Two years after a fast-growing California lender swooped into the Twin Cities area to feed at the bottom of the residential mortgage market, it is alleging that it was hoodwinked by a cabal of local real estate and finance players.

WMC Mortgage Corp. undoubtedly was defrauded by some who sought to make a quick buck off borrowers with poor credit through the scam known as mortgage flipping. Flips involve buying property and reselling it for huge gains within hours or days, and rely on bogus appraisals.

But was WMC entirely a victim? Or did it self-inflict some of its wounds by pushing too hard and fast in the risky but exploding market of subprime lending? WMC's aggressive tactics appear to have increased its vulnerability to flips, judging from court records, mortgage industry veterans and WMC's own marketing.

"They simply don't do some of that due diligence," said David Ramp, an assistant state attorney general who has investigated fraud in the subprime lending industry.

"The Twin Cities schemes were the most sophisticated we have seen, and we are cooperating with authorities who are pursuing the entities involved in these schemes," WMC said in a statement.

It said that its loan approval standards were consistent with other subprime lenders, but that it has tightened them after discovering "there were opportunities for unscrupulous parties to cheat WMC."

WMC is an emerging force in the lending segment that caters to house-hungry borrowers with problems ranging from no credit history to bankruptcies. Such subprime mortgage lending has exploded in the 1990s, especially as those in the subprime niche were joined by traditional bankers drawn by the prospect of earning higher profits by lending at interest rates higher than those in the conventional mortgage market, where margins have thinned.

WMC claims that last year it topped the segment of the subprime market that wholesales first mortgages, with $4.2 billion in volume. That's tenfold growth in two years. Wholesalers fund mortgages that are brought to them by independent brokers who act as middlemen between homebuyers and their agents, and national lenders. Those mortgages often are resold to investors.

Subprime lenders take on borrowers with credit problems that traditionally frightened off bankers. Such borrowers range from those graded by lenders as A-or B-credit -- just out of reach of conventional loans because of minor late payments -- to those graded C or D because of such serious credit problems as chronic delinquencies, foreclosures or bankruptcies.

Lenders plunged into the subprime market confident that they were protected against losses from expected foreclosures because the value of the houses backing the mortgages was substantially more than the debt. But the inflated appraisals typical of flipped mortgages deprived lenders of their collateral if properties were foreclosured.

Aggressive loanmaking

Even within the risky subprime industry, WMC's risk-taking attracted notice. Moody's Investors Service, for example, noted WMC's aggressive loanmaking in 1997, when it evaluated the first pool of mortgages WMC offered on Wall Street.

"WMC's underwriting programs were more aggressive than that of the average subprime issuer," Moody's told investors, saying WMC was willing to finance borrowers with higher debt loads and those with more recent bankruptcies. Last year, it called WMC mortgages in another pool "riskier than average."

WMC's risk-oriented lending also stood out among brokers.

"We were told, 'Anybody can do A-and B-credit loans, but nobody can do C-and D-credit loans,' " said broker Mitchell Cox, recalling WMC's 1997 sales pitch. "That was a niche that they were very aggressive in pursuing."

Cox is among 60 local defendants sued by WMC this year for allegedly conspiring to defraud the lender through three flipping rings. The text of WMC's civil complaint is nearly four inches thick. Cox and other defendants alleged to be part of a flipping ring headed by Nedal Abul-Hajj have mounted a vigorous defense.

They say that the deals cited as flips by WMC were bona fide housing rehab projects that justified a jump in resale prices, and that there was far more time between when the properties were bought and resold than is typical of flip sales. Abul-Hajj has filed supporting affidavits from local landlords and a city inspector.

WMC said in written answers to questions posed by the Star Tribune that it doesn't know how many of its Twin Cities area mortgages were flips, even a year after the flipping scandal broke in the Twin Cities. That's despite quickly gathering 20 underwriters who worked for weeks last summer at a Hilton hotel near its Woodland Hills, Calif., headquarters, with orders to review hundreds of WMC's Minnesota loans for suspect files.

Ramp, a former Legal Aid attorney, said WMC told him it may have some 350 flips among its Minnesota mortgages. A locally based firm that reviewed hundreds of suspect appraisals for Twin Cities area mortgages concluded that the number of WMC flips could be as high as 500, with several million dollars in losses.

A flip hot line was established last month by an agreement between WMC and Legal Aid aimed at writing down mortgages for flip victims. The settlement avoided a potential class-action lawsuit against WMC by flip victims. It has attracted 226 callers in just over a month, with 78 people qualified so far as flip victims financed by WMC, and another 106 borrowers considered possible flip victims financed by either WMC or other lenders. Those figures don't include WMC mortgages to "straw buyers" who bought flipped homes in league with flippers.

'Now I'll be homeless'

One flip victim who didn't qualify for flip relief was Mary Gaines, who said her income had fallen so much that she didn't meet guidelines for refinancing at her northeast Minneapolis home's real worth. She and her sister, with whom she had bought the house, moved out in late June after WMC foreclosed.

Gaines said she holds WMC accountable for the flipping of her house. "They're to be responsible for the [brokers and sellers] who send applicants to them. They have to check them out. If they don't, who will?" said Gaines, adding that she found WMC inflexible.

"Now I'll be homeless. My children will be homeless," said Gaines, who is spending $55 a night to stay at a motel while she seeks housing.

WMC steadfastly has asserted that it was victimized by flippers in league with appraisers and brokers. Although it also has funded some flipped mortgages in Milwaukee and Baltimore, it has emerged as the dominant lender in flipped transactions identified in the Twin Cities.

Hotbed of flipping

The company cited several factors it says made the Twin Cities a hotbed of flipping. They include the low-income housing shortage, the absence of WMC representatives based in this area when the company was lending here and a strong employment market producing more potential borrowers. It also cited a backlog in filing land documents by county recorders so that not all mortgage and deed transactions were available, and the state's limited regulatory controls over mortgage lenders and brokers.

The regulatory climate for mortgage lending and brokering will tighten next month when a licensing law passed in 1998 imposes penalties for those violating standards. Minnesota lagged behind most states in imposing such regulation.

But even without tough regulation, critics like Ramp have asked whether WMC could have done more to deter fraud. WMC said its underwriters and a separate quality-control department filter applications for fraud after they are forwarded by brokers.

"We thought we were dealing with legitimate brokers; obviously in some cases we were not, and like other mortgage lenders, we suffered the consequences," said Stephen T. Hicklin, a WMC vice president and lawyer.

But others dispute WMC's contention that the key figure in its collateral-based lending -- the appraiser who valued properties -- was chosen by brokers who originated loans. Brokers said they had to choose from a list of national appraisal firms selected by WMC, and that WMC dictated both how closely the appraisals were reviewed and ultimately whether to grant loans.

WMC approved some loans despite information available on the Internet that showed appraisals it reviewed were sometimes close to twice a property's value as estimated by local assessors. The high appraisals allowed flippers to profit from the scam and left unsophisticated borrowers buried in debt.

The loans were considered by brokers and lenders whose economic incentive is to approve them. That's because of commission-based compensation for such positions. Underwriters at WMC are paid straight salaries, which is supposed to provide a brake against making unwise loans. In WMC's case, efforts to attract loans from Twin Cities brokers were headed by a sales manager who is married to a WMC underwriter. WMC declined to comment on whether that couple's relationship posed an obstacle to weeding out fraudulent loans, as critics allege.

Subprime loans generally also yield higher fees for the brokers who sent them to lenders for approval, though they often require more fact-checking before the deal and more attention from lenders afterward.

Critics of WMC say the company's lending practices set it apart from other subprime lenders.

'All kinds of crazy loans'

"I have never seen a company that has been this aggressive," said Ben Taylor, a Golden Valley broker. "They were doing all kinds of crazy loans."

Taylor did about 18 mortgages with WMC. The company didn't sue him, though it sued the broker for whom he worked when he did the deals. Taylor said WMC tended not to impose the kind of closing conditions on loans that other lenders did, making them easier to close. Others complain that WMC sometimes signed off on those conditions even if they were not met, particularly late in the month, to meet quotas.

"They were doing anything they could do to push these deals through," Taylor said.

Taylor and others say WMC more often required less paperwork on its borrowers and their properties. Taylor said WMC typically lent a higher percentage of a home's value -- by 5 to 10 percent -- than competitors. That left it less cushion if the loan was foreclosed, particularly if the appraisal overstated the property value.

WMC recently told securities officials that roughly one in seven mortgages in a group of loans it made in 1998 had provoked a foreclosure notice or was in bankruptcy.

WMC's lending in Minnesota plummeted after the flip scandal broke in mid-1998. In WMC's first sale of mortgages to investors in 1997, loans originating in Minnesota represented 7 percent of the $202 million pool -- and a lower-North Side Minneapolis ZIP code was the greatest concentration in the entire nation. But in its most recent sale to investors, Minnesota loans made up only 1.8 percent of the pool.

WMC says it has tightened its loan standards after encountering Minnesota flips, but it has offered new incentives to its sales staff that one banking magazine described this year as signaling a return to ostentatious lending: WMC announced in March a program that awarded the use of a Porsche in April to the top-volume sales representative in each of its seven regions.