Credit crunch brings business to hard-money lenders

Every crisis spawns opportunity for someone, and the credit crunch is no different. As the banks and mortgage companies that binged on free-and-easy real-estate lending have grown gun-shy or disappeared, the niche is widening for so-called hard-money lenders.

It's a low-profile, little-regulated corner of the financial world, with no local or national statistics to track it. Many of the loans go to land developers, small construction firms and other businesses whose usual lenders are tightening their criteria and stretching out their approval times.

Such private lenders charge "a much higher interest rate with much higher fees" than conventional loan sources, says Dave Erickson, president of the Washington Association of Mortgage Brokers.

But as the collapse of subprime mortgages triggers a wider pullback in lending, business has improved "tremendously" for hard-money lenders, says John Odegard, founder and president of Bellevue-based Seattle Funding Group.

His 20-year-old company, considered the largest local player in the hard-money field, claims "a 20 percent increase" over last year. "Not only that, the quality of the borrowers has gone up, especially over the last five months," says Odegard.

At hard-money lender Wadot Capital of Seattle, "We're doing slightly more (than last year) in a market that's a lot slower," says co-owner Erik Egger. "Conventional lenders have cut back, and that has increased our business."

Erickson, who also heads Mortgage Broker Associates in Lynnwood, says he thinks hard-money lenders are "bailing out builders, bailing out land deals," but aren't seeing much more activity from ordinary homebuyers.

Odegard describes his borrowers as "people who need $2 million by next Friday."

"They come here for certainty, for service. ... We're the Federal Express of the mortgage community," he says.

In a recent interview, Odegard said he was about to fly to Park City, Utah, "to analyze a $4.2 million loan on an $8.2 million Park City luxury duplex."

The builder was a bit slow in completing the project, and the original lending bank, which is bailing out of construction loans altogether, was in no mood to extend the loan.

His company's loans typically carry annual interest rates of 9 to 10 percent, says Odegard, while the broader hard-money sector is "anywhere from 9 to 18 percent, depending what kind of borrower, what kind of risk."

Key to a hard-money loan is that the lender finances just 60 or 70 percent of the property's value — unlike conventional lenders and their 80 or 90 percent loan-to-value programs.

"Borrowers with a high percent of equity at stake have a tendency to protect that and make their payments," says Odegard.

"At any given time we could have as much as 10-12 percent of our portfolio in nonperforming status," he adds, but only about 1 percent of properties are actually taken back.

Hard-money lenders may work quickly, says Egger, but "we dig pretty hard on the value" when assessing the property on which they base a loan.

But higher loan rates don't mean hard-money lenders can't collapse just like some of the big subprime lenders did.

Partners Mortgage of Seattle, with an $80 million portfolio of real-estate loans and foreclosed property, filed for bankruptcy protection in late 2003. Soon after, an outside consultant concluded its holdings might be worth only $54 million.

An interim CEO found that its many management problems included poor lending practices, inadequate staffing, questionable appraisals and insufficient reserves for bad debt, according to court documents. These days, that sounds familiar. Odegard says times like these attract more people into the private lending business, "but they all get in with the fantasy that it's easy. ... You've got to remain disciplined."

"Private lending, when done right — every loan makes sense," he says. "Subprime had the actuarial approach — the good will pay for the bad. They factored in that some of it was crap; they just didn't realize how much of it was."

Costco employees get a health dividend

Costco, renowned for generous benefits, told employees four years ago that they would have to shoulder more of the tab for health care with higher payroll contributions, co-pays and the like.

That's helped the Issaquah company control its health-care costs, so Costco has channeled some of the savings back to about 82,000 U.S. employees.

Employees who were eligible for health-care benefits as of Sept. 2 and still employed Dec. 31 received $100 worth of company stock in their Costco 401(k) plans.

"By staying healthy, and being better consumers of health care, you helped reduce Costco benefit expenses below our expected budget this past fiscal year," President and Chief Executive Jim Sinegal said in a letter to employees in January.

"While we cannot guarantee we will be able to do this in future years, we would like to show our appreciation today by sharing some of the prior year's savings with you."

During the fiscal year that ended Sept. 2, employees wound up paying a slightly bigger share of health costs than top executives intended, so they spent about $4 million reducing some co-pays and generic-drug costs, expanding services, and providing more choices for employees.

They then considered giving employees $100 each. But because federal and state income taxes would have whittled the payments down to $75 or less, they gave stock instead, said Chief Financial Officer Richard Galanti.

The effort is consistent with Costco's policy of offering competitive pay packages, Galanti said. "We do it not because we try to act wonderful. We do it because we think it's the right thing to do," he said. "Our employees are our ambassadors to our members."

It's not necessarily an attitude that pleases Wall Street, which worries about profits.

"There's no argument that Costco treats its customers and employees extremely well," said Dan Geiman, a retail analyst at McAdams Wright Ragen in Seattle. "You talk to those on Wall Street, and they say for those reasons, investors are not treated quite as well."

Still, Geiman said "there are benefits that Wall Street doesn't factor."

"If you treat your employees better, you probably get better employees, and customers are more loyal," he said.

— Amy Martinez

Comments? Send them to Rami Grunbaum: rgrunbaum@seattletimes.comrgrunbaum@seattletimes.com or 206-464-8541