A California company and its owner are being sued by the government over mortgage-backed securities it issued. Investors were allegedly told that the loans backing the securities were government-insured — even though they were not. The underlying loans were so bad that they could not be insured, involved mortgage fraud and quickly defaulted.
Radius Capital Corp. misled investors on MBS it issued, according to a lawsuit filed by the Securities and Exchange Commission on Monday in U.S. District Court for the Middle District of Florida. Also named as a defendant is Florida resident and Radius owner Robert A. DiGiorgio.
Radius, which also did business as Home Mortgage of America and Home Realty of America, and DiGiorgio are charged with violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
The California-based company allegedly sold 15 Ginnie Mae MBS for $24 million between December 2005 and October 2006. As required for Ginnie’s securities, the defendants represented that the securities were backed by loan insured by the Federal Housing Administration.
Radius reportedly earned $1 million on the sale of the securities.
Problem was, more than 100 of the 154 underlying loans were not insured by FHA nor would they qualify for FHA endorsement, according to the SEC. The borrowers on the mortgages failed to meet FHA’s requirements for debt-to-income ratios, credit histories and employment histories, among other shortcomings.
In fact, the complaint says, Radius didn’t even apply for FHA insurance on most of the loans and didn’t submit the up-front FHA insurance premiums it had collected on the loans.
In addition, many of the loan files contained red flags indicating possible mortgage fraud and inflated appraisals.
It wasn’t long before many of the mortgages defaulted, leading Radius to default on its pass-through payments. In turn, Ginnie was required to pay MBS investors — losing several million dollars in the process.
Radius, which was incorporated in 1995, has since lost its Ginnie Mae approval. In addition, it has been suspended as a corporation by the Secretary of State of California. The complaint says DiGiorgio was president and chief executive officer of the company until October 2006.
The SEC hopes to obtain permanent injunctive relief against future violations. The agency also seeks a conduct-based injunction preventing the defendants from offering MBS. Finally, the SEC will attempt to enforce disgorgement of ill-gotten gains with prejudgment interest and civil penalties.
Securities and Exchange Commission, Plaintiff, v. Radius Capital Corp. and Robert A. DiGiorgio, Defendants.
Case 2:11-cv-00116-JES-DNF, March 7, 2011 (U.S. District Court for the Middle District of Florida).
