The U.S. Securities and Exchange Commission said that First Mortgage Corporation (FMC) and six of its executives will pay $12.7M to resolve charges accusing them of running a RMBS fraud scam to bilk investors. The Government National Mortgage Association, also known as Ginnie Mae, guaranteed the residential mortgage-backed securities. The mortgage lending company is the one that issued the Ginnie Mae RMBS and the securities were backed by loans that FMC had originated.
According to the regulator, from 3/11 to 3/15, FMC’s top executives withdrew performing loans from Ginnie Mae residential mortgage-backed securities by making false claims that they were delinquent so that it could sell them into newly issued RMBS and make a profit. The mortgage company’s improper and deceptive use of a Ginnie Mae rule giving issuers the choice to rebuy loans that had been delinquent for at least three months caused the prospectuses of the original RMBS to become misleading and false.
The SEC also claims that FMC purposely held back on depositing the checks of borrowers who were late on their loans by making false claims to Ginnie Mae and investors that these loans had stayed delinquent when they were, in fact, current. In its complaint, the regulator said that FMC’s top management approved these actions.
The SEC said that after making buybacks at prices that applied to loans that were delinquent, the mortgage lender resold them again into new Ginnie Mae RMBS pools. They did so at prices that were higher than what the current loans warranted and for a profit that was immediate and almost free of risk. While this was happening, investors did not get the interest payments owed to them on the repurchased loans.
By settling, FMC and its executives are not admitting or denying the charges. The six executives, however, are barred from serving as a pubic company director or officer for five years.
SEC fines First Mortgage $12.7M, bans 6 execs for defrauding Ginnie Mae investors, HousingWire, May 31, 2016
Read the SEC Complaint (PDF)