September 21, 2020

High & Low Finance: After Years of Red Flags, a Conviction

Fannie Mae stopped doing business with the firm, called the Taylor Bean Whittaker Mortgage Corporation.

For Taylor Bean, it was a crisis. Its checks bounced.

But Mr. Farkas scrambled, and Taylor Bean survived to commit more frauds.

This week, Mr. Farkas, 58, was convicted of 14 counts of fraud and conspiracy in what had become a $2.9 billion scandal.

Testifying in his own defense in federal court in Alexandria, Va., Mr. Farkas explained that in 2002 Taylor Bean had sold eight real loans to a lender who resold them to Ginnie Mae, the government agency that buys loans guaranteed by the Federal Housing Administration. When the loans were found to be ineligible for F.H.A. guarantees, Ginnie Mae demanded its money back.

Taylor Bean did not have the cash. So it created fictitious loans and used them as collateral to get the money from a bank. The loans were not supposed to be sold, he said, but a subordinate mistakenly put them in a group of loans to be sold to Fannie Mae.

“I had no intention of paying payments on those loans,” he testified. “It wasn’t my obligation. It was simply a way to keep track of it, and it was, it was an idea I had that probably wasn’t a great idea, but it was an idea that I had how to do it.”

It was also an idea that indicated something very strange was happening at Taylor Bean. It should have been the end for the company.

But it was not. Fannie Mae would no longer do business with Taylor Bean, but there was still Ginnie Mae as well as the other government-sponsored enterprise, Freddie Mac.

“Ginnie Mae did not do anything,” Mr. Farkas testified. “Freddie Mac came down and sent the head of, head of the division that dealt with us and all these other people, and they decided that they would let us, let us live.”

The fraud would last for seven more years, ending in 2009 because Taylor Bean’s principal bank, Colonial Bank of Montgomery, Ala., was itself in danger of failing. Mr. Farkas came up with a scheme to appear to recapitalize the bank, and thus get federal bailout money, but it did not work.

Fannie escaped unscathed. Freddie and Ginnie did not. Two major European banks, Deutsche Bank and BNP Paribas, thought their $1.68 billion in loans was fully secured by collateral. But only a tenth of that collateral was real. Colonial had lent hundreds of millions on the security of mortgage loans that were either nonexistent or had already been sold to someone else.

Mr. Farkas was the seventh person convicted in the case. The witnesses against Mr. Farkas included the other six — four executives from Taylor Bean and two from Colonial Bank, all of whom pleaded guilty. Mr. Farkas was sent to jail and is awaiting a sentence that is almost certain to leave him imprisoned for life.

The Justice Department, which has been criticized for the paucity of criminal charges stemming from the financial crisis, celebrated the verdict. “His shockingly brazen scheme poured fuel on the fire of the financial crisis,” an assistant attorney general, Lanny A. Breuer, said. The United States attorney in Alexandria, Neil H. MacBride, said Mr. Farkas had orchestrated “one of the longest and largest bank fraud schemes” ever seen.

Mr. Farkas did not prove to be a very good witness on his behalf. He insisted no crime had been committed, but his understanding of the law seemed to be a little unusual.

Patrick F. Stokes, a deputy chief of the Justice Department’s criminal fraud section, asked Mr. Farkas if he thought Taylor Bean’s agreement with Colonial Bank allowed the mortgage firm “to sell fraudulent, counterfeit, fictitious loans” to the bank.

“Yeah, I believe it does,” he replied.

“It’s very common in our business to, to sell — because it’s all data, there’s really nothing but data — to sell loans that don’t exist,” he explained. “It happens all the time.”

The second-most important player in the fraud, after Mr. Farkas, was Catherine Kissick, the head of Colonial Bank’s Mortgage Warehouse Lending Division. Her division was in Ocala, Fla., which was also Taylor Bean’s headquarters, and she appears to have been hired by Colonial to enable it to get Taylor Bean’s business, which she had handled for her former employer, SunTrust.

Article source: http://feeds.nytimes.com/click.phdo?i=81b5927bc8dfa97370c4c6960049ed6d

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