He Was Passionate about His Borrowers

It's funny how, even now, Americans don't seem to realize that many financial services intermediaries -- despite whatever title they may hold or "recognition" they may have received -- are little more than used car salesmen.

Sure, there are individuals who genuinely care about their customers, who have a sense of honor and decency, and who actually know what they are talking about. But the bottom line is, brokers and other middlemen (and middlewomen) get paid when they do deals --  and go hungry when they don't.

With that sort of incentive system in place, is it really surprising that the housing bubble yielded "accidents-waiting-to-happen" like the character Bloomberg reporter Bob Ivry writes about in "'Deal With Devil' Funded Carrera Crash Before Bust"?

One week in 2002, Daniel Sadek was $6,000 short of covering the payroll for his new subprime mortgage company, Quick Loan Funding Corp. So he flew to Las Vegas and put a $5,000 chip on the blackjack table.

"I could have borrowed the money, I suppose," Sadek says.

That wouldn't have been his style. With his shoulder-length hair and beard, torn jeans and T-shirts with slogans such as "Where is God?" Sadek looked more like a guitarist for Guns N' Roses than a mortgage banker.

Sadek says he was dealt a jack, then an ace. Blackjack. He would make payroll. Quick Loan Funding, based in Costa Mesa, California, would survive and, for a while, prosper as one of 1,300 mortgage lenders in the state vying to satisfy Wall Street's thirst for subprime debt.

As home prices rose and hunger for high-yield investments grew, Sadek found his niche pushing mortgages to borrowers with poor credit. Such subprime home loans grew to $600 billion, or 21 percent, of all U.S. mortgages last year from $160 billion, or 7 percent, in 2001, according to Inside Mortgage Finance, an industry newsletter. Banks drove that growth because they could bundle subprime loans into securities, parts of which paid interest as much as 3 percentage points higher than 10-year Treasury notes.

"I never made a loan that Wall Street wouldn't buy," Sadek says. He worked hard to build the business, he says, and the company did nothing illegal.

U.S. 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, which amplified the risks of the underlying mortgages, were sold to banks and institutional investors. When borrowers started to default on high-yield, high- risk subprime mortgages by the thousands, the values of these leveraged securities plunged.

An index of subprime loans made in the second half of 2005 fell to as low as 21.83 cents on the dollar from a high of 102.19 cents. It's now at about 30 cents.

Nearly one in six subprime borrowers has missed a monthly payment, sending home prices to their first annual decline since the Great Depression. The Federal Reserve cut its main interest rate three times to fend off recession, and Wall Street firms that posted record profits the last three years have written down more than a combined $80 billion on subprime-related losses.

Sadek, now 39, got into the lending business in 2002, just as home prices were in the early stages of a record five-year surge. Staked by banks including Citigroup Inc., Sadek and others in his industry tripled the subprime market in five years.

Lamborghini, McLaren, Soap Star

"I was working every day, all day, from dusk to dusk," says Sadek, who pumped gas and sold cars before creating Quick Loan Funding. "I slept in my office sometimes. I worked about 80 or 90 hours a week."

Sadek collected a fleet of cars that included a Lamborghini, a McLaren, a Ferrari Enzo, a Saleen S7 and a Porsche, frequented casinos and was engaged to soap opera actress Nadia Bjorlin.

"Daniel was charismatic, crazy, unconventional and passionate about his company and his borrowers," says Lisa Iannini, a former employee.

Sadek would try to help Bjorlin break out of TV's "Days Of Our Lives," co-writing and spending $35 million to produce "Redline," a feature film about illicit car racing, starring Bjorlin as a daring leadfoot.

The movie's climactic line, delivered by actor Angus Macfadyen: "Do you believe in destiny?"

Sadek did.

Wiping the Slate Clean

When homeowner Christopher Aultman, a mechanic for Union Pacific Railroad, 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 Victorville, California, 80 miles northeast of Los Angeles. He needed to tap $20,000 in equity to pay off mounting debts, and he wanted to build a backyard play area for his three children.

His average credit score was 465 out of a possible 850, according to Aultman's loan documents. That is well below the U.S. median of 720, according to Fair Isaac Corp., whose software measures consumer creditworthiness.

Quick Loan Funding was the only lender that would talk to him, Aultman says.

"We'd been struggling and running away from bills, and I was tired of living that way," says Aultman, now 35. "I wanted to be responsible and take care of my debts and wipe the slate clean."

Passed 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 with questions, he says 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. I was desperate."

Loan officers were hired and fired all the time at Quick Loan Funding's 26,000-square-foot call center in Irvine, says Bryan Buksoontorn, who joined the company in 2004. By then, Irvine had become a hotbed of subprime lending companies.

"We were motivated by fear," says Buksoontorn, 28, who is now an independent mortgage broker. "It was a boiler room. You had to make your numbers."

Buksoontorn's job: get the caller's credit card and charge $475 for an appraisal, he says.

"You told the callers what they wanted to hear and you got the credit card," says Steven Espinoza, 39, 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.

"They would get in your face," he says. "'Why aren't you ordering appraisals? Why aren't you selling?' "

Sadek brought a car salesman's mentality to mortgages, Espinoza says.

"It's the same type of hard sell," Espinoza says. "Close 'em, close 'em, close 'em."

Iannini, who was vice president for compliance and risk management, says she tried to make sure the hard sell didn't result in bad loans.

"I went to work every day as an uninvited hall monitor at a fraternity party," Iannini says.

Sadek says 95 percent of Quick Loan Funding's mortgages were made to subprime borrowers.

"If we had a prime borrower on the line, we hung up on them," Buksoontorn says. "We were geared toward subprime because they were easier to close. We were giving them money no other bank would dare to give them."

Citigroup's Backing

Sadek says that with the support of Citigroup, which funded the loans, he pioneered lending to homebuyers with credit scores of less than 450.

Citigroup spokesman Stephen Cohen said the bank doesn't comment on its relationships with clients.

"We made most of our money from selling loans to banks," Sadek says.

Quick Loan Funding, like many subprime companies, specialized in 2/28 loans -- 30-year mortgages that start with lower "teaser" interest rates and ratchet higher after two years.

A key selling point was the 50 percent rise in home prices nationally from 2001 to 2006, according to the National Association of Realtors. Mortgage salespeople told homeowners that as long as values continued to increase, they could refinance or sell before their interest rates jumped.

'They Believed'

It wasn't a lie. Year over year, prices hadn't fallen since the 1930s, according to the Realtors group. The belief that values would form a stairway even seduced Quick Loan Funding employees who took out 2/28 loans themselves, says Marcus Bednar, 32, a former sales manager.

"They believed everything the borrowers believed, that the market was going to go up," Bednar says. "It wasn't just something we were pushing because we tried to rip people off."

Bednar adds, "We were never encouraged to do anything shady."

Borrowers with subprime adjustable-rate mortgages are seven times more likely to default than those with prime fixed-rate mortgages, according to the Mortgage Bankers Association.

Quick Loan Funding, like most subprime lenders, wrote so- called stated-income or "no doc" loans that don't require the borrower to document income with pay stubs or tax forms. They are also known as "liar loans."

The Federal Reserve staff today recommended a ban on such loans.

Reviewed, Rejected

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 Nicole Singleton, 39, to the Irvine office. She reviewed 40 loans and rejected every one, she says.

Sadek says he fostered a competitive selling atmosphere, and underperforming workers "either quit because they're not making money or they're fired because they don't work." He says Quick Loan Funding "thrived on customer service, so the idea of hanging up on callers is not right."

"If the loans were so bad, why did Wall Street keep buying them?" Sadek says.

In July 2005, Espinoza, Buksoontorn, Bednar and other employees sued Quick Loan Funding in federal court alleging various workplace abuses, including failing to pay overtime and not providing adequate lunch breaks. Sadek later settled with the employees, agreeing to pay them more than $3 million, says Jon Mower, an Irvine attorney who represented the loan officers.

"I don't think Quick Loan Funding was much different than many of the other subprime companies," Mower says.

'I Can't Do This'

Sadek denies the charges, adding that it's the type of lawsuit a jury would never decide in the employer's favor.

"They see me as a rich guy and who do you think they are going to believe?" he says.

To get $20,000 in cash 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 and everybody wins."

They convinced him, he says. The company sent a notary to his house with the documents to sign. It was 9:30 p.m. Aultman was worn out from work and the rest of the family was in bed.

Aultman says he didn't see the pre-payment penalty in his contract. If he refinanced within two years, he'd have to pay six months interest.

Crying in Son's Room

He also says he didn't notice his income on the contract: $5,950 a month. At the time Aultman says he made $3,420.

Sadek says he watched employees closely and anyone caught falsifying information would be "fired on the spot."

For a $247,500 mortgage, Aultman paid Quick Loan Funding $10,813, including origination fee, application fee, processing fee, underwriting fee and quality control fee, according to his loan documents.

The average closing costs for a mortgage of that amount in California is about $5,000, according to Pete Ogilvie, president of the California Association of Mortgage Brokers.

Sadek defends charging those fees by saying he took more of a risk by lending to people with such lousy credit. If legislators want to limit fees, they ought to pass laws against them, he says.

Aultman received $21,674.70 in cash, according to the documents.

The monthly payments proved too steep and he fell behind.

"I feel burned," Aultman says. "There's a lot of nights I've gone into my son's room and watched him sleep and I've cried."

Reining in Loan Officers

Quick Loan Funding's survival, like that of other non-bank mortgage lenders, depended on a stream of new borrowers like Aultman. To fund the mortgages, the company had $400 million in short-term credit from Citigroup. To pay that off, Quick Loan Funding sold the mortgages to securitizers as soon as it could.

By August 2005, Sadek was spending most of his time working on his movie, "Redline." He hired Iannini to upgrade the company's risk management.

"My biggest problem day to day was reining in uneducated loan officers," Iannini says. "You have to almost use police force tactics and threaten brutality on a sales floor of a lending institution and have that whip ready to crack, because you never know what employee will be pressured by what influences on any given day."

Iannini had worked at two other mortgage lenders before joining Quick Loan Funding. She says Sadek's firm was the most committed of the three to maintaining lending standards.

Ferrari Crash

Asked about borrowers who have trouble making their payments, Sadek quickly leafs through a mortgage application. He stops, folds over the pages and points to the line that says, "Cash to borrower."

"Who's getting ripped off?" he says.

Sadek was featured on TV newscasts in March. During a publicity event for "Redline" at an Irwindale racetrack, comedian Eddie Griffin, a star of the movie, drove Sadek's $1.2 million Ferrari Enzo into a concrete barrier, wrecking it.

Sadek, who appears in "Redline" as a poker player, also intentionally trashed two of his own Porsches in the making of the movie. In one scene, a Carrera is catapulted high in the air before it crashes.

Aultman, meanwhile, says his credit score hasn't climbed and he has received two notices of foreclosure since refinancing with Quick Loan Funding in November 2005.

'Everything's Not OK'

"You go to soccer games, and everything's great with the other parents," Aultman says. "Nobody knows it, the wife doesn't know it, the kids don't know it, but their old man is in trouble. I put up a façade that everything's OK. Everything's not OK."

Aultman is trying to sell his house, but three others within sight of his driveway also have for-sale signs.

"I'm embarrassed," Aultman says. "I made a deal with the devil. I didn't know what I was signing."

Sadek may be in trouble, too. The California Department of Corporations wants to revoke his lending license. The state says he tried to use the bank account of his escrow company, Platinum Coast, to apply for markers, or gambling loans, at three Las Vegas casinos in April and May.

"It was a bank error," Sadek says. "No money ever left the account."

Sadek holds up a copy of the marker application. It has his name at the top and his signature at the bottom. In the middle of the page is a bank-account number. He says he thought it was his personal account. It wasn't. It turned out to be Platinum Coast's, Sadek says.

He says he didn't know what he was signing.

Now, I'm just waiting for all the entertaining stories about guys/gals pitching CDOs to money market funds, Fannie Mae bonds to foreign investors, leveraged buyouts to pension funds, etc., etc., etc.

Comments

[moneymonk]

DAYUM, whew what a story. The article drove me in. It feels like a screenplay to a movie drama.

Moral of the story pay attention to what you sign.

Sounds like Sadek and Aultman deserved each other

[farang]

The whole economy stinks like a Texas used car salesman on a humid August afternoon.

Now I know why.