Investments Lending Servicing

SEC fines First Mortgage $12.7M, bans 6 execs for defrauding Ginnie Mae investors

Claimed performing mortgages were delinquent, resold them into new pools

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Several senior executives at First Mortgage Corporation lied about the performance of the mortgages the company originated so they could pull the mortgages out of mortgage-backed securities guaranteed by Ginnie Mae,then turn right back around and sell the mortgages back into new mortgage bonds, defrauding investors out of $7.5 million, the Securities and Exchange Commission said Tuesday.

According to the SEC, six senior executives at California-based First Mortgage, including the company’s chairman and CEO, president, and chief financial officer, pulled current, performing loans out of Ginnie Mae mortgage bonds by falsely claiming the mortgages were delinquent in order to sell them at a profit into newly-issued RMBS.

In a release, the SEC stated that from March 2011 to March 2015, First Mortgage and its senior-most executives “orchestrated a scheme” to make the mortgages appear delinquent, by delaying depositing customers’ payments on their mortgages, making it seem like the customers were behind on their payments.

In many cases, the customers were, in fact, delinquent at one point, but were making payments to get back to being current on their mortgage, but First Mortgage withheld those payments and didn’t deposit the customers’ checks to make it appear like the mortgages were still in default.

Then, according to the SEC, First Mortgage would pull the seemingly delinquent mortgages out from the Ginnie Mae mortgage bonds by abusing a Ginnie Mae rule that give issuers the option to buy back their loans if the loans are 90 days delinquent or more.

This caused First Mortgage’s Ginnie Mae RMBS prospectuses to be “false and misleading,” the SEC said.

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, First Mortgage “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.

The SEC said that these actions were taken with the “knowledge and approval” of the company’s senior-most management. 

Then, after repurchasing the loans at prices applicable to their seemingly delinquent status, First Mortgage deposited the borrowers’ checks, making the loans current.

First Mortgage was then able to resell the loans into new Ginnie Mae RMBS pools at higher prices associated with the now-current loans for an “immediate, nearly risk-free profit,” the SEC said. 

Investors, on the other hand, were wrongly deprived of the interest payments on the repurchased loans, the SEC added.

In total, the SEC said that First Mortgage engaged in at least 532 transactions involving the improper repurchase and re-pooling of loans, with total profits of $7.5 million.

According to the SEC, six First Mortgage executives were charged in connection with the SEC’s complaint, and agreed to the following:

  • Chairman and CEO Clement Ziroli Sr. agreed to a $100,000 penalty
  • Company president Clement Ziroli Jr. agreed to pay 411,421.98 plus $27,203.92 in interest and a $200,000 penalty
  • Chief financial officer Pac W. Dong agreed to pay a $100,000 penalty
  • Senior vice president Ronald T. Vargas, who headed FMC’s capital markets department, agreed to pay a $60,000 penalty
  • Senior vice president Scott Lehrer agreed to pay a $50,000 penalty
  • Managing director of the servicing department Edward Joseph Sanders agreed to pay disgorgement of $51,576.51 plus $6,811.19 in interest. Sanders cooperated in the SEC’s investigation

In total, the company and its executives agreed to pay a total of $12.7 million to settle the charges.

Additionally, each of the executives settled the charges without admitting or denying the allegations, but each executive also agreed to be barred from serving as an officer or director of a public company for five years.

“FMC and its senior executives abused their privileged access to Ginnie Mae’s securitization program by allowing greed to corrupt their business practices,” said Andrew Ceresney, director of the SEC's Division of Enforcement. “It is critical that we hold senior management fully accountable for this kind of misconduct, which we were able to accomplish here quickly due to the cooperation of company insiders.”

The SEC’s complaint can be read in full here.

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