WASHINGTON-Talks appeared at a standstill over the New Year's holiday on the recovery of some $125 million of credit union mortgages fraudulently sold by U.S. Mortgage/CU National Mortgage to Fannie Mae.
The negotiations were being conducted on several fronts, with more than a dozen of the 26 credit union victims of the massive fraud continuing to lobby Congress to pressure Fannie Mae, which has been a ward of the federal government since September 2009. Meantime, secondary mortgage market giant continued to meet with lawyers for the credit unions in hopes of settling the claims, according to several sources.
But the credit unions were said to be waiting for the first settlement, to gauge their own prospects of recovery, said one source. "They're all waiting for the dam to break," the source told Credit Union Journal.
And last week pressure mounted on CUMIS Insurance Society, the CUNA Mutual Group unit that held a bond for the impacted credit unions. Suffolk FCU, the biggest victim of the fraud, filed another suit seeking to prevent the credit union insurer from getting a court order declaring the CU National fraud is not covered by its bond. Suffolk said CUMIS has rejected its $42-million claim in the case.
The $840-million credit union is the third, following Educational Systems FCU in Greenbelt, Md., and TCT FCU, in Ballston Spa, N.Y., which have filed separate suits to protect their bond claims. Two other victims with big claims, Picatinny FCU in New Jersey, and Sperry Associates FCU in New York, have filed separate suits against Fannie Mae.
In its suit, Suffolk FCU said under its bond CUMIS agreed to indemnify the credit union for "all losses arising from the dishonest acts of employees, officers and directors" and "its servicing contractor, CU National."
"The Bond also covers Suffolk for its losses resulting from the forgery of promissory notes and other mortgage-related documentation," according to the suit. "CUMIS, however, contends that the losses are not covered under the Bond and wrongly refused to indemnify Suffolk," says the suit.
CUMIS reiterated its position in the case, asserting it does not believe the bond covers the circumstances in the Fannie Mae fraud.
At dispute is the ownership of almost $140 million of mortgages originated by credit unions that were sold by CU National's founder Michael McGrath to Fannie Mae without the knowledge or consent of the credit unions. In its responses to the suits, Fannie Mae said it did now know that McGrath did not have authority to sell it the mortgages and did not know McGrath did not remit the proceeds of the sales to the credit unions.
Fannie Mae officials declined to comment last week.
McGrath has pleaded guilty to fraud in federal court and is scheduled to be sentenced next month. Prosecutors said he lost the money he stole from the credit unions in the markets, trading in stock and mortgage-backed securities issued by Fannie Mae. Under a plea deal, he has agreed to forfeit about $13 million worth of assets, leaving a shortfall of about $125 million of credit union funds in the case.