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Lawmakers Ask Fannie To Explain Tainted Funds

By David S. Hilzenrath
Washington Post Staff Writer
Thursday, December 2, 2004; Page E02

Three House Financial Services subcommittee chairmen yesterday called on Fannie Mae to answer allegations that the company failed to blow the whistle on a mortgage fraud scam and accepted $6.5 million that it knew had been swindled from a government agency.

"We are very concerned that the U.S. taxpayers may have been put at risk" when loans were sold to Ginnie Mae, a federal housing finance agency, "after many of the same loans were determined to be fraudulent by executives at Fannie Mae," the lawmakers wrote in a letter to Fannie chairman and chief executive Franklin D. Raines.

"[I]t is our hope that Fannie Mae would actively seek to prevent such fraud," wrote Reps. Richard H. Baker (R-La.), Sue W. Kelly (R-N.Y.) and Robert W. Ney (R-Ohio), who chair the capital markets, oversight and housing subcommittees.

A federal judge in North Carolina recently ordered that $6.5 million in a Fannie Mae account be frozen, calling that money "proceeds of the criminal conspiracy."

The judge was referring to a scheme in which First Beneficial Mortgage Corp., a North Carolina firm, sold Fannie Mae millions of dollars worth of bogus mortgages. According to the Justice Department, the borrowers were straw men and the loans were not used to buy houses. The former president of First Beneficial was convicted on federal charges and sentenced last year to 21 years in prison.

When Fannie Mae learned that it had bought fraudulent mortgages, it demanded that First Beneficial buy them back, the Justice Department said, and First Beneficial sold the loans to Ginnie Mae to repay Fannie. In court papers, Justice recently alleged that "high level officials of Fannie Mae" knew that the money District-based Fannie received from First Beneficial was obtained fraudulently from Ginnie Mae.

The three lawmakers asked Raines to explain which Fannie Mae executives knew about the fraud, whether Fannie tried to inform regulators, and how Fannie could have been duped by First Beneficial.

"Fannie Mae claims to have a highly sophisticated system for approving lenders and determining the quality of the loans it purchases," they wrote. "Please describe this system for the Committee, and how this system failed in the case of First Beneficial Mortgage Company."

Fannie spokesman Brian Faith said in a statement that the company will "respond fully" to the committee and has cooperated with the Justice Department and other agencies investigating First Beneficial.

"Fannie Mae suffered millions of dollars in losses as a result of the fraudulent activities of the principals at First Beneficial," he said.

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