I knew and worked with a bunch of hard money lenders (who loaned money based strictly on equity) prior to the 2008 meltdown.
Even though they were a bit cocky with their success and they lived like rockstars, they were all nice and honest guys for the most part.
They solicited pools of funds from friends, family members, and outside investors – and then loaned out that money to homeowners and homebuyers who could not qualify for better financing.
The hard money guys were rolling, as they kept their loan-to-value ratios under 70%, they charged at least two points up front, and their interest rates were in the 10% to 12% range.
One of the things they did wrong though was “comingle” all of the investment funds they received, meaning they did not keep separate accounts for all of their investors.
And, all seemed OK when property values were sky-high.
For example, they might have a total of $10 million in loans outstanding against $20 million in total property values as collateral, and they were able to pay back and/or send payments to investors without issue.
BUT – when the meltdown hit and property values dropped by 40% and borrowers stopped paying, the hard money guys were suddenly facing a massive liquidity crisis – with no money to pay back investors.
The investors, who had been promised fully secured and very high returns, were none too happy – so they turned the hard money guys into the authorities.
The authorities then investigated and deemed the hard money ventures “Ponzi schemes” and tossed the hard money guys into jail (I personally knew four people that this happened to).
What was really interesting too was the fact that it was “close friends” who turned them in, in some cases, showing how quickly people can turn when money is lost.
Better Mortgage’s CEO Accused Of Misleading Investors
I won’t go into the details, but he appears to have misled investors about the prospects of his company – and it now seems like Better Mortgage is the poster child of bad press.
When Better was riding high during the 2020-2021 refi boom, nobody cared. But now that the mortgage industry is getting crushed by high rates, everyone cares.
And That Is The Point Of This Blog
When things are booming, it appears that nobody scrutinizes anything.
But, when the economy turns, everyone looks for someone to blame for their losses – and it can get very ugly.
I saw lenders viciously go after loan officers after 2008 for ostensible fraud that the lenders themselves effectively encouraged – during the boom times.
I saw borrowers viciously go after real estate agents, lenders, and loan officers in an effort to recoup their losses.
And I saw legal authorities (especially the FBI) go after everyone both to make examples and to score political points.
I should add that sometimes the suits and criminal claims were 100% justified; it was just interesting that nobody was making those claims before the market tanked.
So – here is my point: with asset prices tanking and a recession on the horizon, we will start to see these claims surface again.
And – if anyone has been playing fast and loose with paperwork, disclosures, promises, or accounting, it will all catch up to them when losses start to surface.
It always does.
This same warning goes for investors with interests in fast and loose investment vehicles, as they (the investors) too might want to shore things up before it is too late.
Anyway – this is just another reminder to be both careful and diligent, and to watch for a lot more legal fireworks as a result of asset corrections or a recession.
