Lenders Go Bankrupt as Pigs Get Slaughtered

The Inside Buzzzz Pigs Get Slaughtered as Lenders Go Bankrupt

By Tony Evans

shut down mortgage companyOf the top 40 mortgage lenders, eight went bankrupt in 2007. So far this year just in California, Attorney General Jerry Brown has shut down seven “bait-and-switch” mortgage companies, including Lifetime Financial. Brown also has the name, address and phone numbers of more vultures who took advantage of California borrowers and the long fingers of the law may be coming your way. Get your one-way train ticket, pal!

For the uninitiated, hard money lenders form a group of private investors, who promise monthly interest payments as high as 12% to 14%. Naturally, you would never get that kind of deal at any bank or credit union, so you take the bait, and run to your nearest hard-money lender like a person who hasn’t eaten in two weeks – greenbacks in hand.

You’re taking a chance, of course, but usually this type of lender does offer some semblance of protection for your investment by ostensibly placing it in ‘A-rated’ properties secured by real estate. From all appearances, your investments looked pretty rosy until last spring (2007) when things started a gentle nose dive. Sometimes you’re the bug – sometimes you’re the windshield!

To compound the headache, new home builders, individuals and “spec” borrowers now find the door about an inch from being closed when it comes to banks and other lending outlets who used to say, “C’mon in, the money’s fine!” They may still have the cash but they’re not lending it out like the ‘ole days. So, if you’re looking for new construction funds, fuggeddaboudit!

Here’s my question! Did I fire six shots or only….no, that’s not right. Let’s start again. Did you lose your 12% to 14% “monthly cash envelope” or was it stolen?

That brings up a sore subject for some of you private investors, who may find yourself holding the proverbial empty bag of “fat-as-a-lamb-chop” high interest payments you were pocketing when you invested with hard-money lenders, who provided builders, individuals and “spec” borrowers your hard earned cash. (They couldn’t get it anywhere else).

They said it was a good deal, since it was secured by real estate. Now, in some areas, the money spigot that was spewing gold has dried up, and some owners of the hard-money offices have closed shop and are lounging on the beach in Cabo San Lucas, smoking a cigar and sipping a Mai-Tai – hold the paper umbrella, waiter.

One hard-money lender’s failure hit the central coast of California. Over 100 private money investors had placed their faith in a company called Estate Financial to the tune of about $650,000, and now the situation has mushroomed into a full-blown nightmare that has left developers unable to finish projects all over central California, and investors wondering if they will ever get any money back.

Naturally, the owners of Estate Financial blame the firm’s problems on the slow housing market and the national credit crisis exacerbated by troubled sub-prime loans. They further added that many of the unfinished projects may be refinanced (fat chance of that) or foreclosed. You wonder where all the money went, but you can be sure this company, much like many hard-money lenders, received their fees up front along with a servicing fee on the monthly paperwork.

Last I heard the investors hired a law firm, notified the area District Attorney, and filed complaints with the State of California Department of Real Estate and Department of Corporations. By now there’s probably a sign on the glass front door of Estate Financial that reads: On Vacation. Yikes!

Here’s a warning for you HP readers who salivate at the thought of dumping your pension savings into a hard-money real estate construction deal thinking 12% to 14% is about as good as it gets. Use common sense and check things out. Coast to coast in this troubled market many lenders are on a death watch, so for now, put your money in a sock, and hide it behind a phony picture frame, where you’ll know where it is. Think: P.T. Barnum.

Published April 2, 2008

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