Peak Insanity: Retail Investors Are Making Direct Subprime Loans In A Reach For Yield

Tyler Durden's picture




 

Submitted by Michael Krieger of Liberty Blitzkrieg blog,

It has come to this. Unable to save enough for retirement with traditional investments, baby boomers in search of yield are becoming their own private Countrywide Financials. They’re loaning cash from their deposit accounts and retirement plans and hoping for a big pay day: specifically large returns that will boost their income and maybe even allow them to pass an inheritance on to their children.

 

It used to be that individual lenders were millionaires who could afford to loan cash and handle the risk of not being paid back. Now middle-income pre-retirees, ranging from chiropractors to professors, are joining their ranks.

 

- From an excellent MarketWatch article:  Want 18% returns? Become a subprime lender

Being a somewhat conscious human being in a world in which our “leaders” have completely lost their minds can be challenging at times. One side effect of this condition is a certain emotional numbness when it comes to reacting to new events occurring in the world around you. It’s simply hard to shock me these days, but every now and then it does happen. The following article published by MarketWatch had me literally shaking my head the entire time. If this isn’t peak insanity, I do not want to know what is. We now have chiropractors and orchestral conductors competing with Blackstone in a crowded, insane trade.

Read it and weep:

Barry Jekowsky wanted to build “legacy wealth” to pass down to his children. But the 58-year-old orchestral conductor, who waved the baton for 24 years at the California Symphony, didn’t trust the stock market’s choppy returns to achieve his goals. And the tiny interest earned by his savings accounts were of no help. Instead, Jekowsky opted for an unlikely course: He became a subprime lender, providing his own cash to home buyers with poor credit and charging interest rates of 10% to 18%. It may sound risky, but “it helps me sleep better at night,” he says. “Where else can you find [these] returns?”

Go ahead and read that twice. Ok, now let’s move on, it gets worse.

It has come to this. Unable to save enough for retirement with traditional investments, baby boomers in search of yield are becoming their own private Countrywide Financials. They’re loaning cash from their deposit accounts and retirement plans and hoping for a big pay day: specifically large returns that will boost their income and maybe even allow them to pass an inheritance on to their children. There is no official data, though it’s estimated that at least 100,000 such lenders exist — and the trend is on the rise, says Larry Muck, chairman of the American Association of Private Lenders, which represents a range of lenders including private-equity firms and individuals who are lending their own cash. “We know the number of people who are doing this is increasing dramatically — over the last year it’s grown exponentially,” he says.

The baby boomers will not rest until they destroy the entire world.

It used to be that individual lenders were millionaires who could afford to loan cash and handle the risk of not being paid back. Now middle-income pre-retirees, ranging from chiropractors to professors, are joining their ranks.

 

The move toward mom-and-pop lending comes in the wake of what experts say is the creation of a perfect storm: Banks are still skittish about lending to home buyers with poor credit. Meanwhile, investors who have endured years of low returns from plain-vanilla investment portfolios are itching for something more.

 

The operations often function like a game of telephone. Subprime home buyers, who know they have no shot at getting a mortgage from a bank, start spreading the word to friends and acquaintances that they are on the lookout for anyone who will lend to them. Eventually, the word reaches someone who is willing to lend his or her cash. Other times, a group of individuals pool their cash together to fund the loan.

A game of telephone…

What all these lenders have in common, however, is their willingness to lend to borrowers with low credit scores. In some cases, they do not even check their scores. They point to examples of otherwise reliable borrowers who fell on hard times during the recession and were unable to keep up with loans. Many say they work with borrowers who intentionally stopped paying mortgages (even though they could afford the payments) when they ended up owing more on the loans than the home was worth.

 

Separately, lenders are supposed to be registered with the state where they are originating loans, but many mom-and-pop loan officers are not, says Guy Cecala, publisher of Inside Mortgage Finance, a trade publication. And since most of these lenders do not originate a large number of loans per year, they are not required to report their activities to the federal government. “It’s a shadow business,” says Cecala.

 

In a sign that the trend may be here to stay, boot camps are training average Joes to become private lenders. Last month, Wealth Classes, a financial-education company based in Walnut Creek, Calif., that launched in 2007, hosted a networking retreat for 250 students who recently became lenders. Many of the company’s students end up lending to subprime borrowers, though others lend to real estate investors who don’t want to wait weeks to get a mortgage from a bank, says George Antone, founder of Wealth Classes. (Private lending transactions typically take about a week or two to go through, while a mortgage from a bank usually requires at least one-month of waiting time.)

 

Randy King, 61, joined Wealth Classes about three years ago when he started using his own cash to fund other people’s mortgages. A former U.S. Air Force servicemember, King, who is based in Colorado Springs, transitioned to buying fixer uppers and selling them and is now a lender for borrowers — many of whom are subprime — who are buying investment properties.

 

Going forward, experts say, it will be difficult to slow down privately funded subprime loans. This funding spreads mostly by word of mouth, so there’s no official advertisement plug that anyone can pull. Consider King. He recently visited his chiropractor who inquired about his lending operations and then asked if he could jump into one of the deals as well. The chiropractor explained where he would get the funds to become a loan officer: He would use some cash he had saved and withdraw equity from his home using a home-equity line of credit.

QE insanity has arrived. Next up silicon bagel implants.

Screen Shot 2013-11-12 at 11.56.17 AM

 

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Tue, 11/12/2013 - 23:34 | 4148674 Hulk
Hulk's picture

SO fucking stupid that I do not even know what to say...

Tue, 11/12/2013 - 23:40 | 4148693 Decolat
Decolat's picture

I am not shocked by the donut heads, I knew the day would come when retard nation would make silicone freakfuckups like this. Freaks we shall have, during the fall of Rome.

Tue, 11/12/2013 - 23:48 | 4148721 HulkHogan
HulkHogan's picture

Their foreheads look like pussies.

Tue, 11/12/2013 - 23:50 | 4148729 smlbizman
smlbizman's picture

i think the donut heads have made better descions then the lenders

Tue, 11/12/2013 - 23:59 | 4148748 knukles
knukles's picture

This is sure to work out well.

Wed, 11/13/2013 - 00:17 | 4148795 strannick
strannick's picture

DumbMoney loansharking to deadbeats

Wed, 11/13/2013 - 00:24 | 4148808 MeMadMax
MeMadMax's picture

Fucking boomers...

Wed, 11/13/2013 - 02:26 | 4148995 cpzimmon
cpzimmon's picture

I kinda resent the attack on the boomers. Some of us are good people who know that things are shitty, some of us know the difference between right and wrong.

Wed, 11/13/2013 - 03:16 | 4149041 Deo vindice
Deo vindice's picture

I agree cpz.

All generalizations are dangerous. (even this one)

But to your point, baby boomers also include a lot of preppers and PM holders.

Wed, 11/13/2013 - 03:34 | 4149053 TruthInSunshine
TruthInSunshine's picture

I almost did this. I had a borrower, named Joe E. Bagadonuts, with a 440 FICO score & a recent bankruptcy.

He wanted to borrow 100k at 17% interest but failed the stress test I subjected him to.

He only lasted 3 1/2 minutes on the tread mill at full speed while I tazed him repeatedly.

I heard he applied for an ObamaLoan recently but is in a very long queue.

Wed, 11/13/2013 - 05:06 | 4149107 cpzimmon
cpzimmon's picture

Taze? I spent a nickel in segregation in Taze.

Wed, 11/13/2013 - 12:25 | 4150126 mmanvil74
mmanvil74's picture

There is nothing wrong with this strategy if done right.  At least with this style of lending, the lender can use real human judgement regarding the borrower's ability to pay, instead of the robo-signing computer based algorithms that led to bankruptcy of Countrywide and others.  

If the buyer has a significant downpayment and a job, such subprime loans are probably worth the risk.  As long as your LTV is no more than 70% your loan is pretty well secured, and a lot of these people with bad credit were foreclosed on during the crash and I don't blame them for walking away from a mortgage that is twice their property value.  

Sure there is risk to the lender, but at least you are getting paid to take risk, unlike T-Bills which pay nothing, and less risky than stocks which are at all time highs and might plummet 25% in any given year.  

The smart players who know what they are doing will do well in this sub-prime game.  Just becuase they are "retail" doesn't mean they are fools, fools are those who sit on mutual funds, doing what their investment banker tells them to do. which is hoping for 5% p.a. until another 25% drawdown happens, in which case they should "hold for the long term", 

Wed, 11/13/2013 - 12:48 | 4150252 Pretty Vacant
Pretty Vacant's picture

As long as your LTV is no more than 70% your loan is pretty well secured

 

Had looked @ some of these deals concerning hard money lending to rehab investors.  No terms were within spitting distance of 70% LTV.  Maybe some SFR private lending hits 70%.  However, if borrower has the cash to have 30% skin in the game they generally do not have sub-prime credit scores.   

Thu, 11/14/2013 - 02:14 | 4153187 Four chan
Four chan's picture

A foole & his money, 
be soone at debate: 
which after with sorow, 
repents him to late.

 1587:

If they pay a penie or two pence more for the reddinesse of them..let them looke to that, a foole and his money is soone parted.

Wed, 11/13/2013 - 12:48 | 4150253 Pretty Vacant
Pretty Vacant's picture

-

Wed, 11/13/2013 - 11:49 | 4149954 Jumbotron
Jumbotron's picture

"But to your point, baby boomers also include a lot of preppers and PM holders."

Yeah....preppers.....people who shoot their toes off and will end up eating their gold when they can't spend it.

Wed, 11/13/2013 - 09:27 | 4149382 Joe A
Joe A's picture

Well, now you know how your parents felt when they got the blame for everything that was wrong in the world.

Wed, 11/13/2013 - 11:26 | 4149878 Neo
Neo's picture

briliant.

Wed, 11/13/2013 - 11:41 | 4149922 1223pm
1223pm's picture

A silicon dildo on their forehead would have been a better choice.

Wed, 11/13/2013 - 00:53 | 4148856 midtowng
midtowng's picture

That's exactly what it is. Loanshark rates to desperate people that probably can't pay back the money.

If you aren't prepared to break people's legs then you deserve to lose your money.

Wed, 11/13/2013 - 01:58 | 4148954 rehypothecator
rehypothecator's picture

There's a business plan in there to loan money (at a decent interest rate, of course) to people with recently-broken legs, so they can afford their medical bills.  

Wed, 11/13/2013 - 09:00 | 4149300 GMadScientist
GMadScientist's picture

Why not? Assuming their collateral is money good, of course.

Wed, 11/13/2013 - 11:51 | 4149958 Jumbotron
Jumbotron's picture

Why not? Assuming their collateral is money good, of course.

Right.....I hear the market is hot right now on livers and kidneys.

Wed, 11/13/2013 - 07:31 | 4149190 Running On Bing...
Running On Bingo Fuel's picture

WTF?
Rent to own or land-contract has been in practice for hundreds of years, maybe longer but I'm too lazy to do the research.

I own the real property until it's paid off. One missed payment and you lose it all. A legal binding agreement enforceable by Judge Judy Cohen or Judge Ira Epstein, or some such.

I assume the risk bro and it's low risk. Pay me.

Over.

Wed, 11/13/2013 - 10:00 | 4149514 toady
toady's picture

Exactly. This is no different than owning a rental. If the lender doesn't get paid the non-paying party gets evicted.

Sounds like the bankers don't like the little guys horning in on their business.

Why defend the bankers monopoly Tyler?

Wed, 11/13/2013 - 12:34 | 4150172 Bangin7GramRocks
Bangin7GramRocks's picture

The article didn't say that these fools buy the entire house with cash and thus have collateral. I think many of these penisholes lend money for down payments and to furnish the new squatters paradise. Nuthin' from nuthin is nuthin'.

Wed, 11/13/2013 - 08:09 | 4149233 StychoKiller
StychoKiller's picture

Yes, "Moral Hazard" has regressed to common loan-sharking.  I wonder if former carpenters can now find "jobs" as "collection agents/repo men..."

Wed, 11/13/2013 - 00:41 | 4148830 RockyRacoon
RockyRacoon's picture

Why does anyone care what folks do with their own money?  I thought we were all on a sort of Libertarian track here... or not.  Boomers want to destroy the world?  Come on.   If the banksters would pay a decent rate, there would be no market for this loan situation.  Sometimes I just can't believe what I read.

It's their own money.  If they want to flush it down the sewer who are we to criticize?

I kinda like the idea of hundreds of thousands of little private banks undermining the Wall Street scammers.   Give 'em a little bit of their own medicine.

Wed, 11/13/2013 - 01:05 | 4148874 RichardP
RichardP's picture

Why does anyone care what folks do with their own money?

In keeping with that - how is this any different from the "lender" buying the property outright, and then leasing it to someone with an option to buy?  So long as the lender has obtained title (by themselves or through the borrower) to a house at a fair price, their investment is protected by the value of the property.  That is, if they've put the deal together properly.  That is probably the big if.

In so many words, this is just Americans doing what they do best - being entrepreneurs.

Wed, 11/13/2013 - 03:14 | 4149039 zhandax
zhandax's picture

I had a client in Detroit 30 years ago who described a sales transaction in which the seller sold and financed the property, and the buyer didn't get title until the loan was paid off.  I think it was some form of land lease, and it may be state specific, but it sounds appropriate for transactions of this nature.

Wed, 11/13/2013 - 06:51 | 4149159 Big Brother
Big Brother's picture

My parents bought their first house in 1981 through seller-financing, paying 10% for 15 years with no money down.  As many may recall mortgage interest rates in 1981 for a first-time home buyer with 20% was about 18%.

When do the sub-prime credit-card private lenders come out?

Wed, 11/13/2013 - 11:53 | 4149966 Jumbotron
Jumbotron's picture

"In so many words, this is just Americans doing what they do best - being entrepreneurs."

Tell that to Native Americans.  Manifest Destiny bitchezz.

Wed, 11/13/2013 - 06:52 | 4149045 starfcker
starfcker's picture

bingo, rocky. who's crying about this? people learn to real world invest, risk vs reward. and borrowers get their loans without filling up databanks and without 20 pages of fine print. and think of the fees you save. it's what made this country great.

Wed, 11/13/2013 - 04:38 | 4149085 Dr. Sandi
Dr. Sandi's picture

The way this was framed sounds like the ongoing effort to vilify the evil baby boomers. Since 'they' created all this mess as a way to destroy the world, society will not have to honor commitments made to boomers when the financial toilet finally flushes.

Hey assholes, if you want to see what the idiot who is destroying your world looks like, get a mirror. We're fucking things up together whether we are big enough to own the idea or not.

Wed, 11/13/2013 - 06:00 | 4149141 lewy14
lewy14's picture

Plus one to the Racoon.

There is no principle / agent problem here. People do their own due diligence. They do not securitize, they do not hedge with derivatives. They have skin in the game. There is no "free optionality".

In short none of the problems associated with the sub-prime crisis apply at all.

I know several people who do this and to it well.

It's hard work. Information wants to be free, but information arbitrage remains dear.

Wed, 11/13/2013 - 07:39 | 4149200 Running On Bing...
Running On Bingo Fuel's picture

Yes, I encourage those who agree, or those sitting on the fence to increment 'Vote up!' by one for the coon.

This is a web destination focused on Libertarianism, specifically dominated by minarchists and a few anarchists who keep things spicy. Let's keep it that way!

Over.

Wed, 11/13/2013 - 08:08 | 4149232 Bobbyrib
Bobbyrib's picture

Most of are for the free market Rocky, but that doesn't mean we can't make fun of malinvestment caused by ZIRP.

Wed, 11/13/2013 - 12:33 | 4150170 RockyRacoon
RockyRacoon's picture

It's only malinvestment if you lose your money.  Seems like all's well if a profit is made (or a decent rate of return for taking risk).   Don't assume that all of these contracts are run at a deficit to the lender!

Wed, 11/13/2013 - 11:46 | 4149941 Jumbotron
Jumbotron's picture

"Why does anyone care what folks do with their own money?  I thought we were all on a sort of Libertarian track here... or not.  Boomers want to destroy the world?  Come on.   If the banksters would pay a decent rate, there would be no market for this loan situation.  Sometimes I just can't believe what I read.

It's their own money.  If they want to flush it down the sewer who are we to criticize?

I kinda like the idea of hundreds of thousands of little private banks undermining the Wall Street scammers.   Give 'em a little bit of their own medicine."

 

You stupid fuck, Rocky.   I'm sorry....I'm trying to limit my comments on this and other sites because I just don't care anymore and words never changed anything.  But sometimes, Cosmic Stupidity forces me back out to address it.

NOBODY OWNS ANYTHING....including most of all, FIAT PAPER !  NOBODY IS A "RUGGED INDIVIDUAL" as that fat fuck drug addict Rush Limbaugh professes.  EVERYBODY AND EVERYBODIES' ACTIONS ARE INTERCONNECTED.....like String Theory in Physics.  If these stupid fucks blow up individually they will affect ME AND YOU !!!  When these fucks whine and moan to their representatives about being destitute over their "individual actions".....and losing their "private" money.....we will take it up the ass.

When they are on the dole because of their "Libertarian" principles....we will all hang together.

Look silly wabbit.....Liberatarianism is just another lie to self delude you all who believe in it that we are NOT born on a Prison Planet where if you didn't have a silver spoon in your mouth when you popped out of your mother's fuck hole.....you're fucked.  AND if you somehow become a "self made man or million (billion)naire you just become just like those sick twisted fucks who are born into the purple.

AND REALLY....YOU COSMICALLY STUPID FUCK !!!????   YOU REALLY ENCOURAGED THESE SHEEPLES TO ACT LIKE BANKSTERS ?????

YOU REALLY THINK THEY WILL UNDERMINE THE BANKSTER CLASS ?????  THEY'RE SITTING BACK LAUGHING AT THESE DUMB SHITS TAKING THE LOSS SO THEY CAN HOOVER UP THEIR HOUSES (both their rental properties AND their personal homes) IN ORDER TO RENT THEM BACK OUT AGAIN AT EXHORBITANT RENTS !

JEEZUS....no wonder you Libertarians never get far......you're too fucking stupid and deluded by your own utopian beliefs.  Not that I believe in Communism or Socialism.  They suck too......but you guys have no viable solutions either.

And encouraging desperate baby boomers who still dream of sitting on their ass drinking Mai Tai's on the beach and leaving "legacy wealth" to their children which encourages their children to sit on their ass is the HEIGHT of Quantum Stupidity.

Grow up.  You were born into fuedalism....you will die a serf.  Accept it.  Better that than dying a rich, psychopath.  Because the rich always die knowing two things......they can't take it with them......and they all will die.  And money can't change that.


Wed, 11/13/2013 - 11:58 | 4149983 PT
PT's picture

+++++ lots Jumbotron.

Nice rant.  Thanks for  contributing.

Wed, 11/13/2013 - 12:36 | 4150186 RockyRacoon
RockyRacoon's picture

All the expressive sentiment aside...   It is their own money.   Why do you even care?  How would you like to see an article here at ZH about some of your choices in what you do with what belongs to you?

Wed, 11/13/2013 - 12:55 | 4150301 Jumbotron
Jumbotron's picture

"All the expressive sentiment aside...   It is their own money.   Why do you even care?  How would you like to see an article here at ZH about some of your choices in what you do with what belongs to you?"

Stupid fuck.  Nobody made the land and it's natural resources.  So nobody owns any of the derivatives from it.  And what we call "wealth" is therefore not owned by anybody as well. 

Wealth today is a string of 0's and 1's in a bank's computer which represents a piece of fiat paper which represents nothing and is backed by nothing but a promise from a lier.  Since you or I or ANYBODY did not MAKE the promise.....you don't own the paper NOR the digital bits it represents.  That promise can be withdrawn at ANY time for ANY reason and replaced  by another promise (lie) with NEW paper which represents LESS of those ephemeral digital bits in your bank account.....if your bank still exists....(which you don't own either).

The land you live own was stolen from Native Americans.  You don't have clear title.  You pay rent to the government every year (property tax) therefore you don't own the land OR the house that's on it.

No wonder you sons of bitches get pulled around by the nose like an ox by your elite masters.  You have no clue to what reality is.

Wed, 11/13/2013 - 11:50 | 4149956 PT
PT's picture

Re "Why does anyone care what folks do with their own money?" :

Sure, go ahead, ignore what other people do with their money.  It is none of your business.  Except that when bankers lend money to idiots who can't add up, those idiots bid prices up to the point where anyone with a brain cannot afford to buy anything.  And those prices have been too high for at least the last 13 years.  So yeah, go ahead.  Have fun living in your tent while you wait for the fwee markits to re-assert themselves.  Corrupt bankers can lend money to an endless supply of idiots for a lot longer than you can happily wait.  Oh, sorry, you seem quite happy.  Maybe it's just me.  Have fun working "harder" and "smarter" so that you can compete with the mass of idiots who just borrow beyond their means.  I'm quite sure all them foreclosed homes will be put up for cash auction eventually.

Wed, 11/13/2013 - 12:38 | 4150196 RockyRacoon
RockyRacoon's picture

The article wasn't about bankers.  It was about individuals and small organizations whose members choose to join freely.   Perhaps you should read the article again and see how people were demonized for "wrong" ways to use their own personal property.

Wed, 11/13/2013 - 00:05 | 4148765 Agent P
Agent P's picture

Lender's Bagels...I just got it.

As for that picture...WTF? 

Wed, 11/13/2013 - 00:20 | 4148802 IridiumRebel
IridiumRebel's picture

http://m.huffpost.com/us/entry/1916188
Yes. The bagel head people are real. What fuckushima tainted adolescent shithead from Japan thought of this? They need to be kicked off of the earth.

Wed, 11/13/2013 - 11:36 | 4149914 PT
PT's picture

Sometimes it truly is amazing, to see how much effort a human being will put into warning everyone else that he is an idiot.

Wed, 11/13/2013 - 12:40 | 4150210 RockyRacoon
RockyRacoon's picture

That's exactly right.  Don't we have enough do-gooders already?  I get really tired of others telling others what they oughta do.   Codependency is alive and well and cultivated by the popular media.   Enough already!

Tue, 11/12/2013 - 23:42 | 4148699 OldPhart
OldPhart's picture

In the old days, these were known as 'loan sharks'. 

I'm pretty sure that missing a payment would be detrimental to your health.

Wed, 11/13/2013 - 00:12 | 4148784 asteroids
asteroids's picture

Bingo. Good, honest folks should just go to cash and stop playing. It'll be hard, but the system will correct a lot faster that way. These yoyo's are just as evil as the scum they are emulating. They deserve everything they will get in the long run.

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