“It’s a creative securities fraud. It’s ordinarily the other way around — trying to pass off the bad loans as good ones.”
Wait, What? Foreclosure Fraud Switcheroo: First Mortgage Corporation Settles with SEC for Making Good Loans Look Bad
From the LA Times:
In countless cases against banks and other lenders over the last few years, investors and federal regulators have made basically the same argument: that lenders committed fraud by hiding the flaws of risky mortgage loans and passing them off to investors and the government as safe, solid ones.
But how about a case against a lender that did the opposite, taking good loans and making them look bad?
That’s the twist in the tale of First Mortgage Corp., a defunct Ontario mortgage lender that this week agreed to pay $12.7 million to settle a first-of-its-kind civil fraud case brought by the Securities and Exchange Commission.
The SEC alleged that First Mortgage pulled a switcheroo with the investors that purchased its loans.
First Mortgage told investors that some borrowers had fallen months behind on their loans, when in fact the company had received – but not deposited – payments from those borrowers, according to the suit, filed by the SEC in federal court in Los Angeles this week.
That allowed First Mortgage to repurchase those loans at a discount, deposit the payments and resell the now-squeaky-clean loans at full price to other investors, giving the company “an immediate, nearly risk-free profit,” according to the suit.
The SEC alleged that First Mortgage and its executives did this with hundreds of mortgages between 2011 and 2015, reaping profits of $7.5 million.
Well, that sure is a first…
From the SEC:
U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23553 / May 31, 2016
Securities and Exchange Commission v. First Mortgage Corporation, et al., Civil Action No. 2:16-cv-03772 (C.D. Cal., filed May 31, 2016)
The Securities and Exchange Commission today announced that a California-based mortgage company, and its six most senior executives, have agreed to pay $12.7 million to settle charges that they orchestrated a scheme to defraud investors in the sale of residential mortgage-backed securities guaranteed by the Government National Mortgage Association (Ginnie Mae RMBS). As alleged by the SEC, the defendants pulled current, performing loans out of Ginnie Mae RMBS by falsely claiming they were delinquent in order to sell them at a profit into newly-issued RMBS.
First Mortgage Corporation (“FMC”) is a mortgage lender that issued Ginnie Mae RMBS backed by loans it originated. The SEC alleges that from March 2011 through March 2015, FMC caused its Ginnie Mae RMBS prospectuses to be false and misleading by improperly and deceptively using a Ginnie Mae rule that gave issuers the option to repurchase loans that were delinquent by three or more months. FMC, with the knowledge and approval of the company’s senior-most management, purposely delayed depositing checks from borrowers who had been behind on their loans, falsely claiming to both investors and Ginnie Mae that such loans remained delinquent when in reality they were current. After repurchasing at prices applicable to delinquent loans, FMC was able to resell the loans into new Ginnie Mae RMBS pools at higher prices applicable to current loans for an immediate, nearly risk-free profit. Investors, meanwhile, were wrongly deprived of the interest payments on the repurchased loans.
The executives charged with fraud in the SEC’s complaint filed in U.S. District Court for the Central District of California include:
- Chairman and CEO Clement Ziroli Sr., who agreed to a $100,000 penalty.
- Company president Clement Ziroli Jr., who agreed to pay $411,421.98 plus $27,203.92 in interest and a $200,000 penalty.
- Chief financial officer Pac W. Dong, who agreed to pay a $100,000 penalty.
- Senior vice president Ronald T. Vargas, who headed FMC’s capital markets department, and agreed to pay a $60,000 penalty.
- Senior vice president Scott Lehrer, who agreed to pay a $50,000 penalty.
- Managing director of the servicing department Edward Joseph Sanders, who agreed to pay disgorgement of $51,576.51 plus $6,811.19 in interest. Sanders cooperated in the SEC’s investigation, and no penalty is assessed against him.
In settling the charges without admitting or denying the allegations, each of the six executives agreed to be barred from serving as an officer or director of a public company for five years.
The SEC’s complaint alleges that FMC, Ziroli Sr., Ziroli Jr., Dong, Vargas, Lehrer, and Sanders violated Sections 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act, and Rule 10b-5(a) and (c). The complaint also alleges that FMC violated Rule 10b-5(b). The settlements are subject to court approval.
The SEC’s investigation was conducted by Allison Herren Lee and John B. Smith from the Complex Financial Instruments Unit in the Denver Regional Office. They were assisted by Dugan Bliss and Judy Bizu, and the case was supervised by Laura M. Metcalfe and Michael J. Osnato. The SEC appreciates the assistance of Ginnie Mae.