'Deal with Devil' burns subprime homeowner
December 23, 2007
By Bob Ivry
One week in 2002, Daniel Sadek was $6 000 (R42 000) short of covering the payroll for his new subprime mortgage company, Quick Loan Funding. So he flew to Las Vegas and put a $5 000 chip on the blackjack table.
Sadek says he was dealt a jack, then an ace - blackjack. Quick Loan Funding would survive and, for a while, prosper as one of 1 300 mortgage lenders in California vying to satisfy Wall Street's subprime thirst.
As home prices rose and hunger for high-yield investments grew, Sadek found his niche pushing mortgages to borrowers with poor credit. Subprime home loans grew to $600 billion, or 21 percent of all US mortgages last year, from $160 billion in 2001.
"I never made a loan that Wall Street wouldn't buy," he says.
US pays the bill
In 2005 and 2006, New York bankers expanded the market for mortgage-backed securities by creating new subprime derivatives contracts.
The derivatives allowed Wall Street firms to sell more subprime securities. Investors poured about $1.2 trillion into mortgage-backed securities in those two years.
Now the US economy is paying the bill for that easy credit. Nearly one in six subprime borrowers has missed a monthly payment, sending home prices to their first annual decline since the Great Depression.
Wall Street firms have written down more than $80 billion on subprime-related losses.
Sadek got into the lending business in 2002, just as home prices were in the early stages of a record five-year surge in which the subprime market tripled.
Wiping the slate clean
When homeowner Christopher Aultman called Quick Loan Funding in July 2005, a man identifying himself as Tim answered.
"He was friendly and he sounded like he knew what he was talking about," Aultman says.
Aultman wanted to refinance the 30-year fixed-rate mortgage on his four-bedroom home in California.
His average credit score was 465 out of a possible 850, well below the US median of 720.
Quick Loan Funding was the only lender that would talk to him.
"I wanted to be responsible and take care of my debts and wipe the slate clean," he says.
From officer to officer
A year earlier, Aultman had paid $204 000 for the house. Quick Loan Funding's appraiser said it was worth $360 000. When Aultman called back later, he was told Tim no longer worked there.
"I was passed from loan officer to loan officer," Aultman says. "It just didn't feel right. But I was praying it was going to come through."
Loan officers were hired and fired all the time at Quick Loan Funding's call centre, says former employee Bryan Buksoontorn.
"We were motivated by fear," says Buksoontorn. "It was a boiler room. You had to make your numbers."
Buksoontorn says his job was to get the caller's credit card and charge $475 for an appraisal.
"You told the callers what they wanted to hear and you got the credit card," says Steven Espinoza, an employee from 2003 to 2005.
Close 'em, close 'em
Sadek and his managers would berate the sales staff, many of whom had no experience or training, Buksoontorn says.
Sadek brought a car salesman's mentality to mortgages, Espinoza says. "It's the same type of hard sell. Close 'em, close 'em, close 'em!"
Lisa Iannini, who was vice-president for compliance and risk management, says she tried to ensure the hard sell did not cause bad loans.
"If we had a prime borrower on the line, we hung up... We were geared toward subprime because they were easier," Buksoontorn says.
Citigroup's backing
Sadek says that with Citigroup's support by funding the loans, he pioneered lending to home buyers with credit scores of less than 450.
Quick Loan Funding, like many subprime companies, specialised in 2/28 loans - 30-year mortgages starting with lower interest rates that ratchet higher after two years.
A key selling point was the national 50 percent rise in home prices from 2001 to last year, according to the National Association of Realtors. Salespeople told homeowners that as long as values continued to increase, they could refinance or sell before their interest rates jumped.
It was not a lie. Prices had not fallen since the 1930s, according to the Realtors group. The belief even seduced Quick Loan Funding employees who took out 2/28 loans themselves, says Marcus Bednar a former sales manager.
"They believed everything the borrowers believed, that the market was going to go up. It wasn't just something we were pushing because we tried to rip people off."
In 2004, Bohan Group, a due diligence underwriting company, was hired by a bank to double-check the suitability of mortgages written by Quick Loan Funding that the bank was looking at buying and turning into securities.
Bohan sent in Nicole Singleton, who reviewed and rejected 40 loans.
Getting a better rate
To get $20 000 from the Quick Loan Funding refinance, Aultman was told, his monthly payments would rocket to $2 264 from $1 464.
"I said I can't do this," Aultman says. "They said take the mortgage, make the payments and once everything is paid off, within 30 days your credit will shoot up 150 points and we'll get you a better rate."
They convinced him, he says. The company sent a notary to his house at 9.30pm. Aultman was worn out and says he did not see the pre-payment penalty in his contract. If he refinanced within two years, he would have to pay six months' interest.
He also says he did not notice his income on the contract: $5 950 a month. At the time he made $3 420.
Sadek says he watched employees and anyone caught falsifying information would be "fired on the spot."
For a $247 500 mortgage, Aultman paid Quick Loan Funding $10 813.
The average closing costs for a mortgage of that amount in California was about $5 000, according to Pete Ogilvie, president of the California Association of Mortgage Brokers.
Sadek defends charging those fees, saying he took more of a risk lending to people with such bad credit records.
Feeling burned
Aultman received $21 674.70 in cash, but the monthly payments proved too steep and he fell behind.
"I feel burned," Aultman says.
Aultman says his credit score has not climbed and he has received two notices of foreclosure since refinancing in November 2005.
Aultman is trying to sell his house, but three others within sight of his driveway have for-sale signs.
"I'm embarrassed," Aultman says. "I made a deal with the devil. I didn't know what I was signing."
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