"I’ll have to go stated," the guy on the other end other end of the phone said. I was then given a list of demands from this individual, from coming to three houses he wanted to purchase from a friend (for 25% more than comparable sales were going for) to the fact that he had a 690 credit score and thus didn’t want to pay a lot of money for this loan. "Other lenders," he said, "Didn’t want to work hard and get creative to get deals done in the new market."
I was obviously not the first lender he’d worked with. He has received training of all sorts, more on getting the house then on managing his cashflow. He found a seller willing to shovel some money at him if he bought at last year’s prices. This would net him some cash.
From what I could surmise, he had been in the business of selling/rehabbing and flipping houses for 2 years. He’d done about 10 transactions, and was carrying 3 unsold properties. He wasn’t behind, but he’d been carrying them for a while. He had a job with the State, and that was a stable income in the high sixties. Besides the houses, he had no other debt, but he was burning through money at $4k/month, with probably 60 days to survive before he’d default. He claimed he had additional resources, which might have been true, and he probably had the means to extend himself with his local bank. Still, he was structuring the transactions to go get cash back, and angling for time.
Oh, and he was going to make it easy for me by transferring his own appraisal to me.
He had a stunning knowledge of underwriting requirements. "My LLC will be 2 years old in the middle of January, so we should schedule a closing right after that, OK?" and "In my 401k I have 6 months PITI". Because of his attitude, and my shift towards providing incredible service to what I consider "good" borrowers, I told him: "I’m sorry, but I don’t have any programs that suit your needs right now, but I wish you the best."
He called me a few names on his way out of my world, as all failing investors do for people that don’t suit their immediate needs. Buddy, I hope that you don’t leave a scar in the world.
If this experience was novel, I would probably just shake my head and move on. However, something like this happens to me two or three times a quarter. A desperate investor comes to me, puffing themselves up and concealing their really shaky situation and cash flow problems, with this structured deal that will be a panacea for them. (Much of the time, it is predicated on the fact that Title Companies will be complicit, but it also hits up appraisers and other folks for fraud). There’s a new wrinkle every time. Some go on a savings account with their Mom to meet the PITI requirement. Some have a "2 year old dormant LLC" to get the Right to 100% investment property stated income financing.
But No–it’s not Fraud…Fraud is for Crooks, Right?
Nobody considers these lending hacks "fraud," not even today. "Going stated" is an acceptable thing to do if someone’s in a business with depreciation, expenses, or otherwise hidden cashflow. It’s not a right, though. If anyone in the transaction brings up the "F" word, you’re impugning someone’s character, and they’d go on to the next practitioner after an unpleasant exchange. Over time, people people wore down, and started coaching investors as to how to accomplish some of these goals.
Fraud was rarely in the form of falsified documents. The programs never required calling black white. They instead found a way to ask the question: Could this black sock potentially be bleached to eventually become white? The market learned how to game itself, with the investors a step or two ahead of the underwriters. Nobody is singularly responsible for where we are today. Nobody put all the moving parts together. No, instead, everyone took a small toll as bad deals floated down river. I’m guessing that we’re still adding more bad loans of uncertain quality to the pile. Here’s to ‘08.
When not having dour thoughts about the Mortgage industry, Chris Johnson is the leader of the Ten Day Team, in Westerville, OH. He can be reached at chris@tendayteam.com.
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