Mortgage Daily

Published On: December 1, 2004
Fannie Unloaded, Ginnie Bought Bogus Notes

1st Beneficial loans ultimately caused Ginnie’s single biggest loss

December 1, 2004


A federal judge has ordered Fannie Mae to turn over $6.5 million it received as a result of selling fraudulent mortgages back to the originator who in turn sold them to the government.One of Fannie’s authorized lenders was holding millions of dollars in bogus loans that had been created as part of a massive fraud scheme that eventually cost the government more than $30 million.

But Fannie didn’t want to get stuck with the fraudulent loans created by First Beneficial Mortgage. So in a remarkable turn of events that is just beginning to trickle out of a federal courthouse in North Carolina, the secondary lender is being accused of allowing nearly $7 million of the phony loans to be sold to government-owned Ginnie Mae.

Neither Fannie, which is a government sponsored enterprise, nor Ginnie is talking publicly, but U.S. District Judge Lacy Thornburg in Charlotte has ordered Fannie to turn over $6.5 million in ill-gotten gains it allegedly received through criminal means by not stopping First Beneficial owner James Edward McLean Jr. from selling the loans to Ginnie, recently unsealed court papers show.

Fannie has until mid January to answer the charges.

As of now, Fannie has not been charged with any crimes. But Thornburg has also ordered the Washington, D.C.-based company not to destroy any potential evidence and cooperate with the federal prosecutors and regulators investigating the case, according to court documents.

Thornburg has also frozen Fannie’s assets at the Federal Reserve Bank of New York. And the U.S. Attorney’s office in North Carolina and the Office of Inspector General at the Department of Housing and Urban Development are investigating and providing testimony in the ongoing case.

Court records show that prosecutors and HUD officials have testified that Fannie was aware that it received money from McLean after he sold the bogus loans to Ginnie.

Evidence shows that on the same day in December of 1998 when Ginnie bought $4.9 million from First Beneficial, that same amount was transferred to Fannie, according to testimony given by an Internal Revenue Service agent. Another $1.7 million was transferred in the same way at a later date.

McLean and his wife, Mary McLean, were convicted last year of conspiracy, wire fraud, bank fraud, making false statements and entries and money laundering, according to the U.S. Attorney’s office for the Western District of North Carolina. They were sentenced in serve more than 20 years in prison.

From January of 1998 to September of 2000, McLean and his business created fake mortgages, and sold them in the form of mortgage backed securities to Fannie, prosecutors said.

When Fannie discovered the notes were false and demanded that McLean’s company repurchase the notes, McLean and his wife sold the false notes to Ginnie, reported last year based on information provided by prosecutors.

McLean, his wife and two other defendants who were convicted in the case — Paul and Debbie Zimmerman — obtained more than $30 million during the scheme, including $7 million from Fannie and $30 million from Ginnie.

It was the largest single loss in the history of Ginnie Mae, U.S. Attorney Bob Conrad said at the time.

Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: [email protected]

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