UPDATE:
Fannie Mae Knew Ginnie Was Possible Fraud Target
By DAWN KOPECKI
January 18, 2005 6:48 p.m.
Of DOW JONES NEWSWIRES
WASHINGTON -- Fannie Mae (FNM) officials were warned in late 1998 that a
Fannie-approved lender the company suspected of fraud was trying to pass off
problematic loans to Ginnie Mae, according to a letter the company recently
sent to House lawmakers.
Fannie Mae, eager in late 1998 to unload a batch of fraudulent loans it
purchased from First Beneficial Mortgage Co., knowingly allowed the North
Carolina lender to resell the bogus notes to Ginnie Mae, formerly the
Government Mortgage National Association, according to federal law-enforcement
officials. Fannie recently agreed to forfeit $7.5 million in
"tainted" funds from First Beneficial to the federal government,
which lost more than $30 million money in what federal prosecutors consider one
of the largest mortgage schemes ever. Loans guaranteed by Ginnie Mae, formerly
the Government National Mortgage Association, are backed by the full faith and
credit of the U.S. government.
Fannie Interim Chief Executive Daniel Mudd admitted to lawmakers in a letter
sent Friday that Fannie knew Ginnie Mae was a possible target in the First
Beneficial scheme and said the company has hired an outside law firm to
investigate how its own personnel handled the situation.
"A review of the totality of the facts in hindsight suggests that Fannie
Mae may have been able to take further steps to investigate and determine
whether First Beneficial was engaging in conduct that amounted to fraud,"
Mudd said, adding that Fannie didn't have a formal process in place at the time
to address fraud.
Reps. Richard Baker, R-La., Sue Kelly, R-N.Y. and Robert Ney, R-Ohio, who chair
three key House Financial Services subcommittees, questioned Fannie Mae's
involvement last month in the mortgage scheme.
"The lax internal oversight described by Fannie Mae in the First
Beneficial fraud makes clear the need for robust external oversight and for
regulatory reform to be passed by Congress this year," Baker, who released
Fannie's response late Tuesday, said in a statement.
Fannie Mae forced First Beneficial to buy back several million dollars in loans
beginning in late 1998 after Fannie officials discovered the mortgages were
fraudulent, knowing all the while that the North Carolina lender planned to
resell the bogus notes to Ginnie Mae, federal law enforcement officials
contend.
Mudd said a North Carolina banking official asked Fannie in November 1998 for
assistance in investigating First Beneficial, stating that the company
"was attempting to get Ginnie Mae to buy loans." Mudd noted that the
official did not refer to loans specifically held by Fannie Mae and that the
investigator never followed up after his initial call.
A First Beneficial employee, however, specifically told Fannie that the small
lender's only investors were Fannie and Ginnie, Mudd said. Another First
Beneficial employee, he said, "speculated that First Beneficial might be
trying to buy loans back from Fannie Mae and sell them to Ginnie Mae."
Mudd's letter did not provide a timeframe for those conversations.
The Department of Housing and Urban Development asked the Justice Department to
prosecute First Beneficial of Charlotte, N.C., and its owners, James and Macy
McLean, in 2002 after discovering that the company was using fake borrowers to
take out loans on nonexistent houses.
HUD discovered that Fannie Mae had learned of First Beneficial's fraud in late
1998 and sold back its troubled loans to First Beneficial over the next couple
of years. While Fannie Mae severed ties to First Beneficial, it didn't notify
regulators of the fraud, which made it possible for First Beneficial to lure
Ginnie into buying those loans.
Mudd said Fannie Mae does not "routinely" issue a public notice when
it suspends a loan seller or mortgage servicer.
"One of the primary reasons for this is that misrepresentations on the
part of a lender do not per se constitute actionable civil or criminal
fraud," Mudd said. "A lender may make misrepresentations
inadvertently and unknowingly, negligently, or intentionally. Like others in
the industry, in most if not all instances of suspected fraudulent activity,
Fannie Mae's concerns are based solely on limited information and
circumstantial evidence."
Making unfounded allegations of fraud, Mudd said, can expose Fannie to
potential legal liability.
"There are substantial incentives for entities to handle problems with
lenders internally," Mudd said, adding that Fannie supports an industry
proposal to create a legal "safe harbor" for companies that report
potential mortgage fraud, even if the conduct in question is later found to be
negligence instead.
"Fannie took what it believed at the time to be reasonable steps to
resolve problems with what it perceived as a small, inexperienced and negligent
lender," Mudd said, noting that the company instituted new anti-fraud
policies in August.
In cases where Fannie finds "material misrepresentations" with a
loan, it generally asks the lender to repurchase the loan or reimburse Fannie
for its losses. If a broader pattern of problems is found, Fannie could require
the mortgage lender to take corrective measures internally, suspend or
terminate the lender's relationship with Fannie or notify law enforcement
officials, Mudd said. The company "may refer (fraudulent) activities to
the appropriate law enforcement or governmental authorities" if outright
fraud is suspected, Mudd said, quoting Fannie's new anti-fraud policy.
Baker, however, doesn't think that is nearly enough.
"I am not at all sure that this kind of problem has been fully addressed
and won't happen again when Fannie's new policy in cases of potential
violations of law is that they 'may' report them to the proper authorities and
not 'must' report them," he said.
James and Macy McLean were found guilty in December 2003 of conspiring to
defraud the U.S. government, money laundering and bank fraud, among other
charges, and the couple were sentenced to roughly 21 years and 11 years in
prison, respectively. They are appealing their sentences.
Fannie Mae officials declined to comment beyond Mudd's letter. A spokesman for
the HUD Inspector General's Office, which investigated the matter for HUD, also
declined comment. HUD Inspector General Kenneth Donohue previously told Dow
Jones Newswires that losses to Ginnie Mae would have run roughly $7 million if
Fannie reported the fraud when it was first detected.