I just returned after sixteen days on Maui chasing wind and looking at real estate. The wind by the way was awesome, as always, and I even got my back-loops wired on my foilboard. For those of you who have not read my profile I’m big into wind and ocean sports, mainly kitesurfing and foilboarding. Maui is a mecca for wind and ocean sports and if I could, I’d call it home. Our plan when we sold our Belmont Shore home in October of ‘06 was to reinvest some of our gain in income property (we bought seven rentals in Texas) and potentially buy a place on Maui where we could eventually spend a good part of the year chasing wind and waves. I knew at the time Maui was overpriced as were most major US housing markets. Our realtor over there has kept me abreast of the market for the last two years. Periodically I would look at a closed sale by pulling public records to see what kind of financing the buyer’s had utilized. As I expected, most of the properties were being purchased with little or no money down and were showing ARM’s as the main financing instruments. I also noticed that the days on market (DOM) were extraordinarily high ranging from 180 to over 420 in quite a few cases. The norm seemed to be between 320 and 390.
Back to the trip. We arrived on May 17th and began looking at properties the very next morning. I also began talking to some of the local business proprietors who actually shared some compelling information regarding an upcoming retraction in consumer spending. One woman in particular was a psychologist who noted quite specifically that her business was off over 30%. Her take on the down-turn was simple - therapy is a luxury, not a necessity, and her clientele’s spending habits are now less luxurious. The same held true with other sectors of the local economy. I spoke with a couple of ‘activities’ brokers - you know, the guys who book you on a dive boat to Molokini, or on a sunset cruise, or on a helicopter tour. Their consensus was identical to the psychologist’s. Business was off at least one quarter versus the prior year. Kitesurf lessons, equipment rentals, and many other extras that typically thrive on the island are now feeling the pinch. I know and talked to these business owners about their feelings on the economic outlook and none were rosy. Flights were full though - I just think people are not spending as much when they get there.
Another interesting fact was the absolute lack of land sales in the Haiku area where Jeanine and I are interested. One development in particular Peahi Farms was subdivided a few years ago and made available for sale approximately two years ago. There are 16 lots total, most of them about 2 acres with unbelievable ocean views and technicolor surroundings that put postcards to shame. The price tags range from $1.3 to $2.995 million. Only one lot has sold - a very telling fact. The entire project was actually taken off the market and ‘repackaged’ recently as an environmentally friendly project - which I don’t understand because their market are people who will build absolute monstrosities and could care less about ‘wind farms’ or ‘composting’ or any other ‘green’ twist they put on these lots. These are estate lots, plain and simple.
Up the hill from Peahi Farms is another five lot subdivision that went on the market in late November ‘06. These lots are all about 3.25 acres with one lot at 6.17 acres. The prices range from $590k to $749k. Not one lot has sold. I can go on and on. I’m looking at a list of land sales (over 2 acres) in Haiku - which is a large market on Maui. In the last six months there have been only seven sales - three of them were non-arms-length transactions and should not be counted. The closing prices of the four ‘real sales’ were anywhere between 35% and 50% below the asking prices of currently listed comparable properties. In other words current sellers are chasing a market (price-wise) that virtually does not exist.
Now you have to remember that over the last five or so years Maui, like many other markets was as hot as my wife’s body - which is smokin’. Condos over there went so fast you could hardly count the days on market. Prices were whatever seller’s wanted. Buyer’s could qualify for anything - literally. Building fueled labor and spending. Tourism had rebounded from 9/11. Home equity loans supported or at least supplemented entire lifestyles. High credit scores circumvented sound underwriting. Entire populations were manipulated into believing it would never end.
Well guess what, it has ended. Maui land sales screached to a dead halt. A trickle of existing homes in affordable price ranges are making it through escrow. The ones that do are well below asking price. It seems only the truly wealthy are pulling the trigger at full pop. With a high percentage of second home speculation on the island, which I believe will be the final nail in the coffin, it is now just a matter of time. Maui, like all other markets will suffer similar foreclosure rates and their economy is highly susceptible to recession.
Of course, I could be wrong. The Fed could potentially manipulate us out of this impending slump - but I don’t think so. I think they can forestall it, but they can’t undo it. Free markets have a funny way of working themselves out. I’m counting on it. Come visit me in 2009 when I buy my lot and put up a slick looking modular home. Until then - Aloha…
Note: The reason I focus on land sales over 2 acres is that there is a tax incentive to buy ‘agricultural’ lots on Maui - which are very popular on the windward side of the island.
“There’s a sucker born every minute”, was a phrase supposedly coined by P.T. Barnum, the American circus mogul. In reality it was originally uttered by Barnum’s competitor, David Hannum, a New York banker turned showman. Hannum made the prophetic statement after Barnum had successfully convinced the media that a ‘giant human fossil’ Hannum had previously unveiled to the public was a fake and that Barnum’s newly found ‘giant human fossil’ was the real deal. Barnum’s newest sensation captured the media’s attention and the public soon flocked by the thousands to pay for and see the latest Barnum attraction. Hannum was discredited and left with a public believing his ‘giant’ was a fake. It was then he uttered the now famous words in the context of Barnum’s ability to dupe the public and the media simultaneously. http://www.historybuff.com/library/refbarnum.html
Ironically, as proven in subsequent court proceedings Hannum’s and Barnum’s ‘giant human fossils’ were both revealed as fakes. That’s a pretty funny story in my book. One liar getting the best of the other. Both of them capitalizing on public stupidity and making a mockery of the masses in the process. In my opinion anyone who paid to see either ‘giant’ should have had their money taken from them. It was their desire to believe the unbelievable that made the transaction legitimate. The same holds true for those who bought dot com stocks. Or maybe a Yugo - remember those? Or how about all the late night infommercials touting ‘get rich quick without hard work or education’ home based businesses? Or how about overpriced homes with exploding debt instruments? I say deregulate all restraints on responsible advertising and business practices and let the buyer beware. Caveat Emptor! That’s the spirit!
Wait a second. I spoke too soon. The Fed has already beaten me to the punch. By design they created the means for suckers to buy into the greatest ‘giant’ of all time. This giant however came in the form of massive debt. Damn. We should have known. When somebody offers something that sounds too good to be true, like home ownership for underqualified buyers, or the perpetual ability to access equity with cheap financing, or economic growth through the never-ending expansion of debt maybe it is too good to be true and maybe it’s my responsibility as an adult to be held accountable for my own financial decisions. Damn. Damn, damn, damn… I hate being responsible.
Who do I blame, who do I blame? How about stupidity? How about I blame the guy on Maui who just paid $1.25 million in November of ‘06 for a fifty year old unimproved four unit place over there with only 5% down then turned around and borrowed $50k from a private party only to refi that loan with a hard money loan for $75k in the face of a declining US housing market. He’s now upside down on the property - no matter what he thinks, and the rents don’t pencil. He’s also upside down on his residence back on the mainland - which he bought for $1.3 million with 100% financing in July ‘06. How about I blame that guy? Believe it or not, I actually hope it works out for him - meaning that he’s able to support the debt. Although I do hope his value crashes.
How about I blame another couple on Maui who paid about $400k for their home 7 years ago and now owe twice what they originally paid for the home and more than its present value for that matter - with no material improvements to show for it? How about I blame them? How about I blame the developers on Maui who are now holding land that they bought years ago and can’t sell it for any price? That’s a whole post in and of itself. Which by the way I’m waiting to pounce on those suckers. How about I blame the Fed? How about I blame the mortgage industry? How about I blame the guy who paid $1.4 million for my home in Belmont? How about I blame everybody for everything? The government for taxes. Big oil for gas prices. Private equity for driving the stock market into the stratosphere. The Fed for monetary policy. My neighbor for their barking dog.
You know what? I don’t blame anybody but myself. I could run for local office and ultimately state or federal office if I don’t like what’s happening governmentally. I could start a lobbying group to combat the oil industry. I can produce and distribute biodiesel (see RebelDiesel.com). I could educate myself on how to capitalize on the unwinding of the credit bubble. I can simply not buy a thing I can’t afford. I can choose to not be a sucker.
My point is this - as consumers we are responsible for our own actions. There are some conumer groups out there that offer a basis by which to make better buying decisions but as a whole, our country remains at the whim of the P.T. Barnum’s of the world. Don’t trust the Fed. Don’t trust the NAR. Don’t trust anybody but yourself. Do your homework. Don’t believe the hype. Read. Educate yourself. For every article you read supporting your view, find another that debuncts it. Be a rebel.
I’m going to continue posting on this site and on RebelDiesel.com. My next post on this site will focus on observations made while on my recent vacation on Maui - during which I spoke with numerous business proprietors and looked at tons of real estate and real estate sales data. All of it confirmed what I still believe is our trend toward recession.
Come visit our biodiesel site to learn about the new revolution…
Trust me - if you’re tracking the US housing bubble you’ll want to read this.
In the winter of 2001 my wife Jeanine and I took our annual trips over Thanksgiving and Christmas down to Los Barriles, Baja California. For those of you lacking Google Earth, Los Barriles is located south of La Paz and north of Cabo San Lucas. It is on the Sea of Cortez and is frequented during the colder winter months up north by both Canandians and Americans the latter of which are mostly west coasters. In the summer months the town reverts back to the locals and a small contingent of white folk who remain year round.
I’ve been going down to Los Barriles to windsurf and kitesurf for over fifteen years. The town is nestled on Bahia Las Palmas, the bay of palms, and is world renowned for its sport fishing. During our 2001 Thanksgiving trip we decided to buy a little piece of paradise in Los Barriles in the form of a 1,600 square metre lot with expansive two hundred degree ocean views laid out in front of us and incredible mountain vistas to our rear. The lot was perched on a ridge about ten lots up from the beach down below. The lot was considered Lote Uno in this particular subdivision, which basically means it was the spot on which the developer stood and said “This is it. This is the gem from which the others will follow.” It just means its the coolest lot.
We were the second closing in the subdivision and could not have been happier when we came back down over Christmas to sign the final papers. Now we were land owners down in Baja. I want to emphasize that we were not speculators. Our plan was to build a home where we could spend our winters and maybe pick up some rental income along the way. The town was growing. Half a dozen other subdivisions were being prepared for sale. There is great infrastructure in Los Barriles including good water, phone systems, and DSL internet already wired to our lot line.
Then we started talking to builders. There were a couple of gringo builders in town and a handful of mexicans. Since my spanish was not conducive to using a mexican builder we opted to use an American guy that was referred to us. Now here’s where the story starts to get interesting. We took our time developing plans for the home, tossing ideas back and forth via email during 2002 and going into 2003. We actually had a final set of plans drawn up and then waited for the construction bid during the spring/summer of ‘03. All during this time we had been discussing numbers with the builder. We’d been very specific about keeping the construction costs below $100 per square foot. We knew it was a realistic number to work with and we figured a 1,500 square foot place would run us $150,000 to $200,000 with changes and cost overruns. But things aren’t always what they seem in Mex.
We were shocked when the bid came in at over $300,000. We literally thought there was a mistake. I quickly got in touch with my friend who had referred me this builder and then the builder himself. They both informed me that construction costs in the area had gone up. Really? You’re not kidding. Anyway, I started making phone calls to the real estate agent who had helped us buy the lot and to everyone else I knew who either owned land or was involved in real estate down there. An interesting picture began to develop.
It seems that when we bought our lot we were the first in a wave of Americans to buy in an outright land frenzy in Los Barriles. But the frenzy was not just in Los Barriles. It was in Cabo San Lucas, San Jose Del Cabo, La Paz, La Ventena, all of which straddled the east cape and Sea of Cortez. Now, we knew there was a lot of buying going on down there. We also knew that this activity was good for the value of our property. However, we did not foresee that almost overnight builders would go from needing business to turning it away. If you couldn’t afford what they were charging, you were screwed. Some builders would even put one guy’s unfinished construction job on the back burner to go start another higher paying one. It was an absolute free for all.
By nature I ask a lot of questions. I try to pay attention to what’s going on around me. What was going on down in Los Barriles was obvious. Virtually everyone caught up in the frenzy was older than Jeanine and I. They were baby-boomers. Flush with cash from home equity loans or inherited wealth or from the sale of bubble-driven real estate back home. My observation points mostly to home equity borrowing as the fuel to the frenzy down in Los Barriles. Jeanine and I were among the youngest couple who’d bought in this wave. Mostly everyone else was a boomer.
Odd thing about boomers - they acted like they ruled the world down there. Their demeanor toward spending and trying to out-do the other guy was tangible - you could feel it in the air. I’m not being cynical either - you can ask anyone who will give you an honest answer down there and they’ll tell you the same thing. Boomers perception of themselves and their wealth was off the chart.
In 2004 Jeanine and I decided to sell our lot. We more than doubled our money. We sold to a boomer couple who were absolute assholes. I kid you not these people looked down their noses at everyone. I was more than happy to stick it to this guy when I sold. I didn’t budge one peso off of my sales price - and I was over market. Ironically over two and half years later they still have not broken ground on the ‘estate’ he claimed he’d was going to finish inside of one year. I’m guessing that popping almost half a million dollars in construction costs was more than he could handle - you’d never know by the guy’s attitude though.
The reason I’m ripping into this guy is because he epitomized the attitude of Americans who’d come down there flush with real estate equity and completely oblivious to the frenzy going on around them. The same attitude that drove the market up here - ‘oh real estate will ALWAYS appreciate in value’ was the same attitude that drove it down there. But guess what - the bubble popped down in Baja also. Their sales dropped dramatically by late 2005 and by 2006 sales were a literal trickle and prices were plummetting. Construction projects got halted. Everybody was selling and nobody was buying. I guess home equity loans only go so far. There are of course exceptions. Quite a few retirees have ample liquid cash to do whatever they want down in Los Barriles. But they too paid a premium over the last few years to buy a bit of paradise.
My friends are now all asking me how I saw this whole subprime crisis and foreclosure event and impending housing crash before it all happened. I can honestly tell them I saw it coming as early as 2003 when I got my construction bid for my place in Los Barriles. Ironically, this was about the same time I went to work at New Century where I witnessed the madness going on in subprime lending. You’ve got to wonder that something is up when people could buy million dollar homes with no money down. Or when someone could pull out three hundred grand to build a home down in Baja when their income did not necessarily justify the additional debt.
For more information on my mortgage company click on the following link - mortgage site.
I wrote the preceding three posts to shed some light on what types of individuals gravitated toward subprime lending as it grew within the mortgage industry. Simply put, all types of people were lured by the potential profits of high risk lending. Some of them were complete industry outsiders. Some of them came from conventional lending backgrounds and saw subprime as a growth opportunity. Finally, others were completely born into and bred by the subprime industry and knew nothing of conventional lending practices and the system of checks and balance built into conventional underwriting.
In the last post I mentioned there is a great divide in the lending industry between conventional and subprime lenders and the people who gravitate to one or the other. While I believe in individual responsibility in all aspects of life I also believe there is one link in this subprime debacle chain that gets overlooked in both blogs and the MSM. And that is the dynamic between the investment community that facilitated the growth of the private MBS market and the subprime lenders they used to fuel the high risk returns the MBS market demanded. Within this dynamic exists the slippery slope the US housing market now finds itself.
Consider this - banks, thrifts, and conventional mortgage bankers selling FNMA/Freddie Mac, HUD, or other A-Paper product all answer to regulatory bodies who dictate lending standards that historically acted as a system of checks and balance on free markets. The private MBS market answers only to themselves. There was absolutely no regulation over the products they created other than the free market itself. Ironically, the more outlandish the product they created the more consumers soaked it up - with subprime lenders acting as the go between.
Blogs upon blogs and even the MSM are now revealing the forces responsible for the present unwinding of the housing market and subprime lending industry. Its components and their respective roles are almost academic at this point. Sadly though, I believe it is the consumer that in the end will be left holding the bag. But don’t forget they too played their role - as did the NAR and real estate agents, home builders, mortgage brokers, flippers, speculators, the private MBS market, subprime and Alt-A lenders, investors screaming for higher returns, the Federal Reserve, and the list goes on. Individual responsibility runs deep in this event.
Where do I fit into all of this? Good question. In the beginning, I resisted subprime lending like it was the plague. But even I, the quintessential conventional mortgage broker, eventually saw subprime lending as a growth opportunity. It wasn’t until I got into the thick of it at New Century that I saw it for what it was - a shell game. Ultimately, I made my exit and here I am. My mortgage company The Funding Shop, Inc. now focuses solely on conventional lending. Our aim is to bring back an air of responsible lending to the consumer level, one customer at a time.
As for the title of this series - Nice Guys Finish Last - I suppose there is some definite truth in that statement. I most certainly passed up opportunities to pursue subprime lending as a core business model. I also most certainly could not compete in the shark tank at New Century - don’t cry for me though, my compensation while there was more than sufficient. In retrospect over the last seven or so years I sat back and watched as guys who in my opinion were and always will be mortgage hacks make un-Godly amounts of money.
So what is my future? I plan once and for all to build the most trusted name in mortgage lending. Pass it on to your friends - http://thefundingshop.com/ .
I had left my position at my friend’s company whose focus was second mortgages and took a consulting position with another start up mortgage company. The company was being formed by a young guy who I had actually gotten to know through my business partners in the mortgage company I had owned a few years earlier. This young guy had recently enjoyed much success in the infomercial arena. His product had been a ‘home-based business’ package that he sold throughout the US via the infomercial and seminar model.
His partner was also my attorney. We all ran in the same circles so the connection was not coincidental. Anyway, they were looking into the mortgage business. The attorney did have some mortgage background, thank God, but the young guy did not. They looked to me for basic guidance through the start up phases of their company. The plan was for me to consult them in the areas of marketing, origination, processing, and other structural and procedural mechanisms inherent to the lending business.
While I had been at my previous position I had developed another niche which was working quite well. The premise was simple - target homeowners who had put down less than twenty percent down payment on their homes within the last two years and approach them to remove the “PMI” payment they most likely had on their mortgage. This was in about 1998 maybe 1999 when the ‘Piggy-back’ loan was coming into vogue. What I basically did was split the client’s one loan into two loans with the first mortgage at a loan-to-value that eliminated the requirement for PMI. The second loan made up the difference and the two new payments always worked out better for the client versus their old mortgage payment plus the PMI. It was a niche that I exploited much to the satisfaction of my clients. They loved it.
Anyway, that was the first product we marketed in this new venture with the young guy and the attorney. However, they quickly turned their focus to the subprime product that now was getting some real play in the industry. The profits were huge. At the time I recommended they stay away from subprime. It was trouble I told them. Focus on the long term which I knew to be conventional loans. They weren’t sexy, but they paid the bills and they provided longevity.
To make a long story short these assholes tried to stiff me for about fifty grand in commissions - of which I was ultimately paid, with much headache, and about six months late. I should have known. Right from the get-go they were slow to pay me. These are the kinds of guys that get attracted to subprime.
So after about nine months I was gone and they’d forgotten about conventional loans. They built up on subprime product for a couple of years until they got popped for predatory lending and had to shut down the one corporation and license only to set up under another. They never lost a step. They were one of those brokers who grew to fund on their own warehouse lines (becoming a lender basically) and were ultimately selling closed loans in bulk to New Century while I was an Account Executive there - they were not my client by the way. I would never have touched any loan with their name on it for the following reasons - fraud and predatory lending. They epitomized everything that is being written about subprime lending today. They were the worst of the worst.
The lesson - there is a great divide in the lending industry between conventional and subprime lenders and the people who gravitate to one or the other. I have seen firsthand the difference in personality and the choices they make to arrive in their respective camps. Alt-A tries to straddle the tightrope between these two, as does the niche of second mortgage lenders - time will be the jury on those.
My next post will wrap up this series and bring us current to today’s market and where I see it going - and what I’m doing to improve it. For more information on my mortgage company, The Funding Shop, Inc. follow the preceeding link or visit http://thefundingshop.com/ .
Two other cases where I had involvement during the start up phases of a mortgage company, one directly and one as an observer, raise some issues regarding just what it is some of these companies are motivated by.
One company where I was merely an observer has become wildly successful as the largest independently owned funder of second mortgages in the US. The owner of the company happens to be my ex-employee. Ironically, he was the first loan officer I’d hired at my mortgage company described in the first post in this series. After my company had dissolved this gentleman went to work at a mortgage company in Lake Forest where he continued his personal success as a loan officer. A year or so later he decided to go it on his own and opened his own shop in Irvine. He brought with him a friend from the Lake Forest mortgage company whose focus was on second mortgages.
At the time they launched their little shop I signed on to originate conventional loans. During their growth phases it was obvious they were focused on the burgeoning market for second mortgages. It was also during this time that the 125% second mortgage loans were coming into vogue. They jumped on that bandwagon and began peddling loans at 125% loan-to-value to the public. We all know where that product went. As soon as housing prices took a downturn the product imploded and Wall Street pulled the plug. But this little company kept their head to the grindstone and kept peddling second mortgage product through every avenue and in every market they could.
Now, I need to be clear on this point. The gentleman who was my ex-employee and now owner of the ’seconds’ company I am referring to has every bit of integrity as I do. He does not practice predatory lending nor does he commit fraud. You do not grow a company like his and maintain regulatory compliance and grow good will as he has for over ten years without sound business practices. That said I will counter my own praises of my friend by saying that the very product they sell is indicative of the credit mentality our society lives by.
It used to be, not too many decades ago, that taking out a second mortgage was an act of necessity. Sending a child to college, weathering a disability, or adding on to a home have always been compelling reasons to take out a second mortgage. And there are other very practical reasons also. However, it is now the norm for many people to jump on a second mortgage as soon as they buy a home or as soon as a home might appreciate in value. The money often gets spent on things not driven by necessity but rather by want. I want to remodel my kitchen. I want to buy a boat. I want to buy an RV, or a Wave Runner, or I want to pay off credit cards I’ve maxed out to buy all the things I just mentioned.
The difference between necessity and want or even of sacrifice are all intertwined into our personal decisions regarding the indebtedness we are each willing to carry. Am I willing to sacrifice the forty foot RV so I can send my son to a UC? You bet. Do I need to cover my expenses if I become disabled? Possibly. Do I need granite countertops in my kitchen? No. Should I save and spend cash for all of the latter? Definitely.
Second mortgages are a slippery slope that sink our society further into debt servitude and serfdom. Necessity, want, or sacrifice are all personal choices. Our most recent economic boom was driven in large part by credit instruments such as second mortgages and home equity loans - and subprime loans of course. It’s going to be interesting to see the impact of the housing correction on our spending habits. Of that we can be sure.
Back to my friend’s company. They continue focus on second mortgages and home equity loans. Their business has slowed and they have shut down their wholesale division. My guess is they will not survive this growing foreclosure event and the resulting housing correction it is already bringing. The market for loose second mortgages will disappear and their business model will be curtailed. Are you starting to see a pattern here? Subprime lending didn’t work. Alt-A will see it’s own unwinding. Second mortgages will most likely fall to the chopping block. En masse it will be conventional lending that survives in its present form - but even it will most likely see some reform.
The next post will describe an infomercial player’s foray into the lending industry. He’s made a killing by the way - all in subprime, all against my recommendation, and all on the backs of unsuspecting borrowers. For more information on my mortgage company The Funding Shop, Inc. visit the preceeding link or visit http://thefundingshop.com/ .
I can honestly look my fifteen year old son in the eye and tell him I have never done a fraudulent loan in my entire lending career.** I can honestly tell him that I never sacrificed my morals or ethics when it has come to my professional life. Simultaneously, I would also tell him that I have made a few mistakes along the way - one which stands out would be hiring on at New Century Mortgage.
In this blog I’ve written about some of the events that led me to New Century. What I haven’t written about are a few other key events that taken in sum raise some interesting questions about the lending industry and our social makeup as a whole.
I’ll start with the early nineties. I was twenty-nine years old and had already been in the lending business for almost five years. I’d worked for World Savings for most of that time and had undergone some of the best training in the industry. A refinance boom was getting underway and I came up with a very unique business plan to capitalize on the expanding market. My only problem was capital. I had about twenty thousand dollars set aside to start my own business which was not nearly enough to do it properly. I needed a partner. A friend of mine, about six years my senior, had gotten into real estate development some years before. His partner was an extremely successful gentleman with the background and financial statements I’d need to prop up my fledgling company. A month later we’d signed a partnership agreement and I’d moved in to their suite in Laguna Beach.
I owned controlling interest in the partnership which in hindsight was the only smart thing I did in partnering up with these guys. You see, what I quickly learned was that if you’re going to go into business with someone, make sure they are in your business. This was not the case in my partnership. These two gentleman, although they had a great deal of knowledge where real estate was concerned they had no idea of the intricacies of the lending business. They saw it only as a means to an end. Whereas I saw it completely different. To me it was my life. I took pride in helping people with their life’s dream of owning a home or improving their financial structure through sound financing decisions. My partners cared only about profit.
Now don’t get me wrong - my focus was also on profit. It was our ideologies regarding how to get there where I and my partners differed. Jump forward six months to when my business plan had proven it was right on the money. What I had discovered was a hole in traditional print advertising in major newspapers where I could not only compete with but go toe-to-toe with the biggest names in lending at the time - at least on a regional basis. What I had done was place a three inch by one inch rectangular add in the LA Times which simply read in white bold type on a black background - Mortgage Rate Hotline - with our 800 number printed below. The phones literally rang off the hook. It was cheap and effective. The more ad space I bought, the more phone capacity we needed. We literally had to scale the business in advance of media purchases.
So now we’ve got a tiger by the tail. We’d moved into five thousand square feet in Irvine with an option for more adjacent space. The business quickly expanded to exceed forty employees with additional contract workers off payroll. Revenues were expanding as was the market. My friend, now my partner, who had known nothing about the lending industry before was now an expert, or so he thought.
My deal in the partnership allowed for compensation on three levels; management fees, commissions, and partnership distributions. In hindsight I actually think my partners never thought I would grow the company to the extent I had and certainly not as quickly as I had. And that’s when greed kicked in. The tone of our relationship changed and my friend became my enemy. He believed he could run the company better than I and he covertly set out to extricate me from his agenda - which had turned into one of profit at any cost. You see this was when subprime lending was first getting off the ground. We would have these subprime wholesale reps come into our office peddling this new product and I’d send them packing. I was focused on what I knew was the future - solid traditional lending product that served the consumer and the economy alike. My partner, who didn’t know his ass from a hole in the wall when it came to a good loan - one that would stay on the books - saw these new subprime loans as the key to massive profit.
So now we’re a year into the partnership - which has obviously gone sour. In a bitter dissolution we went our separate ways. I took the core employees and left them with the shit. I took what I had socked away so far and used it to set up shop on the sixth floor of the Sanwa Bank building in Irvine. By this time though the momentum had waned and the cost to restart my company was too big a drain to weather my growth plan - which had been to ride the refinance wave, build my brand during this time, maintain short term financial commitments and low overhead, and be in a cash position to weather the storm when the refinance market was over.
Nine months after we split up our partnership my ex-partners were out of the mortgage business. They fell flat on their face after I left. A year and a half after our dissolution I’d decided to sell my business and moved on. Had my partners simply let me do my thing we would have built a major player in the mortgage industry. Most everybody that was there would agree with me. The timing was perfect. We had the right business plan. We had the right people. But a couple of guys who were industry outsiders killed the whole thing because they were blinded by their own egos.
I’m going to end this post right here and will continue with two other parts to this piece, possibly three. The next part will tell of two other events similar to the one above. The third will wrap it all into summation and actually make sense of the title of this post. For more information on my mortgage company, The Funding Shop, Inc. follow the preceeding link or visit http://thefundingshop.com/ .
**Note: Clarification - I have never knowingly done a fraudulent loan. However, I can almost guarantee that mortgage brokers and/or borrowers have slipped a few loans under my nose that made it through underwriting. I will also say that I have killed more deals than I can count at the first whiff of impropriety.
Below is an excerpt from an AP article on Forbes.com regarding a new ‘All-In-One’ product from WAMU. The mortgage enables borrowers to skip the hassles of refinancing to take advantage of fluctuating rates and also to take out ‘automatic’ HELOC’s once again turning their house into a veritable credit card. Yippee! They finally did it! Now I can make irresponsible decisions and charge it to my house easier than ever!
On the surface this product may appear to offer some advantages to people who want to take advantage of interest rate fluctuations that fall in their favor. However, I guarantee you the product will be used like a credit card and nothing more. Given the time that it takes to bring a product like this to market we can also assume that it has been in the works for quite some time - like, during the madness of the equity-based lifestyle.
My question is this - Why doesn’t WAMU come out with a loan that locks in at a market rate and should rates decrease the spread between the initial rate and the now lower rate gets applied to principal? Now that’s helping a homeowner do what they should be doing - which is pay down principal. Has everyone forgotten that a mortgage is eventually supposed to pay off to a zero balance through the application of periodic principal payments? I’ll need to take a hard look at the installment note on this gem before I recommend it to anyone.
Associated Press
WaMu Offers New All-In-One Mortgage
By ELIZABETH M. GILLESPIE 04.26.07, 12:24 AM ET
Washington Mutual Inc. has begun offering a new mortgage and home equity line of credit bundled into a single loan tha