U.S. agencies trying to recoup mortgage scam losses linked to Taylor Bean
Saturday, June 19, 2010
Federal agencies that saw billions of dollars vanish in an alleged mortgage scam involving one of the nation's largest lenders are seeking to recoup the losses.
The U.S. government this week accused Lee Bentley Farkas, founder of the now-defunct mortgage firm Taylor, Bean & Whitaker, of masterminding complex mortgage schemes that targeted government agencies and led to the collapse of Colonial Bank, one of the nation's largest regional banks.
On Friday, government-owned mortgage financier Freddie Mac, based in McLean, said it might have lost at least $1.8 billion, more than it had previously disclosed, in its dealings with Taylor Bean. It has filed a claim in Taylor Bean's bankruptcy proceedings to recoup that money. But if it fails to do so, taxpayers could be on the hook because the government has pledged to cover Freddie's losses.
Other agencies hit by the alleged scam -- the Federal Housing Administration, Ginnie Mae and the Federal Deposit Insurance Corp. -- have funds available to absorb losses and would only turn to taxpayers if those funds became depleted.
Legal experts say that even if the agencies recover money, it is unlikely they would get enough to make up for the losses.
"Rarely in my experiences are there enough funds available to pay back the agencies 100 cents on the dollar," said Walter Stuart, a New York attorney who specializes in financial institution litigation.
Earlier this week, federal authorities arrested Farkas, 57, accusing him of covering up losses at his firm and creating fictitious mortgage assets, among other scams. He also is accused of trying to defraud the Treasury Department of $553 million from its rescue fund for banks. Farkas, through his attorney, has denied wrongdoing.
The FHA and Ginnie Mae could potentially get hit with more than $3 billion in losses, said Kenneth Donohue, the Department of Housing and Urban Development's inspector general. FHA and Ginnie Mae halted business with Taylor Bean in early August. The company shut down one day later.
Taylor Bean was one of FHA's largest business partners. The company would borrow money from Colonial to buy FHA-insured home loans from small lenders. It would pool the loans into securities and sell them to investors. Ginnie Mae would then guarantee those securities.
Federal prosecutors allege that Ginnie Mae continued to approve Taylor Bean as a securities issuer, and increased the amount of securities it could issue, based on false financial data that Taylor Bean submitted to Ginnie Mae.
If federal prosecutors recoup money, some of it could go back to the FHA insurance fund or to the general treasury, Donohue's spokesman said.
The FDIC also has money at stake. It took over Colonial in August and had to pay out slightly more than $4 billion from its insurance fund to cover the cost of the collapse and make its depositors whole, agency officials said.
FDIC officials said they have two options for recouping that money: work with the Justice Department or file a separate civil lawsuit. No decision has been made on whether to pursue civil action, they said.
Any recovery in civil cases would be paid to the failed bank's creditors, with depositors at the front of the line, an agency spokesman said.
The Securities and Exchange Commission launched a civil case this week against Taylor Bean. It is seeking the return of ill-gotten gains and penalties plus interest from Farkas and his company, though the court handling the case has not yet set dollar amounts. The court also will decide whether that money will go to Treasury or a fund that repays investors harmed by such scams.