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Firm’s President Sentenced for $136 mil in Secondary Fraud

The February 2009 collapse of CU National Mortgage LLC was followed one week later by the collapse of its parent company — a net branch operator. The former president of the parent has been sentenced for his role in the failure — allegedly selling $136 million in mortgages that were owned by other institutions to Fannie Mae.

CU National Mortgage notified its credit union clients in February 2009 that it had stopped processing loan originations. A lost warehouse line-of-credit and the loss of approval as a Fannie Mae seller-servicer were blamed for the demise at the time.

A week later, parent U.S. Mortgage Corp. issued a statement indicating it had gone out of business. The Pine Brook, N.J.-based firm, which marketed a “branch link” program where branches were charged a flat fee per loan, blamed “unforeseen circumstances” for its demise.

The next month, 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. After being confronted by Picatinny, 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.

By June 2009, U.S. Mortgage president and controlling shareholder Michael J. McGrath Jr. had pled guilty to one count of mail and wire fraud conspiracy in connection with the company’s collapse.

Turns out that McGrath had used $139 million of the funds 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.

The next guilty plea came in May 2010 from former U.S. Mortgage servicing manager Leroy Hayden, who pled guilty to one count of wire fraud conspiracy.

On Thursday, a 168-month prison sentence was handed down to McGrath, the Justice Department reported.

In addition, he faces three years of supervised release and the forfeiture of the proceeds of his crimes and $14 million of his assets that the government has seized or frozen.

Total losses in the case were originally estimated at $139 million, and McGrath is expected to be required to pay $136 million as part of an upcoming restitution order.

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