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Fannie Must Forfeit $6.5 Million

Firm Accused of Accepting Tainted Funds

By David S. Hilzenrath
Washington Post Staff Writer
Wednesday, December 1, 2004; Page E01

A federal judge has ordered Fannie Mae to forfeit $6.5 million after the Justice Department alleged that the giant mortgage funding company accepted funds it knew had been fleeced from a government agency by the perpetrators of a fraud and money-laundering scheme.

The court order, unsealed in October and reported Monday by Dow Jones, directed the Federal Reserve Bank of New York to freeze money in a Fannie Mae account, calling the $6.5 million "tainted funds" and "proceeds of the criminal conspiracy."

_____Background_____
Fannie Supports New Regulator, But Wants a Say (The Washington Post, Nov 26, 2004)
Ohio Sues Fannie Mae, Alleges Securities Fraud (The Washington Post, Nov 20, 2004)
No Action Taken After OFHEO Probe (The Washington Post, Nov 18, 2004)
Fannie Mae Misses SEC Filing Deadline (The Washington Post, Nov 16, 2004)
Fannie Regulator's Budget Loses Key Backer, for Now (The Washington Post, Nov 11, 2004)
Fannie's Issues: Simple or Not? (The Washington Post, Oct 23, 2004)
SEC Takes Fannie Mae Investigation To Next Level (The Washington Post, Oct 15, 2004)
Report on Fannie Mae Regulator a Secret (The Washington Post, Oct 14, 2004)
Justice Asks Fannie to Save Documents on Accounting (The Washington Post, Oct 13, 2004)
_____Background_____
Timeline: Fannie Mae (washingtonpost.com, Oct 8, 2004)
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In the 1990s, District-based Fannie bought millions of dollars worth of mortgages from First Beneficial Mortgage Corp. in North Carolina. When Fannie Mae learned that the mortgages were fraudulent, it demanded that First Beneficial buy them back. First Beneficial repaid Fannie by selling the same bogus loans to Ginnie Mae, a government agency that finances housing, according to Justice Department news releases from earlier in the case. A Ginnie Mae executive has told the court that the scam cost the government more than $35 million.

James E. McLean, who was president of First Beneficial Mortgage, and other defendants were convicted on federal charges in 2002. McLean was sentenced last year to 21 years in prison. The borrowers named on the mortgages were phony, and the proceeds of the loans were not used to purchase the property described on the notes, the Justice Department said.

Fannie Mae, a government-chartered corporation, did not blow the whistle on the scheme, Dow Jones reported. The news service quoted Kenneth M. Donohue Sr., inspector general at the Department of Housing and Urban Development, as saying, "Fannie should have been a better citizen in advising the respective regulatory agencies of the potential fraud that existed here."

A spokesman for Donohue declined comment yesterday.

The government "has substantial evidence that high level officials of Fannie Mae had direct knowledge of the fact that the funds Fannie Mae received . . . were fraudulently obtained from Ginnie Mae," the Justice Department said in an October motion seeking forfeiture of the $6.5 million.

U.S. District Judge Lacy H. Thornburg in Asheville, N.C., on Monday granted Fannie Mae an extension until Jan. 21 to respond to his order freezing the funds.

"We will be reviewing the facts and, once we have completed the review, we will be working with the U.S. Attorney's office to resolve any issues," Fannie Mae spokesman Brian Faith said in a written statement.


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