Dec. 18 (Bloomberg) -- 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. mortages 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 allowed Wall Street firms to sell more subprime securities and offered a new way to bet against the U.S. housing market. Investors from Germany to Japan poured about $1.2 trillion into mortgage-backed securities in those two years, according to Global Insight Inc., an investment research firm in Waltham, Massachusetts.
Now the U.S. 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. 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.
``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.''
Lamborghini, McLaren, Soap Star
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 credit-worthiness.
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.''
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``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. mortages 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 allowed Wall Street firms to sell more subprime securities and offered a new way to bet against the U.S. housing market. Investors from Germany to Japan poured about $1.2 trillion into mortgage-backed securities in those two years, according to Global Insight Inc., an investment research firm in Waltham, Massachusetts.
Now the U.S. 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. 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.
``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.''
Lamborghini, McLaren, Soap Star
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 credit-worthiness.
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.''
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