Firm Showed Few Signs of Impending Cash Squeeze : Real estate: Just 2 months before it landed in bankruptcy court, Property Mortgage Co.'s co-owners were offering words of assurance.


Last December, investors in Property Mortgage Co. had little reason to worry about the $150 million they collectively invested in mortgages and other loans arranged by the Sherman Oaks firm and its affiliates.

As they did every year, PMC’s co-owners, Elliot Fine and Stanley Glickman, sent holiday boxes of See’s chocolates to each investor’s home. The investors also received the firm’s latest newsletter, headlined “A Holiday Word of Comfort and Assurance,” that emphasized how PMC--mindful of the sluggish real estate market--was keeping a careful eye on its loan portfolio.

“We’re comfortable and we certainly hope that you, our investors, are comfortable continuing to invest your confidence in us,” the cheery newsletter stated.

But two months later, the roof fell in. During the first week of February, PMC ran short of cash, and interest payments to PMC’s investors--mailed like clockwork for 20 years--suddenly stopped. Then, on Feb. 14, the company’s biggest investors filed a petition that seeks to have PMC reorganized under Chapter 11 of the federal bankruptcy laws. The action, which PMC is not expected to contest, has the same effect as if PMC had filed for Chapter 11 itself, and it freezes the investors’ money and protects PMC from their lawsuits until the company devises a plan to straighten out its messy finances.


That same evening, a lawyer for PMC announced the filing to grim-faced investors from throughout Los Angeles but provided little information about what went wrong. Some investors quickly dubbed the meeting the “St. Valentine’s Day Massacre.”

PMC thus became the second major mortgage broker in the state to end up in bankruptcy court so far this year. In January, Pioneer Mortgage in La Mesa, with about $250 million of loans outstanding, filed Chapter 11 when a cash squeeze aggravated by the real estate slump left it unable to pay its 2,500 investors.

The exact causes of PMC’s collapse have not yet been made public, although PMC’s problems with a Carlsbad-based developer and the current real estate slump appear to be major factors. It’s also not clear exactly how many investors PMC has, although investors and lawyers involved in the case have estimates that range from 400 to 1,000.

The state Department of Real Estate has been investigating PMC since the problems surfaced early this month, and the agency tries to audit all mortgage brokers at least once a year, said Managing Deputy Commissioner William Moran in Los Angeles. But when asked whether the department saw PMC’s problems coming, he conceded, “No, we didn’t.”

Now, the investors--many with $100,000 or more tied up in PMC--are worried and angry. They claim that PMC gave no forewarning of its problems and that Fine, Glickman and other PMC executives were virtually unreachable after the problems became critical.

“So far, we know nothing,” said an elderly widow who said she has more than $200,000 invested in PMC, but who, like most of the investors, agreed to speak on the condition that she not be identified. “I want some answers.”

But Glickman and Fine aren’t providing any publicly. Glickman declined comment and Fine did not return telephone calls requesting an interview. One of PMC’s lawyers, Hydee R. Feldstein, declined to discuss the case in detail pending an investigation of PMC by a court-appointed examiner.

The investors caught in the middle include elderly couples who claim that their major source of income was their PMC interest checks. Members of the exclusive Hillcrest Country Club are reportedly PMC investors; other investors include comedian Louis Nye.


“What can you say? It’s a tough thing, and hard-earned money, especially in my business,” Nye said.

Like Pioneer, PMC arranges mortgage loans for both residential and commercial properties using cash that largely comes from the investors. Because PMC technically only arranges the loans, the investors’ money is in accounts with PMC affiliates such as SLGH Investments Inc.

Many of the loans are secured by second trust deeds, that is, second mortgages on properties that already were acting as the collateral for first mortgage loans. Second mortgages carry additional risk because they would be subordinate to the first mortgage in terms of repayment should the borrower default.

For that reason, the second mortgages brokered by PMC carried relatively high interest rates, currently in the range of 12% to 15%, and maturities of only a year or two. It’s those lofty yields that kept PMC’s investors coming back.


(Until 1979, such interest rates would have exceeded state usury laws. But that year, voters passed Proposition 2, which enabled mortgage loans to carry whatever interest rates the market would bear, if the loans were arranged through a licensed real estate broker.)

For its part, PMC earns a sizable commission for arranging the loans, often 4% to 10% of a loan’s amount, otherwise known as points. Investors also surrender 0.75% of their interest income to PMC for servicing their loans.

There was another reason investors stayed with PMC. For two decades, the firm “never failed to mail a check on time,” said Gerald Silver of Encino, who has a “low six-figure” investment with PMC. That steadiness led many investors to trust PMC and keep reinvesting their profits.

“I had such supreme confidence in them because they were so prompt, so reliable,” said one 90-year-old Los Angeles man who said he has $300,000 invested in PMC.


Investors also liked the way PMC cultivated a family atmosphere. PMC’s roots go back to Harry Dunitz, Fine’s father-in-law, and Fine in turn is the father-in-law of Glickman. Fine and Glickman formed the current PMC in 1970, and the business grew largely by word of mouth.

“Many investors were their friends, relatives, neighbors,” said one investor and a longtime acquaintance of Fine and Glickman. Both men urged their customers to call any time with a problem, or drop by their offices.

The men also are heavily involved with Sherman Oaks Savings Bank and its holding company, Sherman Oaks Financial Corp., where Glickman is chairman and Fine is a director. Bank president Steven Tartaglini said that PMC per se does not own any of the holding company’s stock, but that PMC’s pension plan owns less than 25%. He declined to be more specific.

He said PMC’s bankruptcy filing “has no impact on . . . the bank,” which has about $60 million in assets. In the past, Glickman and Fine had urged PMC’s customers to use the bank--which is in the same building as PMC--so that their PMC checks could be quickly reinvested.


Glickman also kept an active social calendar. He is a past president of the Maple Center, a nonprofit community health center in Beverly Hills, and is on the Cedars-Sinai Medical Center’s board of governors, a fund-raising group for the hospital.

Although the factors that crippled PMC are not yet public, one of its lawyers, Bernard Shapiro, told the investors at the Feb. 14 meeting that some borrowers had defaulted in recent weeks and that there “was an unusual requirement for funds” by PMC’s investors, leaving the company short of cash.

One major trouble spot for PMC appears to be its relationship with JL Construction Co., a developer in Carlsbad. Shapiro said $60 million of PMC’s $150-million loan portfolio involved deals with JL, and that on Feb. 1, JL was in default on several of its PMC loans.

But JL Chairman James L. Franklin blamed PMC for failing to come up with enough cash and jeopardizing some of JL’s projects. He said that in most of their dealings, PMC and JL were joint-venture equity partners in developing apartment complexes throughout the state. One such project is the completed Highland Downs complex in Duarte, and overall PMC is involved in 11 of JL’s 17 total current projects, he said.


But beginning several weeks ago, “the reality was that, for a myriad of reasons unbeknownst to us, they were not able to meet their obligations,” Franklin said. “What specifically created the problem at PMC, I don’t know.”

Now that PMC is in bankruptcy court, one or more committees of the investors and other creditors will probably be formed. It’s not yet known whether PMC will be forced to sell properties to raise cash for the creditors, but in any case, PMC is unable to take any action without first getting approval from the court.

In the meantime, the investors won’t know for sure how many cents on the dollar they’ll get back, and the uncertainty hurts, said Silver, the Encino investor. The investors, he said, “want this resolved quickly.”