During those now infamous years of 2005-2007, the residential foreclosure market was characterized by what are now called “liar’s loans.” This was when Joe Six Pack walked into his lender and filled out paperwork for his American Dream mortgage loan, a financial escapade based on a fabricated income level. His real earnings were nowhere near what was needed to support the extravagant home he bought. We know the end result of that story many times over.
An interesting tidbit comes to us courtesy of, Walter Hackett, a gentleman who used to be a vice-president at California’s PFF Bank & Trust (now defunct). It turns out that during the ramp up to the residential foreclosure crisis, the real estate and financial industry were creating their own version of liar’s loans, though the scam was based on revenue projections rather than income.
It went something like this. A real estate company would create a number of subsidiary companies and sell a property from one to the other, many times over, each time bumping the price up. Often the parent company didn’t even bother actually transferring money between the branches. After a few sales, the price was astronomical, and the company would go to a lender and ask for a loan, using the inflated price of the property as the collateral value.
Hackett offered his opinion on the process…
“A lot of the stuff I saw over the years that made business sense was gone. I started to see bigger and bigger assumptions being made. It stopped being about the numbers and common sense. I heard people say things such as ‘it’s Bob doing the deal, so there’s nothing to worry about. It’s real estate, it’s secured, there’s no problem.’ In 27 years I had never seen deals done that way. I started to feel like I was besieged by lunatics.”
Hackett also asserted that the bank paid loan officers a commission on each completed deal, a recipe for quality control disaster if we ever heard of one. While the level of commercial foreclosures has yet to reach the astounding numbers of residential foreclosures, it seems like both sides of the property industry – residential and commercial – were besieged by lunatics.
The Commercial Investing Center Team
Flickr / ElectronicFrontierFoundation