June 3, 2016
From The Los Angeles Times

A weird fraud case: Lender was accused of making good mortgages look bad

by James Rufus Koren

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.

Mark Olthoff, an attorney at law firm Polsinelli, said while the case has elements of garden-variety fraud – withholding information from investors, or lying to them outright – it also turns the typical mortgage manipulation scheme on its head.

“It’s a creative securities fraud,” he said. “It’s ordinarily the other way around — trying to pass off the bad loans as good ones.”

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