Pg. 11 Vol. 170 No. 7

Fannie Accuses a Servicer Of Pocketing Prepayments

Jody Shenn

This month Fannie Mae will compensate mortgage-backed securityholders for prepayments that a servicer allegedly collected but failed to pass on to the bondholders.

Fannie said in a press release last week that the servicer never informed it that borrowers had paid off 234 mortgages in 169 pools. The principal payments will be made Jan. 25.

Though Fannie did not identify the servicer in the press release, it filed a lawsuit Nov. 16 against Olympia Mortgage Corp. of Brooklyn, N.Y., and Lieb Pinter, an Olympia principal and managing director, in the U.S. District Court for the Eastern District of New York.

The suit, in which Fannie asked the court to appoint a receiver for Olympia, said that it retained at least $44 million owed to investors from 260 loans.

To cover up the payoffs, the suit said, Olympia continued to fund a trust with enough money to cover the monthly payments for the loans, which borrowers had actually refinanced. (It is unclear whether Olympia originated the refis.)

In the suit, Fannie called the case "a variation on the typical Ponzi scheme."

Alfred King, a Fannie spokesman, said Friday that it was still trying to determine the amount involved in the alleged fraud, which he confirmed was the reason for the planned payments. He said it was rare, but not unheard of, for Fannie to pay when a servicer fails to remit payments from borrowers.

Last month a different type of fraud burned Fannie. It agreed to pay $7.5 million to the government because First Beneficial Mortgage Corp. of Charlotte had repurchased phony loans from it by selling them to the Government National Mortgage Association. Fannie allegedly failed to warn the agency, known as Ginnie Mae, that the notes were never insured by the Federal Housing Administration, as First Beneficial had claimed.

But in its suit against Olympia, Fannie said it informed the appropriate authorities when it discovered the alleged fraud, and it learned that the Justice Department, the Department of Housing and Urban Development, and the New York State Banking Department have launched probes.

The incident serves as a reminder of a market function of Fannie and Freddie Mac that they have pointed out when they have come under attack in Washington: guaranteeing payment of principal and interest to investors, regardless of default (or, in this case, alleged fraud).

Cenlar FSB, an Ewing, N.J., subservicing specialist, has taken over the remaining loans from Olympia, Mr. King said. Fannie dropped Olympia from its approved servicer list Oct. 19 and had the servicing transferred to Cenlar shortly afterward, he said.

Mr. King would not say how many loans were involved. In a Jan. 1 disclosure on Fannie's mortgage bonds, Cenlar was listed as an "interim" servicer on at least some of the Olympia loans.

Olympia, which faces state and federal investigations, did not return phone calls.

A Freddie spokesman would not say whether it had ever purchased loans from Olympia, approved it as a servicer, or had an experience similar to Fannie's. "We've never made public who officially are our sellers and who are our servicers," he said.

According to Fannie's suit, Olympia has begun liquidating its operations. In late October the New York State Banking Department temporarily suspended Olympia's mortgage banking license and said the lender was under investigation. On Friday, a spokesman for the department said Olympia had voluntarily surrendered the license permanently in November.

Around the same time the California Department of Corporations said that New York regulators had found that Olympia diverted payments and proceeds on at least 270 loans worth $35 million. California ordered Olympia to establish separate trust accounts for borrowers in the state and to stop lending and servicing there.

Connecticut officials later fined Olympia as much as $200,000 for not disclosing the other regulators' actions, and the state declined to renew its mortgage banking and brokering licenses.

A Federal Bureau of Investigation spokesman in New York confirmed Friday that it has been conducting an investigation in partnership with HUD and the New York regulators for several months.

Fannie, which had been working with Olympia since 1988, said in the suit that some borrowers continued to send payments to Olympia after the servicing work was transferred to Cenlar. The borrower confusion is one reason Fannie asked the court to appoint a receiver.

The alleged scam by Olympia Mortgage is a variation on one more frequently run by fraudulent closing agents. In that one, the agent takes proceeds from a new loan at the closing table, as typical, but never uses the funds to pay off an existing mortgage. Even an originator that sells such a second loan can end up liable under its representations and warranties, because it is not in the first lien position and is ineligible for title insurance.

Bob Simpson, the president and chief executive of Investors Mortgage Asset Recovery Co., said when a servicer gets a loan payoff from a closing agent and allows the new lien to be recorded, it would appear the new lender should be in the correct lien position. (His Irvine, Calif., company litigates small fraud cases for mortgage insurers and lenders.) Such a fraud is bold, because "you leave such a paper trail," he said. "There's no real denying the fraud" after the fact.

Mr. Simpson contrasted that alleged fraud to a bigger one in which dozens of homes in the Poconos were sold at prices that were allegedly inflated through collusion between builders, mortgage brokers, appraisers, and other settlement agents. In that case, each home had a "willing buyer," so it is hard to prove the prices were too high, he said.

After four years of local and federal investigations, the Pennsylvania Attorney General's Office announced the first criminal charges in that case last week.

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