Resource Bancshares Mortgage Group's $390 million deal to buy Walsh Holding Co. is being delayed while Resource looks into fraud allegations against Walsh.
Walsh, a subprime lender that Resource agreed to buy in April, is under investigation by New Jersey and the FBI in a suspected land-flipping scheme. Land flipping is the illegal inflation of property and loan values through a series of sham sales.
Walsh is suing the real estate agents and mortgage brokers that directed the loans its way.
Resource shareholders were to vote on the deal this month. But Steven Herbert, Resource's chief financial officer, said the deal has been put on hold until Resource completes its own review.
The land-flipping allegations surfaced in June, just two months after Resource, in Columbia, S.C., agreed to buy Walsh, Parsippany, N.J. Resource is being sued by a former employee who claims that Resource has engaged in fraudulent activity. Resource is suing the employee, claiming extortion.
Resource filed its complaint July 24, a day before R. Michael Watson, formerly a director of human resources and senior vice president for Resource, filed his complaint.
Mr. Watson alleges in his lawsuit that he and other employees found "a scheme of fraud" at Intercounty, Resource's retail production subsidiary.
According to Resource's suit, Mr. Watson said that unless he was paid, he would inform Walsh that he was fired because he knew of fraud at Intercounty and intended to tell Walsh about it.
The Resource complaint does not say why Mr. Watson was fired, but it alleges that he issued unauthorized pay raises for himself and others.
Mr. Watson claims in his complaint that Resource discussed a deal as early as summer 1996. But according to documents filed by Resource with the Securities and Exchange Commission, no talks with Walsh took place until January of this year.
Mr. Herbert said Mr. Watson's claims of a widespread problem at Intercounty are inaccurate. Mr. Herbert said that of the more than 5,000 loans by Intercounty from March 1995 to June 1996, just 14 were reviewed for fraud and that only one was found to be problematic. He added that the loan in question has paid out.
The deluge of bad news comes on the heels of a decent second-quarter earnings report last week. The company's net income was $7.4 million, a 17.5% increase over the second quarter of 1996.
Gareth Plank, an analyst with UBS Securities, said Resource's production margins were boosted by its new subprime division. Resource started to originate subprime loans last year and bought a wholesale subprime originator, Meritage Mortgage Corp., this year.
Mr. Plank voiced concern about what would happen if the Walsh merger were called off. Resource originated $133 million of subprime loans in the first half of 1997, but a merger with Walsh could propel B and C originations to more than $1 billion.
"A big part of 1998's projected earnings are coming out of Walsh," Mr. Plank said.
