On June 15, federal prosecutors handcuffed Lee Bentley Farkas, the former chief operating officer and current chairman of Ocala, Florida-based Taylor, Bean & Whitaker (TBW) outside of Compass Fitness & Health gym he owns. The following day, the 30-page criminal indictment filed against Farkas in the U.S. District Court in Alexandria, Virginia was unsealed and revealed 16 counts of conspiracy, bank fraud, wire fraud, and securities fraud that equaled $1.9 billion. The United States of America v. Lee Bentley Farkas complaint alleged that Farkas misappropriated funds from Ocala Funding, LLC, Colonial Bank, and the Troubled Asset Relief Program (TARP), and thereby defrauded those firms as well as Freddie Mac, Ginnie Mae, TARP, and the Federal Deposit Insurance Corporation (FDIC).
Farkas and his co-conspirators allegedly attempted to defraud the federal government of $553 million from the tax payer funded $700 billion TARP. Farkas also allegedly led a scheme to misappropriate more than $400 million from Colonial Bank; and $1.47 billion from Ocala Funding, which was owned by TBW, to cover operating losses.
Farkas bought TBW in 1990 when it had six employees, and grew it to employ 300 in its headquarters and many more in 25 branches across the nation. TBW had carved out a lucrative mortgage lending niche by manually underwriting difficult to do loans for the Federal Housing Administration (FHA). By manually underwriting mortgages that FHA’s automated underwriting system had turned down, TBW prolonged some of the risky aspects of the failed mortgage lending business model that had rested on mortgage fraud and predatory lending, which had enabled the housing and refinance boom.
The FHA loans that TBW underwrote and did not perform were one by one desecuritized from the Ginnie Mae pools and one by one sold back to TBW by Washington, D.C.-based Housing and Urban Development (HUD). As a result, TBW’s operating losses mounted with each passing year. The company’s financial problems and Farkas’ alleged fraudulent schemes started in 2002. Those losses translated into a growing amount of real estate owned (REO) and non performing loans it serviced. These were then misrepresented as assets as pledged collateral to secure additional funding to keep the company afloat and fee income coming in from new originations, securitizations, servicing, and refinances.
One of TBW’s funding sources was Ocala Funding, LLC, a wholly owned entity that came into being about January 14, 2005 to provide TBW with a line of credit to cover operating expenses and originate mortgages. Ocala Funding raised capital by selling commercial paper. Ocala Funding sold up to $1.25 billion in in commercial paper to Frankfurt, Germany-based Deutsche Bank and $500 million of the same to Paris, France-based BNP Paribas. That commercial paper was secured by TBW’s non performing mortgages and real estate owned.
Though the secondary market for mortgages collapsed in June 2007, TBW dominated a niche that permitted FHA to become the new subprime to originate mortgages for marginal and unqualified borrowers. After the collapse of the secondary market, many retail mortgage lenders looked to TBW as the means to keep business going. TBW filled the huge void left when Countrywide Financial Corporation and many other firms exited the mortgage business.
Between July 2008 and August 2009, TBW increased its FHA originations and securitization by 81 percent growing its business from $14.8 billion to $26.8 billion. TBW was able to do this, because it owned the FHA manual underwriting niche in the United States. Mortgage industry analyst Guy Cecala believed that TBW’s phenomenal growth was due to either lax underwriting or fraud.
Throughout 2008, Montgomery, Alabama-based Colonial Bank’s Mortgage Warehouse Lending Division in Orlando, Florida provided $70 billion in short-term financing to TBW for 400,000 mortgages. In 2009, Alabama’s financial regulators seized Colonial Bank, and FDIC placed the bank into receivership. On June 7, 2010, Colonial BancGroup, Inc., the parent company, filed for bankruptcy. Winston-Salem, North Carolina-based BB&T Corporation took control of 46 branches and $20 billion in deposits. Colonial BancGroup’s stockholders were wiped out. FDIC insured all of the bank deposits.
In August 2009, Washington, D.C.-based Housing and Urban Development (HUD) pulled its authorization away from TBW and Ginnie Mae assumed TBW’s entire government loan portfolio. That intervention shut TBW down and over 1,000 “traumatized” TBW employees became suddenly unemployed. Farkas’ closely held company filed for Chapter 11 bankruptcy protection on August 24, 2009. Prior to this, TBW was the largest non depository mortgage lender in the nation. TBW’s countless financially desperate and unqualified borrowers became totally out of luck.
The federal government also alleged that Farkas misappropriated $22 million in TBW funds for personal use, and as a result, demanded forfeiture of five properties in Florida and Georgia, a 1929 Model A Ford, a 1937 Pack CV, a 1958 Mercedes Benz Cabriolet, a 1963 Rolls Royce, and five other luxury cars.
Though the charge against Farkas is for $1.9 billion, actual losses approach $8 billion. Farkas’ scheme resulted in FHA and Ginnie Mae’s largest loss on record of about $3 billion. Freddie Mac anticipates $1 billion in losses as a result of TBW. As a result of Farkas and the 1,000 “traumatized” TBW employees, Colonial Bank, one of the top 50 banks in America, failed making it the worst for 2009 and the sixth worst bank failure in history. The FDIC paid out $4 billion in connection with Colonial Bank, and is liable for a large percentage of its $25 billion loan portfolio.
Anthony C. Cochran of the Atlanta, Georgia-based law firm Chilivis, Cochran, Larkins & Bever LLP said, “Mr. Farkas will enter a plea of absolutely not guilty, will vigorously defend against the charges and looks forward to having his day in court to clear his name.” If convicted, Farkas could get between 20 and 30 years for each count in the indictment, and then be placed in a cell the size of a bathroom.
James M. Cole, President Barack Obama’s nominee for deputy attorney general, testified on June 15 during Senate confirmation. Regarding the financial crisis Cole said, “We need to hold people accountable ….One of the main ways to do this is to go after the individual executives who are responsible. It is they who will go to jail, they who will suffer the consequences.” To date, no high level executive has been imprisoned in connection with mortgage fraud, predatory lending, or the financial crisis that devastated the American and global economy.
The sources used to prepare this report included United States of America v. Lee Bentley Farkas (both criminal and civil complaints), Department of Justice, Securities and Exchange Commission, The Colonial Bancgroup, Inc. Form 8-K, Housing and Urban Development, Ginnie Mae, Taylor, Bean & Whitaker Chapter 11 Bankruptcy Filing, Business Week, The New York Times, The Washington Post, CNBC, Bloomberg, St. Petersburg Times, and National Mortgage Professional Magazine.
Author of Mortgaged and Armed
(coming late-July 2010 on Amazon.com)