars in FHA insurance claims and hundreds of millions of dollars more likely in expected claims.

MortgageIT reportedly endorsed 39,000 FHA loans for more than $5 billion from 1999 until 2009.

“As set forth below, Deutsche Bank and MortgageIT repeatedly lied to be included in a government program to select mortgages for insurance by the government,” the complaint says. “Once in that program, they recklessly selected mortgages that violated program rules in blatant disregard of whether borrowers could make mortgage payments.”

On Dec. 21, U.S. District Judge Lewis A. Kaplan signed an order denying Deutsche’s motion to dismiss and requiring that the government’s second amended complaint be filed by Jan. 10, though no second amended complaint is on file yet with court.

A former employee of Universal Mortgage Corp. was receiving kickbacks to fund sub-standard loans at the company. After Universal sold the loans, investors picked up on the scheme and demanded that Universal repurchase the loans — leaving the lender with “a significant financial loss.”

Universal filed a claim under a mortgage bankers blanket bond underwritten by Württembergische Versicherung AG and several other investors. But the claim was denied, and Universal sued. The district court found that the bond didn’t cover the loss and dismissed the lawsuit, so the lender appealed the decision with the U.S. Court of Appeals, Seventh Circuit, which denied the appeal.

“The fidelity bond at issue here employs direct-loss causation language,” the appeals decision said. “The bond provides coverage for losses ‘directly caused by’ dishonest acts of employees. A financial loss resulting from contract liability to third parties is not ‘directly’ caused by employee misconduct, even if employee misconduct is the source of the contract liability.

“Here, Universal’s loss resulted from its contractual repurchase obligations. Although this contract liability arose as a result of an employee’s misconduct, the employee misconduct did not directly cause the eventual financial loss associated with the repurchases. In addition, an exclusion in the bond specifically bars coverage for losses resulting from loan-repurchase obligations. Because Universal’s loss resulted from its contractual obligation to repurchase real estate loans, this exclusion applies.”

CU National Mortgage advised its credit union clients in February 2009 that it would be unable to fund additional mortgage business. The wholesale business provided mortgage services to credit unions. At the time, the halt to operations was attributed to the loss of a warehouse line of credit and the termination of its Fannie Mae approval.

CU National’s demise was followed one week later with the closing of its parent company, U.S. Mortgage Corp.

Turns out that Michael J. McGrath Jr., president of U.S. Mortgage, was selling loans to Fannie that were still owned by CU National’s credit union clients to make up for $139 million of the funds that he used for his personal expenses — including the purchase of 1 million shares of Fannie before it collapsed. He hid the fraud from customer credit unions by sending them fake statements.

McGrath pled guilty in June 2009 and was sentenced in February 2011 to 168 months in prison.

Fannie has since been negotiating claim settlements on $62 million in mortgages with Suffolk FCU in New York, Picatinny FCU in New Jersey and Treasury Employees FCU in Washington, D.C., National Mortgage News reported. After the settlements and pending insurance claims, the victim credit unions are expected to recover 90 percent of their original claims.

Mortgage Expert

Mortgage Daily Staff



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