Malibu investors left high and dry
State law enforcement officials are investigating whether 70 retirees and other investors in Northern California were bilked when they put up $6.4 million for construction loans on Malibu land that may be undevelopable.
The investors have foreclosed on the land, which is worth just a fraction of its appraised value as prime home building property. But they’re still trying to figure out where their money went.
“Nobody knows what happened to it,” according to Fred I. Mann, 77, a retired advertising executive who said he invested more than $500,000 in the transaction and is facing a total loss.
The episode illustrates the perils of “hard-money” lending, a little known and largely unregulated corner of the real estate market.
Hard-money loans traditionally go to borrowers who can’t qualify for conventional bank mortgages or construction loans. They are commonly funded by individual investors who buy fractional interests in the transactions, enticed by the promise of double-digit returns safeguarded by underlying property values.
Worries grow
Over the last year or two, hard-money portfolios have suffered the same problems afflicting conventional real estate lending -- questionable underwriting, rapidly deteriorating property values and, some investors believe, fraud. The fallout has begun to alarm state officials.
“We’re getting a zillion of these types of cases with investors who have bought fractional notes,” said Kathryn Holguin, an investigator for the state attorney general’s office.
Responding to complaints by investors, Holguin said in an interview that she has opened an investigation into the Malibu transactions. She said it was not yet clear whether those deals involved criminal behavior, but “it’s definitely worth looking into who put this together and what due diligence was done.”
Hard-money loans are typically riskier than conventional mortgages. They are based on the value of the land being developed, rather than the income and creditworthiness of the borrowers.
Accordingly, they are subject to much lower loan-to-value ratios to provide larger cushions against loss and carry higher interest rates to compensate for the risk. The Malibu loans, for instance, were supposed to be limited to 50% of the appraised value of the properties and carried an above-market rate of 12%.
“These loans are secure if properly underwritten,” says Michael Belote, a Sacramento lobbyist for the California Mortgage Assn., a trade group for hard-money lenders. He said investors needed to take the responsibility to check out their brokers and the properties they were investing in.
The group is gearing up to fight proposals in the Legislature to outlaw mortgage lending that does not consider the creditworthiness of borrowers -- a rule Belote contends would harm legitimate borrowers, such as retirees, who have little current income and wish to tap into their home equity.
No figures are available on the general condition of the hard-money market, in part because regulation is spotty and fragmented.
In California, regulation is divided between the Department of Corporations, which oversees issuance of investment securities, and the Department of Real Estate, which licenses real estate professionals.
In April, the Department of Corporations suspended the license of three hard-money lenders, including Monterey-based Cedar Funding. Cedar was shuttered after the agency turned up evidence that nearly 25% of its loans had gone to the firm’s own principals, contradicting disclosures made to investors, according to department records.
Those actions and others jeopardized as much as $160 million put up by 1,100 investors, according to attorneys for some of the investors. The firm has since filed for bankruptcy.
Attorneys for investors have called Cedar a “Ponzi scheme” in court filings.
Losses ‘likely’
The Malibu loans were brokered through Charlene Goodrich, 72, a Santa Rosa, Calif., loan broker who has been in business since 1981. Disclosure statements Goodrich filed with the Corporations Department show that her portfolio began to deteriorate rapidly in 2007. During that year, she initiated or completed foreclosures on 28 loans owing more than $14 million.
Another $5.8 million in loans was delinquent as of March 30 this year. That meant that 48% of her outstanding portfolio was delinquent, facing foreclosure or already foreclosed, according to the disclosure statement, which said that losses on the portfolio were “likely.”
Six lawsuits have been filed against her by investors who contend that she disbursed money to borrowers improperly or made other errors leading to their losses, according to one of the disclosure statements.
In a Sonoma County case, plaintiffs allege that Goodrich allowed borrowers on a home construction loan to use the money to purchase the property. They allege this violated the loan terms.
The move left insufficient funds for construction and the borrowers defaulted, according to the lawsuit.
Goodrich has denied the allegations in the lawsuits, which are pending.
The Malibu investors have not filed suit, although Mann and other investors have consulted an attorney as they consider their options.
Goodrich denies any wrongdoing in the Malibu case. She said in an interview that the problems in her portfolio stemmed mostly from the real estate slowdown.
“I’ve taken a real beating the last couple of years,” she said, “but I didn’t commit fraud.”
At issue in the Malibu case are four large parcels, totaling 174 acres, in the hills overlooking Pacific Coast Highway off Decker Canyon and Corral Canyon roads.
The properties were subdivided into 13 parcels. Investors were told that homes of up to 10,000-square-feet could be built on each one, according to the offering circulars. Information provided to investors indicated that the land had been appraised in mid-2005 for nearly $13 million.
The appraiser, Tyna Degenhardt, said in an interview that she personally inspected every parcel and appraised them according to accepted industry standards.
Goodrich solicited investors for loans on the properties twice, once in early 2005 to fund construction and again about six months later to refinance the first loans, according to investors’ documents.
Investors say they learned of the investment opportunities through ads Goodrich placed in Northern California newspapers and on radio shows offering high returns.
Ultimately she received $6.4 million from about 70 investors, many of them elderly retirees from Santa Rosa, according to Mann and other investors. Goodrich said all of the money has been disbursed to the borrowers.
The borrowers were a group of partnerships registered in Nevada, with names such as Greene Broad Beach and Malibu Beach View, according to documentation Goodrich sent investors.
Goodrich said she worked through brokers who served as intermediaries. She and the investors have consulted attorney Patric J. Kelly, who told investors that he believed the borrowers may have defrauded both Goodrich and the investors.
The Times was unable to contact the people behind the partnerships.
Investors say they received interest-only payments on their loans for about nine months.
Then, in early 2006, the payments ended. About a year later, Kelly was hired to help them foreclose on the borrowers. In the course of foreclosing, investors say, they learned that the four original parcels had been subdivided without state Coastal Commission permission.
That meant that at most four homes could be built, not 13, reducing the value of the properties accordingly.
The properties, some of which are bisected by deep ravines and thus difficult to build on, may be worth only a combined $3.4 million, according to Bill Moss, a veteran Malibu realtor whom the investors have hired to market the foreclosed tracts.
“There’s no doubt that the appraisals were totally wrong,” Holguin, the state investigator, said.
Appraised value jumps
Documents provided to investors by Goodrich show that Degenhardt’s appraisal of at least one of the subdivided properties jumped sharply in the months between the two rounds of lending.
Degenhardt appraised that parcel -- a 3.86-acre tract on Decker Canyon Road -- for $470,000 on Nov. 3, 2004, and for $775,000, or nearly 65% more, six months later, according to documents Goodrich provided to investors.
“Properties were appreciating at a pretty high rate at the time,” Degenhardt said in an interview.
She said that she appraised the tracts as though all 13 were legal for construction, but that determining whether they were in full conformance with Coastal Commission regulations was beyond the scope of her duties.
Her appraisal forms carry a standard disclaimer stating she will “not be responsible for matters of a legal nature that affect . . . the title” to the property being appraised.
That was Goodrich’s responsibility, she said, adding that she advised Goodrich in her appraisals that Goodrich should verify such issues as whether there was legal access to some parcels that did not directly abut public roads.
Goodrich said she relied on documents showing Los Angeles County planning officials had approved the subdivisions. She said she was unaware that Coastal Commission approval was also needed.
Goodrich and the investors are now weighing their next step. Attorney Kelly, who met with investors April 30, told them that recovering their money would be difficult. “We didn’t hear much that was encouraging,” Mann said.
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