Originate Report- January 2018

JANUARY 2018

HAPPY NEW YEAR

!

Make 2018 PURPOSEFUL & PROFITABLE

Cities to Watch: Portland, Oregon

THE OFFICIAL MAGAZINE OF GERACI

Inside January The Promise of

FINTECH

Internet Mortgage

Pricing Engines’

DIRTY LITTLE

SECRETS BANKS &

Conservative

LOANS

www.originate.report 1

2 Originate Report | January 2018

ANTHONY GERACI CEO/Editor

RUBY KEYS Marketing/Editorial Director

JOHN PELACHE Account Executive

ALICIA CARTER Marketing Coordinator

DAVID BASEN • MAX BERGER Marketing Assistants

PAM HUBER Graphic Artist

CONTRIBUTORS Max Berger • Edward Brown Mark Heenan • Tim Malburg Michael Miller

FOUNDING UNDERWRITERS

Letter from the Editor We are kicking off our first full year with Originate Report, and I cannot be more excited. We are going to bring you more content and more value with each issue.

Thank you so much for your comments and readership. Here is what some of you said:

“I wanted to write you and let you know that the content was terrific. It goes beyond the traditional ‘business periodical’ in our industry and is more ‘real world,’ in regard to what

MARK HANF President, Pacific Private Money

can help us as originators.”

“Hey Anthony, just wanted to let you know that the magazine is informative and I enjoy it.”

For only being our 7th publication, your letters

mean the world to us. Keep sending them

in, and keep letting us know what you find valuable. To kick off 2018, we thought we’d

rewind the clock to 2007 and review Richard

DAVID OWEN

Fuld’s time at Lehman Bros and the implosion

CEO, A List Partners

that in my opinion started the Subprime Crisis.

To Your Success,

ORIGINATE ONLINE www.originate.report

GERACI ONLINE www.geracilawfirm.com Interested in advertising in Originate Report? Please reach out to John Pelache at John@Originate.Report or (949) 379-2600

Anthony

For Advertising Submissions, Article Submissions, and Inquiries contact Submissions@Originate.Report

ORIGINATE MAILING ADDRESS Geraci LLP 90 Discovery, Irvine, CA 92618 PHONE (949) 379-2600

GERACI CONFERENCES www.geracicon.com www.originate.report 3

contents JANUARY 2018

Features

6 National Vs. Local Lenders and the Rise of Fintech

By Mark Heenan, PeerStreet

10 Why Banks Do Not Lend on Conservative Loans

6

By Edward Brown, Pacific Private Money

12 The Dirty Little Secret Behind Internet Mortgage Pricing Engines

By Tim Malburg, Capstone Mortgage

16 The Rise & Fall of Richard S. Fuld, Jr.

By Originate Report Staff

16

Trend Report

8 The New “It� Investors: Flipsters

By Michael Miller, 5 Arch

Industry Spotlight

18 Elizabeth Morales: Marketing &

Communication Director, Applied Business Software

18

8

Cities to Watch

22 Portland, Oregon

By Max Berger, Geraci LLP

Special Features 24 Upcoming Events 26 Loan Home 4 Originate Report | January 2018

22

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www.originate.report 5

FEATURE

National vs. Local Lenders and the Promise of Fintech

By Mark Heenan, PeerStreet

6 Originate Report | January 2018

N

ational hard money lenders are making it

Next, when a loan goes into default, it’s much harder

Lastly, and in some ways most concerning, national

their institutional backing and easy access

dle a workout. Local lenders have relationships with

funds and are prone to abandon the space when the

hard for local lenders to compete. Due to

to capital, they are equipped with highly competitive rates. As they grow, they will become more difficult for

private lenders. The solution is to galvanize and unify local lenders with tools that make them more efficient and nimble than national players.

for a national lender without local relationships to han-

local construction crews and other operators that can help in these situations.

The ability to navigate workouts at the local level is a key benefit of partnering or working with local lend-

lenders are usually backed by fickle capital from hedge

market turns, when LIBOR increases, or another more enticing opportunity presents itself.

The United States witnessed the lending industry tran-

sition from a local context to a national one with the supersizing of banks, which happened at great cost to most Americans. Lending left its community-focused

roots, becoming impersonal and detached from the nu-

ances and needs of neighborhoods. The private lending space is one of the few truly local lending paradigms

left, and its work continues to transform communi-

ties for the better, one house at a time. Local lending should be supported and protected as much as possible.

For these and many other reasons, local lending helps create a better and less risky system for everyone.

How Technology Can Help

With the rise of financial technology, local lenders now

have access to the capital and technology they need When a national lender steps out of their geographic

ers. When national lenders enter a new market, they

risk. Today, as national lenders aggressively expand,

customers (which can be very expensive), they under-

market or product type, they are open to heightened some of their lending choices are reminiscent of trends

that brought about the recession of 2008. Looking

closely at the market, we can see the warning signs that must be addressed.

Local is Better

The recent trend of national lenders is entering markets that have traditionally been serviced by local private lenders. This shift is causing systemic risks. First, national lenders lack local market knowledge. Data is

great, but it isn’t enough to fully evaluate these submarkets. You need “boots on the ground” professionals who

know the historical trends intimately as well as which

borrowers to work with and which ones to avoid. Since most of these national lenders are headquartered in ma-

jor metropolitan cities such as Los Angeles, San Fran-

cisco and New York, the lenders do not have a nuanced knowledge of every submarket in which they lend.

don’t have existing borrower relationships, so to attract cut pricing and increase advance rates. This adds risk

to the entire system because it doesn’t just affect their deals, it becomes the new market norm in that area.

The lack of relationships with borrowers or the community at large also removes social pressure for a bor-

rower to perform. When borrowers work with lenders within their communities instead of a large impersonal entity, the local lenders strive to meet additional social and reputational expectations.

to compete against national lenders. Platforms such as

PeerStreet offer to connect lenders with new capital sources and data and analytic tools that empower local

lenders to strengthen and streamline their work. Fintech resources can take the mindshare of previously

time-consuming tasks to help them be completed not

only faster, but better and more efficiently. By offering tools for more back-end tasks, fintech platforms allow

lenders to focus on what they do best: finding great borrowers and writing high quality loans. As more services proliferate to support local lenders, the goal is to

expand the type of loans local lenders can offer so that lending can increasingly return to its community-based roots, without sacrificing quality or options.

ABOUT THE AUTHOR: Marc Heenan oversees the team that identifies and onboards lenders to PeerStreet, a platform for investing in real estate backed loans.

Previously, Marc was First Vice President in OneWest Bank’s Commercial Real Estate Group, where he managed a team that sourced new originations in the Bank’s $15$40 million bridge lending program between 2013 and April 2015. Between 2011 and 2012, Marc oversaw a portfolio of distressed legacy commercial real estate loans for the Bank. Previously, Marc co-founded a firm which invested in distressed commercial real estate loans and has worked at Kennedy-Wilson and Merrill Lynch. He has a BA in History and Political Science and an MBA from UCLA.

CONTACT: marc@peerstreet.com | www.peerstreet.com | (844) 733-7787

www.originate.report 7

TREND REPORT

The New ‘It’ Investors:

Flipsters

By Michael Miller, 5 Arch

L

oan originators, get ready: There is a new breed of real estate investors in the industry. Meet the “flipster”—a millennial who flips houses, often selling them to other millennial homebuyers.

If you think this is a passing fad, think again: A survey conducted by Better Homes and Gardens reports that 96 percent of millennial investors are looking at real estate for their next profit.

“Millennials are beginning their journey into real estate, moving from their parents’ homes into rentals, and with those at the top of the generation beginning to buy, it makes sense that a growing number of them are looking to flip homes,” says Steven Davis, CIO and CFO of 5 Arch, a private mortgage company for residential real estate investors. “This is a generation of individuals who aspire to be their own bosses. Real estate investing is an exceptional way to do just that, and those who specialize in tailoring loans to this market can thrive.”

So, where are millennials getting the money to fund these flips? There are those who aren’t too proud to ask Mom and Dad for a loan. Sheena Schwartz is one such millennial for whom Thanksgiving dinner won’t be an awkward occasion: One of her latest flips turned a $250,000 profit.

Then there are those flipsters who choose to rent, taking money they would use for a down payment on a home and using it to buy investment properties instead.

“Millennials are in it to win it,” says Davis. “They see the draw of short-term cash flow, but are also committed to long-term revenue growth. Loan originators can feel good about funding millennial clients.”

Eva Boccio, a 27-year-old acquisition specialist with Realty Warehouse in New York, is one such millenni-

8 Originate Report | January 2018

al catering to other millennials. Her company takes on abandoned properties then vacates the properties in preparation for flipping or renting.

“Once inside [the property], I love to imagine what the potential of the house could be and come up with more pragmatic ways to rearrange the layout for the modern-day family’s lifestyle,” says Boccio. She cites open concept as a big draw for millennial homebuyers, along with spacious closets, an office, and a children’s play area.

While urban centers remain popular with single millennial buyers and renters, those who are starting families look to the suburbs for more room. And there’s a lot more room to be had, in fact: A recent article in the Washington Post indicates that construction of McMansions (homes between 3,000 and 5,000 square feet) is on the rise—a sure sign that the recession is in the rearview mirror.

Millennials often get a bad rap for being the entitled “snowflake generation.” Flipsters like Boccio, however, are showcasing that many millennials are just as hard-working as their Gen X and Baby Boomer predecessors. In fact, she believes that being a millennial in the real estate industry offers her an edge. “It has given me an advantage because of my drive and my hunger to

make my life the best that it can possibly be.”

“My clients feel comfortable with me because they know I am a hard worker and that I am reliable, honest, and trustworthy,” says Boccio.

Though she boasts experience in the field, her relative youth is still a bonus. “I’ve been told it’s like I’m ‘everyone’s daughter,’ and am very easy to work with—patient, relentless, and resourceful,” she says.

Boccio also credits her success to being a digital native.

“It helps that I am used to navigating technology since I was a child, and it comes easy to me to utilize any and all resources available when analyzing properties,” she says.

Flipping properties interests Boccio for a number of reasons. “Every day is a different journey, challenge, and opportunity,” she says. “I learn more about myself and other people every day, and I feel good when I know that I am helping people out of a difficult situation [regarding their properties].”

Flipsters are much more than their trendy name. These millennial investors are game-changers in the real estate market, and loan originators should be prepared to play.

ABOUT THE AUTHOR: Michael Miller serves as the Chief Marketing Officer of 5 Arch and its parent company, 5 Arches, LLC. Prior to this, Michael was the CMO

of Epsilon Agency Services and Managing Director of Catapult Marketing. He also co-founded Hyper Marketing, which was later acquired by Epsilon. Mr. Miller lead global strategic initiatives and marketing for MRM Worldwide and advised McCann Worldgroup, as well as other prominent advertising agencies. He has developed global marketing platforms across brands, including JPMorgan Chase, Union Bank, Wells Fargo, Google, Intel, GM, The Home Depot, Lennar, and Tishman Speyer.

CONTACT: mmiller@5archgroup.com

www.originate.report 9

FEATURE

Why Banks Do E Not Lend on Conservative Loans

ver wonder why banks shy away from loans that appear to be relatively conservative?

There are numerous reasons banks avoid making loans that are likely to be paid back. During the mortgage crisis almost

a decade ago, one thread seemed to run through all of the bad loans: late payments on even the smallest of items, such

as a department store credit card. This led banks to steer away from otherwise good borrowers. Thus, a borrower who never missed a mortgage payment but may have been late

on a small credit card was seen as a bigger risk for a future default.

By Edward Brown, Pacific Private Money

Banks are not in the business of taking over property and do

not want to be viewed as predatory lenders. Even if a bor-

rower has a good story, it’s not enough reason for the bank

to entertain the request. Banks are very cash-flow oriented.

They do not want to lend to borrowers when there may be a question of how a mortgage will be serviced.

Continues on page 14

10 Originate Report | January 2018

www.originate.report 11

Why Banks Do Not Lend on Conservative Loans continued from page 12

Due to competition, most banks work off of a fairly

slim arbitrage, so it is not worth having riskier loans

in their portfolio. When a loan moves onto a watch list

or into default, more of the bank’s resources are tied up and not available for new loans. Watch list loans are

those in which the loan to value is not as strong as the bank had originally determined. Although the borrower may not be late on any mortgage payments, the value of

the property may have declined to a level of potential default.

If a bank makes loans that appear questionable, they risk receiving a lower rating. They find it better to avoid loans that may blemish their reputation, even though they would have earned a higher yield on the mortgage.

For example, if the bank made a loan on a property two

years ago for $100,000 on a property that had a value

of $150,000 (67%), the bank would set aside a certain amount of reserves as prescribed by the FDIC. Howev-

er, if the property declined in value to $117,000, the $100,000 loan (presuming the loan was interest only)

now stands at over 85% LTV (loan to value). Under this scenario, the bank would be required to set aside more reserves. This creates a problem for the bank: Less In commercial real estate loans, banks use a ratio called

provide a much larger down payment (but require a

measure of the borrower’s available cash flow to pay

the mandated down payment and found they could not

Debt Service Coverage Ratio (DSCR). The DSCR is a current debt obligations (principal and interest in cases

of a mortgage). It shows the ability to produce enough cash to cover the mortgage payment. Before 2007, most banks required a DSCR of at least 1.1.

For example, if the mortgage payment (including prin-

cipal and interest) was $10,000 per month, the net cash flow after paying normal expenses and before the mortgage needed to be at least $11,000 per month. This

was not usually an undue burden, as most real estate investors would have expected a break-even cash flow after paying the mortgage. However, after 2007, almost

every bank in the nation tightened their standards and insisted on a DSCR of at least 1.25 and as high as 1.35.

Although this may not seem excessive, the extra 15 to 25 basis-point requirement severely restricted the bor-

rower’s ability to borrow. The investor would have to

12 Originate Report | January 2018

smaller loan). Many real estate investors did not possess qualify for the higher DSCR.

Another aspect that impacted banks’ ability to make loans to less than stellar borrowers is that they are simi-

money for the bank to lend out. If the loan actually

progresses into default, substantially more reserves are

needed. After the mortgage crisis, stringent guidelines were handed down to banks, as the federal government did not want to bail out more banks. Thus, most banks found it was just not worth using resources for potentially non-income earning activity.

lar to corporations that rely on their good ratings (from

There is a lot of activity in the lending arena as the

or floating paper (through Wall Street’s ability to attract

attractively low. With the numerous requests for loans,

S&P and Moody’s, for example) in attracting deposits

bond financing). From a deposit standpoint, although deposits are FDIC insured up to $250,000, many banks that have lower than AAA ratings pay higher yields

to depositors to attract money. From a bond offering standpoint, the higher the rating, the lower the rate the banks have to pay their bondholders. If a bank makes

loans that appear questionable, they risk receiving a

economy has strengthened, and interest rates are still many banks do not need to attract borrowers. They do

not want to explain to auditors (or even bank board

members) why certain loans are initiated when they

have many slam-dunk loans. Banks cannot justify the

extra time, expense, and risk to make a typical non-bank loan.

lower rating. They find it better to avoid loans that may

An alternative to conventional financing can be found

earned a higher yield on the mortgage.

nies do not have the same reserve requirements and will

blemish their reputation, even though they would have

with private lending companies. Private lending compa-

generally provide loans more expediently with much

Of course, if time is not of the essence, a borrower

all adding their fee onto the loan. A two-point deal

interested in equity-based lending, meaning how much

tional lender. However, borrowers should not be dis-

the loan reaches the final funding, many brokers can

less hassle. These private lending companies are more equity is in the property at the time they make the loan.

This provides the private lending companies an oppor-

tunity to fill a gap where the banks have left off: Loans

that are not generally considered risky but still need funding. However, the price of capital is higher because

should first attempt to obtain funding from a conven-

mayed if they are turned down. Alternative sources of capital are available. Many mortgage brokers also know

private lenders and can assist the borrower with pricing and reputable companies.

the private companies do not have the same access to

In bringing a deal to a private lender, the borrower

ance to their capital resources; thus, they have to pay a

(seeking many lenders at the same time for the best

capital that banks do. They cannot provide FDIC insurhigher rate than depositors of banks.

In conjunction with higher access to capital costs, these private lending companies must charge the borrowers

a higher rate for the money. The benefit to the bor-

should be careful not to attempt a shotgun approach deal), which may hurt the borrower in the long run.

This may force competition, but many times, it back-

fires on the borrower, as some brokers broker to other brokers. This means a chain of brokers may be involved,

rower is the access to otherwise unavailable capital; in addition, the borrower usually does not have to jump

may turn into a four-point deal because, by the time

claim they had a hand in the deal and all want to get

paid. The borrower may find that a better plan of action is to find one good broker who is well connected with an array of lenders. Many times, this broker will know

ahead of time what terms the borrower can expect and communicate this with the borrower to avoid surprises.

Some brokers specialize in construction loans (as do

some lenders); some will not touch personal residence loans due to the Dodd-Frank regulations. It is best for a

borrower to seek out a broker who is well versed in the type of loan that the borrower seeks.

ABOUT THE AUTHOR: For over 20 years, Edward Brown was CEO of a $40 million alternative lending company based in Marin County. Today he assists Pacific Private

through as many hoops as with a conventional bank and

Money with capital raising and investor presentations. Edward is also the host of two

window. Many borrowers find borrowing from private

master’s degree in taxation from Golden Gate University, and he has held licenses and

will almost certainly be able to borrow in a shorter time lenders worth the extra cost.

radio shows: The Best of Investing with Mark Hanf and Sports Econ 101, a national sports and business show. Brown earned his bachelor’s degree in accounting and certifications including Real Estate Salesperson, Insurance License, Series 7 Securities License, Tax Preparation License, and Certified Fund Specialist.

CONTACT: (415) 299-0330 | edward@bestofinvesting.com | bestofinvesting.com

We turn optically challenged loans into

COMMISSION. Nationwide commercial real estate lending.

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FEATURE ESSAY

The Dirty Little Secret Behind Internet Mortgage Pricing Engines

By Tim Malburg, Capstone Mortgage

pear seamless. They will ask generic questions about your income, assets and credit history. Based on your responses, they will highlight your strengths and weak-

nesses. All of this can be done over the telephone in

about 10 minutes. It will be the most valuable time that you spend.

Upon selecting a lender, your loan officer will run their proprietary pricing engine. This engine produces "live rates" that are tailored to your specific loan program.

The rate can be locked immediately or floated and locked at a future date.

Prior to locking a rate, I remind my clients that mort-

gage rates always consist of two parts: interest rate and points. They are joined at birth and can never be sep-

arated. I often use a playground seesaw to describe the

relationship. On one side sits the interest rate and on the other side sits the points. When points are assigned a value of zero, the seesaw is balanced.

Online mortgage shopping is convenient and saves time, but shopping for a mortgage should not be a race against time. Multiple factors should be considered before applying for a loan.

Location, location, location,” is the most popular mantra for buying real estate.

A similar mantra exists for mortgage shoppers: “What’s the rate?”

As with any seesaw, if you lower one side, then the other

Mortgage lenders have listened and responded accordingly. The internet is now inundated with generic mortgage pricing engines. It is almost impossible not to test drive one. With just a couple of clicks, an enticing interest rate is displayed before a shopper’s eyes.

est rate, then the points go down. Can points go below

I

s there is any value to these pricing engines? I sup-

The preponderance of consumers who submit loan ap-

maceutical company's TV commercial. But at the

proved at rates substantially higher than the indicative

pose, just as there is some value to watching a phar-

end of the day, I would never consider self-medicating myself. Likewise, I would caution mortgage shoppers

from thinking that they have become mortgage experts with five clicks of a mouse.

The problem with these mortgage-pricing engines is

their end product. They generate an "indicative" interest rate. This rate is not guaranteed nor should it be inter-

preted as a loan approval. It is simply a sophisticated form of interactive advertising. Its sole purpose is to motivate the consumer into submitting a loan application. This is their dirty little secret. They are simply lead generators.

14 Originate Report | January 2018

plications via mortgage pricing engines are usually ap-

rate. This advertising practice is not illegal; but in my opinion, it is misleading. It preys on consumers who are obsessed with the rate.

Online mortgage shopping is convenient and saves time,

but shopping for a mortgage should not be a race against time. Multiple factors should be considered before ap-

plying for a loan. These considerations include, but are

not limited to, future employment, career changes and potential liabilities looming on the horizon.

Selecting a loan program is only half the process; the other half is getting approved. The approval process is complicated, but a good loan officer will make it ap-

side goes up. In this example, if you lower the interest rate, the points go up. Conversely, if you raise the interzero? Absolutely. When this happens, the points become

negative and the lender "pays" the borrower to accept a higher interest rate. Depending on your situation, a "negative point interest rate" may be your most attractive option.

ABOUT THE AUTHOR:

Tim Malburg has 30 years of experience in financing residential properties.

During that time, he has originated over $1 billion of mortgage loans. In 2000, Mr. Malburg became President of Capstone Mortgage Company, a full service mortgage brokerage firm, specializing in prime paper. Mr. Malburg received his BS from North Carolina State University and his MBA from Cornell University.

CONTACT: (203) 834-6293 | TWM41@aol.com

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SPOTLIGHT

Industry Spotlight:

Elizabeth Morales Marketing and Communications Director, Applied Business Software

16 Originate Report | January 2018

E

lizabeth is the Marketing and Communications Director for Applied Business Software. She has a proven record in senior operational roles and is known as an inspirational, forward-thinking approach leader and a data-driven marketer. She has created full scale marketing platforms, handles media, public relations and brand management for ABS; she is a strategic planner and a female leader in a male dominated industry. Prior to coming to ABS Elizabeth managed an Educational Program for the State of California that became a national model through the United States Department of Education. As a Vice President for VanKirk Media, a Closed Captioning and Subtitling Company, she managed the most complex scheduling for subtitling and closed captioning films that have gone around the world. The most notable film she ever worked on was a Documentary that was nominated for an Oscar: ENRON: The Smartest Guys in the Room. A former Business Adjunct Faculty, Elizabeth has a Bachelor of Arts in Spanish Literature and a Masters in Business Administration.

months you will become obsolete. As an example, just this past year, we added a Cloud/SaaS version, rolled out online payments, HMDA, text alerts, online loan application, over the phone payments, a fourth mortgage pool methodology, and about 50 other things. We always stay one step ahead – that’s our thing.

OR: What tools are essential to making ABS/ TMO succeed?

EM: That’s an easy one – having all the right people in place in every department. There are no weak links

OR: What is it that excites you about the Elizabeth Morales Mortgage Industry?

EM: The fact that it is so unpredictable and constantly here. We attract and keep the best and the brightest. It’s changing. I also really like what Private Lending offers a great place to sell and support a phenomenal product, the community, the industry, and the average Joe that and since the product works so well, it’s easy to sell Conventional Lending doesn’t. and support.

OR: What changes has ABS had to make due to the fast, growing technologies today?

EM: Do you mean this year, or over the past 40?! In the technology world if you rest on your laurels for six

OR: What CRM Software do you use and why?

EM: Top Secret. Kidding. We looked for something that would meet our needs for the Sales Department, since our reps make a high volume of calls every day. Most CRM platforms are geared towards ‘appointments’ versus tele-sales, so we use a system designed for that – Ours.

OR: What drew you to Marketing?

EM: Bringing all the pieces of the Marketing Puzzle for a common goal is very appealing to me. By pieces I mean, PPC, SEO, PR, Email, Advertising, Tradeshows, Videos, Social Media, Blogs, and everything in between.

Marketing technology certainly keeps me on my toes, especially on Mondays. That’s because the programmers will come in then and say “We just added this cool feature over the weekend – tell people about it!”

Originate Report: How long have you been working at ABS? Elizabeth Morales: Four fun years.

OR:What advice do you have for those who are looking to purchase a software system?

EM: I guess the biggest one is to find out what your competitors and peers use in your area. If 80 percent use product X and are happy with it, that should be your first call. When you do call, ask a lot of questions.

If the answer is always ‘yes’ to everything, make sure you see each of those things on a granular level in action; basically take your time doing your homework.

When calling references, make sure you ask these same things. It can be time consuming, but spending time (and money) on a non-stable product is much worse.

Also search for online reviews and make sure there are plenty of them from private lenders.

OR: What or who has been your greatest influence in business and why?

EM: I have learned a few things from mentors in all my jobs, but as far as Public Figures are concerned, I enjoy Sir Ken Robinson, Tony Robbins and Elon Musk.

Anyone that comes in disrupting business, changing paradigms, and questioning the status quo, I like.

OR: What are some of the biggest challenges that ABS/ TMO faces?

EM: The ever changing technology and regulatory environment. On the regulation side, our system is already compliant with HMDA, even though most lenders aren’t even aware of this Federal mandate. Just like RESPA, we jumped on this before anyone else, and our customers love this about our company. On the technology side, we always try to be ahead of the curve by implementing the next big thing.

OR: What do you enjoy most about working for ABS? EM: The constant learning, the diversity of markets we thrive in, and the awesome things we discover that our customers do with our software on a regular basis. We have a ton of happy customers spread across 20 countries, so it makes it a lot of fun.

OR: Have you had to learn any lessons the hard way?

EM: Who hasn’t? One of the hardest lessons of the last few months has been finding out our customers don’t know everything our software does. For example: we sent out a reminder email about our software providing 24/7 Online Access for Lenders, Borrowers and Pool Partners and we received replies from long time customers saying this was a great new feature.

New feature? We created that when the Spice Girls were the “it” group, Titanic was released in theaters and Microsoft was releasing Windows 98. Fun fact and for ice cream the next time I see you: Do you know who else (Hint: big bank) did online access the same year ABS did it? Drum roll… If you said Citibank you were right, and I will buy you ice cream when I see you next.

So lesson learned: Just because you did it, it does not mean people know about it; even if you poured your heart into it.

OR: What is one piece of advice you have learned and carried with you throughout your life?

EM: My mother always said to my sister and me: “Know where you are going, always walk with your head up high, and never give up if it’s worth it”.

CONTACT:

Elizabeth Morales | elizabeth@absnetwork.com

www.originate.report 17

market and the economy were humming along. Housing construction was on the rise, and home prices had reached an all-time high, producing an enormous housing bubble. With loose lending rules and easy access to loans, homebuyers were able to secure more financing than they could afford (or even qualify for).

FEATURE ESSAY

Looking to cash in on the boom market, many investment banks (including Lehman) moved assets away from stable government securities into higher-risk mortgage-backed securities (MBS) which offered better interest rates. Inevitably, these investment firms sought out higher and higher returns, taking on risky collateralized debt obligations (CDO) or MBS that helped inflate their book value and boost stock prices.

Lehman, like so many other Wall Street firms, was swept up in the excitement of capitalizing on the higher returns that came with subprime mortgage securities. But many of the MBS packages being bought and sold on Wall Street had questionable credit ratings.

The Rise & Fall of Richard S. Fuld, Jr.

By Originate Report Staff

“Everything’s ‘great’,” he added. “Why the hell does it not feel better? Why has the belly of America been ripped out?” Richard (Dick) Fuld Jr., CEO of Lehman Brothers, told a group of investors in 2015, telling them they need a new President. The subprime crisis wasn’t his fault, or the fault of other banks, according to Fuld. “[I]t starts with the government.”

D

ick Fuld led Lehman Brothers into bankruptcy in 2008 and shocked the entire financial world, as it was the largest bankruptcy filing in history. Looking back to 2007, Lehman Brothers was on top of the world, and at the time rated the fourth largest investment bank in the nation. They were at the pinnacle of the financial markets, on par with such financial behemoths as Goldman Sachs, Morgan Stanley, and Merrill Lynch. Only nine short months later, its empire lay in ruins, and the U.S. economy experienced one of the most significant financial downturns in a generation.

Chief Executive

Presiding over one of the worst financial collapses in history, Richard S. Fuld, Jr. was the top executive at Lehman, leading the company to record profits before its economic crash. It is hard to pin the firm’s disastrous decline entirely on Fuld, although he ultimately took responsibility for its demise.

By the time Lehman filed for Chapter 11 protection, Fuld had worked for Lehman for more than 30 years.

He took over the role of CEO in 1994, helping the firm to weather the Asian financial crisis and an historic decline in share price.

At the time, Lehman was suffering annual losses of more than $100 million. Fuld led the charge out of insolvency and returned the firm to profitability each of the years he served as CEO. By 2007, Lehman accumulated

18 Originate Report | January 2018

14 straight years of financial growth under Fuld and reported earnings of $4.2 billion that year. That run earned Fuld his nickname, “Gorilla of Wall Street,” along with the title of longest-tenured CEO on the Street.

According to Bloomberg, Dick Fuld was a strict loyalist, demanding the same from all of his employees. He demonstrated his dedication to the firm by taking and holding most of his compensation in company stock.

During his tenure at Lehman, Fuld earned more than $500 million in total compensation, the majority of which paid in stock or stock options.

Fuld’s total compensation in 2007, the most profitable year in Lehman’s history, was just over $22 million. He was listed on Barron’s list of the 30 best CEOs and nicknamed “Mr. Wall Street” by the publication. In 2006, Institutional Investor magazine listed Fuld as America’s top private-sector executive. He seemed to have the world by the tail, and apparently, the world knew it.

The Beginning of the End

Nearly a decade has passed since the collapse of Lehman Brothers and the ensuing recession. The shocking bankruptcy filing by Lehman caught Wall Street by surprise toward the end of 2008 and riled markets. The subsequent loss of clients, drop in stock price, and sell-off of assets helped send the global economy into a tailspin and ushered in the worst housing crash in history.

Even as the war in Iraq raged on, the U.S. housing

As more subprime securities were being created, packaged, rated, and sold on Wall Street, more consumer financing was needed to fuel the boom. Lehman, and others, would leverage the vast amount of assets they were carrying on their books to borrow more money from the Federal Reserve and offer out to consumers in the form of “innovative” mortgage products.

As their mortgage business swelled, so did their stock price, and this effect brought in even more institutional-level investment to the investment banks that were betting on the housing market. It isn’t hard to see why the financial markets failed (or refused) to recognize they were feeding a bubble — the money was just too good to pass up.

After peaking in mid-2006, economists started to see a decline in the real estate market. Prices reached a high point and began to drop. In early 2007, the housing bubble had nowhere left to go and popped.

Fuld’s Crisis Leadership Role

So, what led to the decline of Lehman Brothers? During the run-up to 2008, Fuld was praised for his handling of the subprime mortgage crisis. But even this titan of Wall Street underestimated just how far housing prices would decline. While other Wall Street CEOs were shown the door by the end of 2007, Fuld kept his position and seemed to have the full support of his board.

As the firm’s share price began to drop, few board members envied the position Fuld was in and were hesitant to challenge his leadership. Well-positioned interested parties, including Warren Buffet and the Korea Development Bank, which would have saved the firm from bankruptcy, were offering partnership deals. But Fuld, a “lifer” at Lehman Brothers, believed the company held much more value than was being offered.

Although Fuld was criticized by some for not taking a deal that would rescue Lehman, others were quick to take the blame off of Fuld and place it on others. Some in the Wall Street inner circle said there was a management coup taking place at the firm, and in disarray, the company made poor financial choices.

New York magazine wrote an extensive piece at the time explaining that the head of Lehman’s Investment Continues on page 20

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The Rise & Fall of Richard S. Fuld, Jr. continued from page 18

Banking Division, Skip McGee, had disagreements with the COO, Joe Gregory, forcing a meeting of the firm’s senior bankers in which Gregory was demoted and replaced by Bart McDade.

According to the article, Fuld was CEO in title, while McDade was actually running the day-to-day operations. At the same time, Fuld was secretly looking for a buyer during the summer of 2008 as a last-ditch effort to stave off insolvency. Apparently offering to step down as CEO, Fuld’s priority was the survival of the Lehman Brothers’ brand and saving as many jobs as possible.

Other Lehman Brothers insiders disagreed, contending that Fuld had ignored warnings from senior leadership before the crash, and continued warnings from analysts went unheeded during key management meetings.

economic crisis, Fuld said that you couldn’t just point to “one single thing.” He went on to present a list of reasons that he felt, coupled with the “buildup of the U.S. bull-market mentality,” played a role in the “Great Recession.”

Fuld contended that much of the blame for the economic crash lies at the feet of the government. According to Fuld, government policy encouraged people (even those not qualified) to own homes and contributed to a record level of consumer debt that ultimately resulted in record mortgage defaults when values dipped, and adjustable rate mortgage payments increased.

By September 2008, it was clear that the rumored Korea Development Bank buyout was not happening, resulting in a massive selloff of company stock. On September 9, Lehman stock dropped 45% to $7.79 per share.

The next day, Lehman announced it had taken a loss of $3.9 billion and that it intended to sell a majority stake in its investment-management business. By this time, the writing was on the wall as Lehman’s stock price entered a slide that it would see it decline another 40%.

Lehman Brothers Holdings announced on September 15, 2008, that it would file for Chapter 11 bankruptcy protection, claiming bond debt of $155 billion and bank debt of more than $600 billion. At the time of the filing, the bank held assets of $639 billion.

Fuld Revisited

“There was very little regulation or market supervision,” Fuld said.

To Fuld’s credit, the rate hikes did curb bank lending, and the subprime debacle led to the elimination of “easyqual” or “no-qual” loan programs (innovative products) that many homebuyers had relied on to finance their homes. Along with consumers, businesses faced reduced access to credit, restricting economic growth and resulting in less hiring and a rise in unemployment.

In 2008, Lehman was in no position to obtain a loan (not even a government bailout) that could save it from the ultimate demise it faced. Fuld’s loyalty, and possibly the shortsightedness caused Facing the Music As for the collapse of Lehman Brothers, Fuld still conby it, contributed to the failure of a tends the firm was not a bankrupt company. He places 158-year old American institution.

“They wanted everybody to be able to fulfill their view of the American dream,” he said. “We had low rates, easy access to credit. That led to increased home values, household debt, people borrowed a record amount of money, and as rates went down further, people refinanced, they used their homes and the increased value in their homes as ATM accounts.”

Placing much of the blame on Americans who had easy access to credit seems easy enough, but what about the financial professionals who looked the other way as funded mortgages were being diced and sliced, and sold off to investors as highly-rated securities?

Was the demise of Lehman Brothers and its ensuing economic calamity Fuld’s fault entirely? Well, he was the head of the company and oversaw the buying and holding of toxic assets that placed the corporation in a precarious position, ultimately imploding in early 2008.

Fuld makes no mention of the Wall Street firms that created massive liabilities by packaging up subprime mortgages with conventional loans, creating securities that had the appearance of a triple-A rating, and sell them off to unsuspecting investors seeking to capitalize on the housing boom.

Although Fuld took responsibility at the time, years later he had a long list of others (including the economy) with whom he was eager to share the blame. Speaking to a group of bankers on Wall Street in 2015, Fuld attempted to explain. When asked what caused the 2008

Fuld points to the economic growth of the early 2000s as swelling the reserves of Wall Street investment funds.

According to Fuld, private-equity companies had $800 billion under management in 2008. That was a 70% growth from 2000, with the number of hedge funds

20 Originate Report | January 2018

This glut of liquid cash, according to Fuld, fueled the growth in “innovative products” (subprime mortgages) that were offered out to consumers by investment banks such as Lehman. While Wall Street was more than willing to provide the capital, Lehman and others, went to work funding anything and anybody that could put pen to paper.

He also went on to blame the Federal Reserve for raising interest rates at a time when the housing market was booming, claiming that the policy prevented homeowners from refinancing their homes and drove up adjustable rate mortgages to the point that they were no longer affordable.

Late in 2007, Lehman faced unprecedented losses from the effects of the subprime crisis. By then, the firm had shuttered its subprime lending division, BNC Mortgage, closing 23 offices and eliminating more than 1,200 positions. Now, Lehman was leveraged heavily in subprime MBS debt and was seeing substantial servicing losses.

As a result, Lehman was likely unable to unload the low-rated mortgage bonds, accruing steep losses through the end of 2008. For the year, Lehman reported $2.8 billion in losses, was forced to sell off $6 billion in assets, and lost 73% of its stock value.

rising from 4,000 to more than 10,000 and over $1.8 trillion in assets under management by 2008.

part of the blame for its failure on the Treasury Secretary and the New York Fed Chairman for not offering a bailout, as it did for other “too big to fail” banks.

The fact remains that in 2008, Lehman was in no position to obtain a loan (not even a government bailout) that could save it from the ultimate demise it faced.

Fuld’s loyalty, and possibly the shortsightedness caused by it, contributed to the failure of a 158-year old American institution.

Greed played a part for sure, and not an insignificant one, as Fuld and others fiddled with easy-access credit products and played the same Wall Street shell game that forced hundreds of other Wall Street firms to meet the same fate.

Fuld has held several other positions with Wall Street firms since leaving Lehman, but none that ever seemed to stick. His unique story of his rise to glory as a titan of Wall Street was followed by the tale of a calamitous fall from grace that ushered in one of the worst recessions our nation has endured.

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CITIES TO WATCH

22 Originate Report | January 2018

Cities to Watch:

Portland

By Max Berger, Geraci LLP

Portland has seen a dramatic surge in popularity over the last decade. Having developed more of a national reputation thanks to its burgeoning economy, unique infrastructure, and strong counter-culture, it has become one of the most attractive cities in the U.S. – especially for career-minded young people.

P

ortland is known for being a trailblazer of

green initiatives (as well as the home of the actual Trail Blazers NBA team), its coffee

shops and microbreweries, and its thriving music scene.

gorgeous forest hiking. It’s a great place to spend a day with the family.

nese food, check out Chin’s Kitchen, or hit up The

Woodsman Tavern for some late-night barbecue from Top Chef finalist Doug Adams. Finally, La Leña comes highly recommended for its delicious Peruvian dishes.

Entertainment: There’s never any shortage of qual-

ity entertainment in Portland- and one of the most

popular places to go is the Moda Center arena. Catch

Blazer games, massive concerts, plays, wrestling events,

hockey and figure skating, and even rodeos! Plan ahead to see when your favorite events are happening. Also,

check out the Keller Auditorium in downtown for Broadway stage productions, operas, ballets, and more.

floors, themed parties, and live music on weekends. If

on the entire West Coast, and has more than 42,000

edy based entirely on the quirks of the city, is currently

new favorite among locals and tourists craving Chi-

Museum. It’s one of the largest and oldest art museums

preference for local, organic food. Fans of art and theimmensely popular TV show “Portlandia,” a sketch com-

is home to some of the best burgers in town. For a

Nightlife: One of downtown’s most popular late-

art, you could do a lot worse than the Portland Art

ater will also find a lot to like here. On top of that, the

the food cart-turned-restaurant Stoopid Burger

Portland Art Museum: If you have an interest in

It’s also one of the healthiest cities in the country, with easy walkability, a high concentration of cyclists, and a

Dinner: A recent addition to Portland’s food scene,

works of art at any given time. It showcases both mod-

night spots is Holocene, a bar/club with two dance you’re particularly interested in Portland’s music scene, the Doug Fir Lounge is one of the best places to get

airing its 8th season! Portland is unlike any other city,

and it’s proud of that fact- That’s probably why its unofficial slogan is “Keep Portland Weird!”

Must-visit locations:

Washington Park: Portland is known for many things, but among the most prevalent are its parks and

hiking spots! Washington Park contains 400+ acres

of some of the city’s most popular locations, including the famous Oregon Zoo. On top of that it is home to

several museums, war memorials, a beautiful Japanese garden and rose garden, an archery range, and miles of

Portland, Oregon Economy:

• Major industries: Technology, Manufacturing, Recreation • Minimum wage: $11.25 per hour • Cost of Living: 27% above national average

Housing:

• Median Household Income: $68,126 • Median Home Price: $405,500- an 0.8% increase from last year • Median Rent Price: $1,895

Job Market:

• Forbes List - #1 Best Places for Businesses and Careers • Unemployment: 3.8% • Job Growth from 2016: 3%

ern and contemporary art, Northwestern art, and Asian

your drink on and hear today’s best up-and-coming

al traveling exhibitions so that there’s always something

Restaurant and Pub, a unique blend of Irish and

and Native American art- on top of that, it hosts seasonnew for returning visitors!

acts. Another popular Portland mainstay is Kells Irish Northwestern influence with a great whiskey selection.

Pioneer Courthouse Square: Seated right in the

heart of Downtown Portland, the Square is also referred

to as “Portland’s living room.” Home to plenty of urban

art, great spots for food, shopping, and entertainment, and more than 300 public events per year, there is al-

ways something exciting going on here. With over ten million visitors annually, you don’t want to miss out on one of Portland’s most popular attractions!

Max Berger is a Marketing Assistant at Geraci LLP and supports all marketing campaigns, projects, and events throughout the corporation and contributes to the execution of the firm’s growth.

CONTACT: (949) 379-2600 m.berger@geracillp.com

www.originate.report 23

UPCOMING EVENTS

All event dates subject to change.

Please visit conference websites for agendas and details.

Upcoming Events

Don’t be left out! Showcase your upcoming event here!

Contact Ruby@originate.report for more information.

2018 JANUARY

Innovate 2018 Conference FEBRUARY

February 7-9, 2018, Newport Beach, CA www.geracicon.com

MARCH APRIL MAY

Activate 2018 Conference May 9-11, 2018, Los Angeles, CA www.geracicon.com

JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER 24 Originate Report | January December 2018 2017

Captivate 2018 West September 9-11, 2018, Las Vegas, NV www.geracicon.com

Captivate 2018 East October 10-12, 2018, Boston, MA www.geracicon.com

GERACI PRESENTS

2018 CONFERENCE Attend Innovate 2018 to learn about the latest trends and insights in the private money lending space that we’re seeing. We will show you how to raise and deploy capital more effectively, while also bringing you together with the people that you need to know in this industry! See you in Newport Beach.

FOR MORE INFORMATION ABOUT ATTENDING, SPONSORING, OR SPEAKING, CONTACT RUBY AT RUBY@GERACICON.COM

FEBRUARY 7-9, 2018

BALBOA BAY RESORT | NEWPORT BEACH, CA

www.geracicon.com/innovate www.originate.report 25

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PROVIDING PEACE OF MIND As a full service law firm that caters to the private lending industry, Geraci’s team of bankruptcy, banking and finance, litigation, securities, corporate, and real estate attorneys has provided our clients with peace of mind for over a decade.

Let us deal with the legal side of your business—so you can stay focused on what’s really important.

28 Originate Report | January 2018

Geraci Law Firm | 949.298.8050 | www.geracilawfirm.com