Regulators Audit Mortgage Broker in Sherman Oaks : Investments: State officials who are reviewing Property Mortgage Co.’s books say it is too early to tell what the problem might be.

State regulators are investigating Property Mortgage Co., a major mortgage broker in California, after receiving reports from the public that it has stopped brokering new loans and suspended payments to investors who provided the cash for many of those loans.

Randy Brendia, regional manager in Los Angeles of the state Department of Real Estate, confirmed Monday that his agency is auditing Property Mortgage to determine the problem.

“We are currently looking at their books and records,” Brendia said. He said it is too early to say what the audit might reveal.

Officials of Property Mortgage, which is located in Sherman Oaks, did not return repeated telephone calls requesting comment. State records show that the company was incorporated nearly 20 years ago, and its principals are Elliot R. Fine and Stanley Glickman.

The company arranges mortgage loans to borrowers using cash that primarily comes from investors, and it is a major mortgage broker in the state, according to people familiar with the company’s operations and based on pending lawsuits in Los Angeles Superior Court that involve Property Mortgage. Some of the investors put their money in a Property Mortgage affiliate named SLGH Investors Inc., and Property Mortgage acts as the broker of the loans, according to court records.

Barry S. Glaser, a Los Angeles lawyer who helps Property Mortgage collect from borrowers who are in bankruptcy proceedings, said he had no information about the company’s apparent problems. He said, “I am doing everything in my power to have these bankruptcy matters resolved so that money can come in to Property Mortgage. I expect that in 60 to 90 days, a substantial amount of money will come in. We believe the company will survive.”

Gary Judis, president of Aames Home Loan in Los Angeles and chairman of the California Independent Mortgage Brokers Assn., said Aames and certain other mortgage brokers concentrate on residential house mortgages, but Property Mortgage focuses much of its effort on arranging loans for commercial properties.

Because of the economic recession and the real estate slump in California, one possibility might be that too many of Property Mortgage’s borrowers defaulted on their loans, leaving the company unable to pay its investors. If Property Mortgage got into a cash crunch, it would not be alone.

Pioneer Mortgage, a La Mesa, Calif.-based mortgage broker that operates similarly to Property Mortgage, filed for reorganization under Chapter 11 of the federal bankruptcy laws on Jan. 9 because too many borrowers had defaulted on loans that Pioneer arranged, leaving Pioneer unable to relay payments to its 2,000 investors.

Pioneer, with about $250 million in investors’ money tied up in loans when it filed Chapter 11, was well-established, had a record of making regular payments to investors and focused on commercial properties, traits reportedly shared by Property Mortgage.

According to court records, the loans that Property Mortgage makes are sometimes secured by second trust deeds, that is, second mortgages on properties that already are acting as the collateral for first mortgage loans. Second mortgages carry additional risk--they would be subordinate to the first mortgage in terms of repayment should the borrower get into financial trouble--and borrowers who need “seconds” or even “thirds” often find traditional lenders such as banks and thrifts unwilling to extend the loans.

So the borrower turns to brokers such as Property Mortgage. And to compensate for the extra risk, the second mortgages typically carry relatively high interest rates that can be several points higher than a conventional first mortgage.

A conventional fixed-rate mortgage today can carry a rate of 10% or less, but a second mortgage through a broker might cost 13% to 15%. Those high yields attract investors willing to make the loans. In addition, for arranging the loans brokers earn a sizable commission, which can amount to 5% or more of the loan amount.