An alleged $140 million mortgage scam involving flashy Beverly Hills real estate developers resulted in some bad loans being dumped on the Federal Home Loan Bank (FHLB) of San Francisco.
Lehman Brothers Holding Inc. repurchased $60 million in “problem loans” from the bank in May, according to an Oct. 2 letter bank president and CEO Dean Schultz sent to shareholders. The loans are part of an alleged massive mortgage fraud by Beverly Hills Estates Funding. In a $140 million federal lawsuit filed in U.S. District Court for the Central District of California, Lehman has accused the company of using phantom buyers, bogus appraisals, and other phony and fraudulent documents to make the loans.
Operators of Beverly Hills Estates Funding did not return phone calls to comment.
The FHLB in San Francisco purchased the loans before Lehman exposed the alleged fraud, Schultz said.
The mortgages were packaged by Lehman and sold to the FHLB as mortgage-backed securities.
In his letter Schultz said the FHLB bought $2 billion in ‘AAA’ mortgage-backed securities from Lehman Brothers late last year.
“During its normal post-closing due diligence earlier this year, Lehman Brothers discovered problem loans totaling approximately $60 million in the loan pools underlying the MBS,” Schultz said. “In accordance with its contractual obligations, Lehman Brothers repurchased the problem mortgage loans from the pools because the loans violated the standard representations and warranties.”
Schultz said that at the time of the purchase all of the “MBS purchased from Lehman Brothers were AAA-rated and met the bank’s stringent risk management criteria.”
The remaining loans are still “‘AAA’ rated and continue to meet those criteria,” he said.
“The repurchase of loans out of an MBS pool is a commonplace event,” Schultz said. “It is standard business practice for a securities issue to repurchase loans if it finds a breach of the representations and warranties during its due diligence after the sale of the MBS to investors.”
According to court documents in Lehman’s civil fraud, Beverly Hills principals Mark Alan Abrams and Charles Elliott Fitzgerald masterminded the fraud scheme on 86 upscale residential properties in California. People close to the firm would buy houses for approximately $1 million but would then file property transfers — claiming they paid more than $2 million, Lehman’s lawsuit alleges.
The company would then take a mortgage based on the inflated rather than the actual price, according to the court documents.
The lawsuits indicate that Lehman Brothers believe Abrams and Fitzgerald used proceed from the fraudulent mortgages to pay for extravagant lifestyles that included expensive cars, homes and gambling trips.
Lawyers for the pair did not return phone calls to comment.
