Subprime: All you need to know

From Bloomberg:

`Deal With Devil’ Funded Carrera Crash Before Subprime Shakeout

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.
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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.
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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.”
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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.”
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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.
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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.

(no relation, -jb)

“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.”
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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.”
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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.

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.
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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.
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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.