Quick Loan Funding And Daniel Sadek Emerge As “Pirate Swashbucklers” Of Subprime Mortgage Reign Of Deceptive Mortgage Lending; CitiGroup Provided Much Of The Support For His Pillaging

3 01 2009

Quick Loan Funding, which Sadek founded in 2002, wrote about $4 billion in subprime mortgages before it collapsed in 2007. Sadek made, and eventually lost, a fortune through Quick Loan. He bought a Newport Coast mansion, a fleet of exotic cars and a condo in Las Vegas where he became a high roller at the blackjack tables.

Mark Goldman, a lecturer in real estate at San Diego State University, said lenders have nothing to gain by giving a break to borrowers who probably won’t repay their loans.

“It doesn’t serve the lender to do a loan modification that’ll result in a default,” he said. Which raises the question: Why did Citi give Sadek more time?

 

http://www.ocregister.com/articles/sadek-citi-loan-2270290-billion-quick

Daniel Sadek was one of the princes of subprime lending in Orange County whose high-risk mortgages helped bring Wall Street to its knees.

This summer, Citigroup, the Wall Street bank that has received this year’s biggest federal bailout, offered to modify its loan terms and help Sadek keep a home after he fell two months behind on his mortgage.

But on Dec. 18, Citi Residential Lending filed a notice of default after Sadek failed to make the new payments on the house at 65 Briar Lane in Irvine, one of at least four residential properties he owns in Orange County

That Sadek even got a second chance with Citi angered industry watchers who complain that banks have done too little, even with billions in federal assistance, to help borrowers facing foreclosure.

“There’s a big irony, when thousands of people are struggling to get affordable loan modification offers from servicers that aren’t responsive, that someone who has perpetrated harm would get a loan modification,” said Paul Leonard, of the Center for Responsible Lending. “It’s incredible.”

Reached by phone, Sadek said he “did not want to be rude,” but he did not want to talk. His attorney, Thomas Borchard, said he was unaware of the Citi loan modification.

“I know he and Quick Loan Funding have a long-standing history with Citi,” Borchard said. “I’d assure you there’s some logical explanation.”

The original mortgage isued by Sadek’s Quick Loan Funding in August 2006, was for $768,000. Under Citi’s loan modification, the principal rose to $800,000, records show. Zillow.com estimates the home is worth $632,500.

The original mortgage was an interest-only loan. Under the Citi loan modification, Sadek’s monthly payments increased almost 50 percent to $6,445 – the interest, principal, taxes and insurance on an $800,000 mortgage.

The latest notice of default said Sadek owed $34,888 as of Dec. 18, indicating he had not made a single payment since the loan modification. The notice says Sadek still has 90 days to catch up with his payments before he will lose the house.

The record is unclear how Citi got authority to modify Sadek’s original mortgage. Citi declined to discuss Sadek’s loan, citing client privacy rights.

Sadek’s original loan – No. 106087598 – was not part of the three Citi mortgage pools. Bank of America, Bear Stearns, Countrywide Home Loans, Lehman Brothers, Merrill Lynch and Morgan Stanley also securitized and sold Quick Loan mortgages.

Filings with the Securities and Exchange Commission show at least $2.3 billion of Quick Loan’s $4 billion mortgages were sold to investors after Wall Street firms packaged them as mortgage-backed securities, collateralized debt obligations and other complex financial instruments.

“In some cases, Citi purchases loans which may have been modified by another servicer,” Rodgers said. “If a loan is owned by an investor, the right to modify is subject to the agreement under which the loan is serviced.”

On the Citi loan modification, Sadek said 65 Briar Lane is “owner occupied” and that he “will suffer a hardship” if the terms of the loan are increased too much.

Other public records list his home address as 3 Longboat in Newport Coast, where Sadek was interviewed by the Register in April 2007. Borchard said he could not comment on the address discrepancy. Rodgers said borrowers can demonstrate their residence by producing a utility bill.

When a Register reporter visited the Briar Lane house, a woman living there said Sadek was “not here.” But she would not say if he lived there.

Lou Pacific, a real estate and mortgage consultant from Mission Viejo who was a vice president at Quick Loan Funding in 2004 and 2005, said he was surprised by the Citi loan modification, given Sadek’s financial resources and multiple residences.

“The usual way you qualify for a loan mod is if you live in the home and you have a valid hardship,” Pacific said.

Court judgments

Most borrowers would have a hard time getting a hearing from a bank if they were already in default on a million dollars in other debts.

Records on file with the Orange County Clerk-Recorder show that Sadek faces $1.5 million in debts, including:

•State Franchise Tax Board liens totaling $545,922 in taxes and penalties.

•Orange County tax collector liens totaling $8,998.

•Liens from the Newport Coast homeowners association, for $1,588, and The Marquee Park Place Homeowners Association in Irvine, for $7,517, both for monthly association fees.

•Court judgments from Wells Fargo Bank, for failure to make payments on leased

equipment ($603,289) and Wells Fargo ($294,341) for other debts.

No effort to hide

Wells Fargo has placed writs of attachments on Sadek’s Newport Coast home, an undeveloped Newport Coast lot, his condo in Irvine and 65 Briar Lane.

Dennis Fabrozzi, an attorney for Wells Fargo, said such writs would normally be a red flag for banks considering a loan modification. “I would think most banks would pull a preliminary title report,” Fabrozzi said. “Most of the information is online. It’s easy to pull. You could probably do it in about five minutes.”

Borchard said Sadek intends to make good on his debts.

“Mr. Sadek has not filed for bankruptcy. He has not made efforts to conceal, hide or transfer his assets,” he said. “For him, every day is another day of looking to try to resurrect a business interest to repay creditors,” Borchard said.

Sadek’s other troubles were documented before the Citi bailout.

In May 2007, The Orange County Register reported that Sadek took out a $1 million marker from the account of his escrow company, Platinum Escrow, to gamble in Las Vegas.

In June of this year, the state Department of Corporations revoked all of Sadek’s lending and escrow licenses for his failure to safeguard the money and records.

On Dec. 17, the Department of Corporations banned Sadek from the escrow industry for a year and seized accounts totaling $515,000.

Sadek and Citi

Citi’s business dealings with Sadek date to the founding of Quick Loan Funding in 2002.

Citi’s subsidiary, First Collateral Services, gave Sadek a line of credit – known as a warehouse line – to fund his mortgages. As Quick Loan grew – issuing a peak $218 million worth of mortgages in December 2005 – other warehouse lenders gave the company lines of credit. At its peak, the Citi warehouse line was $100 million, Pacific said.

When Quick Loan’s collapse accelerated in the spring of 2007, Citi was the last warehouse lender left, Sadek said during an April 2007 interview at his Newport Coast mansion.

During the interview, Sadek said Citigroup provided a $16 million line of credit to help him market his feature film, “Redline,” which starred his then-girlfriend, Nadia Bjorlin, and his fleet of Ferraris, Porsches and Saleen S7 exotic cars. Sadek said he spent $31 million to make, distribute and publicize “Redline.”

The film earned $8.2 million in ticket sales worldwide, according to Box Office Mojo. Sadek is being sued in federal court by the Cartoon Network for failing to pay $845,000 in advertising for the film.

 

 

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Mortgage Brokers And Mortgage Bankers Pushed Subprime Loans To Borrowers Because There Was No Risk To Lenders As Loans Were Sliced Up And Sold Off Quickly

26 12 2008

Subprime depended basically on brokers who did not care whether the borrower could pay his loan because they got paid their commission at closing, on banks that also did not care much whether the borrower could pay since the loan was being sold off, on packagers of loans who cut and sliced the packages of loans so that some could be called AAA rated loans (generally called CMO’s).

http://seekingalpha.com/article/112297-was-subprime-lending-just-as-dishonest-as-madoff?source=email

 

 

Subprime is a specific type of transaction more generally called CMO’s (Collateralized Mortgage Obligations) and CDS (Credit Default Swaps). Subprime depended basically on brokers who did not care whether the borrower could pay his loan because they got paid their commission at closing, on banks that also did not care much whether the borrower could pay since the loan was being sold off, on packagers of loans who cut and sliced the packages of loans so that some could be called AAA rated loans (generally called CMO’s). They paid credit rating companies to put triple A ratings which could not possibly be justified with any analysis of the underlying package of loans. Finally, they paid credit insurance companies to give guarantees (Credit Default Swaps) that they would cover any default when the credit insurance companies did not have the financial ability to pay if called on to pay. To make it even better, everyone seems to have had the idea that real estate prices would always go up. Finally, we even had President Bush saying all this was good because we were increasing housing without looking at the inevitable results.

 

1.     Financial Results: There was never a history of the returns. Financial institutions and their sales representatives told everyone that this was an exceptional investment. They talked about a piece of paper that is “triple A rated “and “guaranteed by insurance through Credit Default Swaps.” While Madoff peddled dishonest results, here banks peddled a dishonest idea without any results.

2.     Public Explanation of the process: Salesmen only explained these were triple AAA rated investments “structured so that they could not fail.” Furthermore, there was an insurance guarantee just in case. When it all fell apart, we naturally got the obvious truth that the so called protection never existed in reality. When the problem was obvious, Merrill Lynch (MER) sold these triple A rated bonds with insurance guarantees for 22 cents on the dollar and most people said the real value for Merrill was only 5 cents on the dollar. Madoff’s explanation was no phonier than the banks explanation of the value of Subprime triple A rated with CDS guarantees.

3.     What kept the fraud going? While Madoff had to pay out early investors, this fraud did not even depend on really paying investors off. The only ones who really collected on this were the bankers who earned bonuses or a percent of the profits (which can be 40% of the transactions’ profits) when these subprime loan packages were sold. The finance community had never made so much money on an idea like this. Who was going to say that it would not work? Here is a clear case that the personal greed of the bankers led to their own demise and that of their investors. Probably anyone that wanted to cut back on the system was probably told to shut up. As a former banker, I know the pressures put on people. “X bank is making all that money. What is wrong with you?” If you try to say it is a bad idea, most people get run over by the system. Years ago, former Fed Chairman Greenspan said that he trusted the bankers to protect their own interests. He recently said in congress that he made a terrible mistake in this assumption. And in this simple mistaken assumption, we see a root cause of the problem.

4.     Professional Opinion: The personal interest of bankers led them to tell all their investors that this is a splendid investment. In this case, the professional bankers did a 20 times greater disservice to themselves and their customers than all of the Madoff salesmen.

 

 

 

 





Claim That Subprime Loans Expanded Homeownership A “Fraud” As They Were Designed to “Fail”

24 11 2008

“…Carr, of the National Community Reinvestment Coalition, said that in hindsight the claim that subprime loans expanded homeownership was “a fraud.” Subprime loans, with their low teaser rates and expensive prepayment penalties, were “designed to fail.”

“…(in) Orange County, where subprime lending giants New Century, Fremont, Option One and Argent all were based. Subprime accounted for less than 10 percent of all home loans made in the county between 2004 and 2007. But in central Santa Ana – today the county’s foreclosure hotspot – the subprime share topped 40 percent…”

http://www.ocregister.com/articles/subprime-percent-home-2233845-lending-loans

For a few delirious years, subprime mortgages brought fat profits to Orange County lenders – plus Mercedes, Beemers and the occasional Lamborghini for their salespeople.

Subprime loans left a more lasting impact elsewhere, in places like Fresno and Moreno Valley, Florida and Michigan – areas now suffering from massive foreclosures.

A Register analysis shows that subprime loans were concentrated in the less prosperous, less stable corners of the nation. The Register studied 43 million prime and 12 million subprime loans made between 2004 and 2007.

The analysis shows how subprime loans evolved from a niche product, largely confined to Texas and the Deep South, into a nationwide phenomenon. But even as subprime went national, it played a much bigger role in some housing markets than in others. (Click here to see maps of both California and U.S. from 2004-2007).

Consider two cities: During the height of the bull market, residents of New York City got just 3 percent of their home loan money from subprime mortgages. In hard-pressed Detroit the figure was 31 percent.

Now look home, to Orange County, where subprime lending giants New Century, Fremont, Option One and Argent all were based. Subprime accounted for less than 10 percent of all home loans made in the county between 2004 and 2007. But in central Santa Ana – today the county’s foreclosure hotspot – the subprime share topped 40 percent.

A series of maps shows subprime lending spreading year by year from the South to California to the Midwest and Northeast.

The maps are “like you’re looking at X-rays of a cancer patient,” said Jim Carr, chief operating officer of the National Community Reinvestment Coalition, a nonprofit that promotes lending to low-income areas. “(2004) and ’05 is when it went viral.”

Subprime lending mushroomed from less than 10 percent of national home loan volume in 2004 to 20 percent in 2005 and 24 percent in 2006. In 2007 as major lenders failed, subprime fell to 15 percent of national home loan volume.

Subprime’s sudden collapse gave counties that depended on subprime loans a bitter foretaste of the credit crunch. While total home loan volume dropped 21 percent nationwide in 2007, it slumped by 43 percent in Riverside and San Bernardino counties. The crunch was even sharper in parts of the San Joaquin Valley: Home lending dropped 50 percent in San Joaquin and 55 percent in Merced.

Easy credit helped the valley prosper in the first half of the decade. Its urban centers grew twice as fast as the state did. Cotton fields and vineyards gave way to new homes from Bakersfield north to Stockton.

“The subprime lending practices definitely lent fuel to the economy,” said John Mahoney, director of the Real Estate & Land Use Institute at Cal State Fresno. “That single element alone is what expanded this market to unsustainable levels.”

Mahoney has studied the new home market in Fresno for years. Between 2004 and 2006, he said, the number of new housing units produced each year doubled. The median price also doubled.

Easy money was “the primary component that fueled the overbuilding, the overpricing,” Mahoney said. It was “a marketing cycle that fed on itself.”

It couldn’t last. In 2007 home lending volume in Fresno County slumped 37 percent, builders stopped building and the first foreclosure signs appeared.

Mark Boud, an Irvine real estate economist, has studied the valley market. Between February and August, he said, there were 4,133 foreclosures in Fresno and neighboring Madera County – four times more than in the same period in 2007 and 30 times the 2006 number.

Subprime is a big factor in foreclosures, Boud said. He blamed “loose lending standards,” particularly in the new-home market, for the surge in foreclosures.

Carr, of the National Community Reinvestment Coalition, said that in hindsight the claim that subprime loans expanded homeownership was “a fraud.” Subprime loans, with their low teaser rates and expensive prepayment penalties, were “designed to fail.”

Carr looks at the maps showing the spread of subprime year by year and sees a lost chance for regulators.

“As late as 2004 we could have prevented this foreclosure crisis,” Carr said. “They had an oportunity to tighten down on financial institutions whose lending behavior was clear as early as 2002-2003. It was a missed opportunity to get this problem under control.”





Subprime Lenders Exempt From “Community Reinvestment Act” Law Responsible For Mortgage Crisis

15 11 2008

“It is subprime that’s really causing it,” Hayes said of the mortgage crisis. “But CRA did not force anyone to do subprime.”

“…most of the lenders who made risky subprime loans were exempt from the Community Reinvestment Act. And many of the lenders covered by the law that did make subprime loans came late to that market – after smaller, unregulated players showed there was money to be made…”

http://www.ocregister.com/articles/loans-subprime-banks-2228728-law-lenders 

“…people are charging that the Community Reinvestment Act of 1977 forced banks to make bad loans, leading to financial Armageddon.

There’s just one problem: It isn’t true.

A Register analysis of more than 12 million subprime mortgages worth nearly $2 trillion shows that most of the lenders who made risky subprime loans were exempt from the Community Reinvestment Act. And many of the lenders covered by the law that did make subprime loans came late to that market – after smaller, unregulated players showed there was money to be made.

Among our conclusions:

  • Nearly $3 of every $4 in subprime loans made from 2004 through 2007 came from lenders who were exempt from the law.
  • State-regulated mortgage companies such as Irvine-based New Century Financial made just over half of all subprime loans. These companies, which CRA does not cover, controlled more than 60 percent of the market before 2006, when banks jumped in.
  • Another 22 percent came from federally regulated lenders like Countrywide Home Loans and Long Beach Mortgage. These lenders weren’t subject to the law, though some were owned by banks that could choose to include them in their CRA reports.
  • Among lenders that were subject to the law, many ignored subprime while others couldn’t get enough.
  • Among those standing on the sidelines: Bank of America, which made no subprime loans in 2004 and 2005; in 2006 and 2007 subprime accounted for just 2 percent of its loan portfolio. Washington Mutual, meanwhile, raised its subprime bet by 20 times to $5.6 billion in 2006 – on top of its already huge exposure through its ownership of Long Beach Mortgage.

Since the federal takeover of mortgage giants Fannie Mae and Freddie Mac in September and particularly since the federal bailout of Wall Street, some have argued that the reinvestment law is to blame for the mortgage meltdown and credit crunch.

In a Sept. 22 editorial, The Wall Street Journal said that the law “compels banks to make loans to poor borrowers who often cannot repay them. Banks that failed to make enough of these loans were often held hostage by activists when they next sought some regulatory approval.”

In a Sept. 15 editorial, Investors Business Daily wrote that by strengthening the reinvestment law in the late 1990s, President Clinton “helped create the market for the risky subprime loans that he and Democrats now decry as not only greedy but ‘predatory.’ ”

And in an Oct. 13 op-ed in The Register, Chapman University President James Doti, an economist, wrote that the law “pressured banks to make loans and mortgages to people who might not be the best credit risk. In fact, Clinton administration Attorney General Janet Reno threatened legal action against banks that didn’t loosen up mortgage requirements.”

The criticisms of the reinvestment act don’t make sense to Glenn Hayes. He runs Neighborhood Housing Services of Orange County, which works with banks to provide CRA loans to first-time homebuyers. In its 14-year history, the nonprofit has helped 1,200 families buy their first homes. Score so far: No foreclosures and a delinquency rate under 1 percent.

“It is subprime that’s really causing it,” Hayes said of the mortgage crisis. “But CRA did not force anyone to do subprime.”

Bob Davis, executive vice president of the American Bankers Association, which lobbies Congress to streamline community reinvestment rules, said “it just isn’t credible” to blame the law CRA for the crisis.

“Institutions that are subject to CRA – that is, banks and savings asociations – were largely not involved in subprime lending,” Davis said. “The bulk of the loans came through a channel that was not subject to CRA.”

Congress passed the Community Reinvestment Act to crack down on “redlining,” the practice by banks of refusing loans to neighborhoods where most residents are minorities or earn low incomes. The law applies to all federally insured banks and thrifts that take deposits. It generally requires banks to help potential customers near their branches, typically by making loans, investing or providing other services such as financial education.

A companion law, the Home Mortgage Disclosure Act, requires every large home lender to report annually on every home loan application they receive. (No names or streets are listed.) Those reports feed a database that in turn allows regulators, community activists and others to monitor home lending in virtually every neighborhood in America.

Beginning in 2004, federal regulators also have required lenders to report on high-priced loans – those with rates at least three percentage points higher than U.S. Treasury notes of comparable maturity. While the mortgage industry defines subprime loans by credit scores, Federal Reserve Board analysts believe that subprime and Alt-A loans fall into their high-priced loan category.

The Register used that database for its analysis. During the four years covered by our analysis, lenders made 55 million home loans, including 12 million subprime loans.

In its glory days, subprime lending was a lucrative business that paid six-figure salaries to 20-something salespeople and made fortunes for top execcutives. Nowhere were the riches more evident than in Orange County, home to industry giants New Century, Ameriquest, Argent and Fremont.

But the money spread far beyond Orange County, thanks to Wall Street’s years-long love affair with subprime. In 2005 and 2006, subprime lenders sold about 70 percent of their loans by dollar volume to investors – principally to finance and insurance companies or by packaging the loans in highly rated securities.

Fannie and Freddie, the federally sponsored mortgage buyers, were bit players in this market. Together they bought about 3 percent of all subprime loans issued from 2004 through 2007, most of that in 2007 alone.

In 2007 Wall Street turned its back on subprime. That year, subprime lenders were forced to keep 60 percent of their loans on their own books or on the balance sheets of their affiliates.

That was the last fatal step in a financial high-wire act.

Since then, most of the 25 companies that dominated subprime lending between 2004 and 2007 have shut down or been sold at fire-sale prices.

Just eight of the 25 top subprime lenders were subject to the reinvestment law. But among those eight are two of the summer’s most prominent failures – Washington Mutual and IndyMac Bank. Together with its Long Beach Mortgage subsidiary, WaMu made $74.2 billion in subprime loans. IndyMac specialized in “Alt-A” loans to customers who had good credit but couldn’t qualify for top-drawer loans.

pirates-caribbean-4

“…Fannie and Freddie, the federally sponsored mortgage buyers, were bit players in this market. Together they bought about 3 percent of all subprime loans issued from 2004 through 2007, most of that in 2007 alone…”