San Luis Obispo County’s hard-money real estate lending industry — which helped fuel the area’s building boom by collecting hundreds of millions of dollars from local investors for housing and commercial projects — fell into nearly complete disarray this year.
The owners of two Central Coast lending companies, Paso Robles’ bankrupt Estate Financial and Santa Maria’s Pacific Coast Mortgage, pleaded guilty to multiple crimes, including defrauding their investors by operating Ponzi schemes.
Four other local key players in the industry — Jay Hurst Miller of Hurst Financial, Candy Wells of Heritage Lending, Tammy Jordan of Real Property Lenders and Don Vaughn of Country Financial — have been forced into or voluntarily filed for Chapter 7 personal bankruptcy while battling potentially costly civil lawsuits alleging fraud or breach of contract in their alleged failure to return their creditors’ money.
None of these four industry leaders say they have done anything wrong, although Miller is the subject of an ongoing criminal investigation by the FBI, the U.S. Attorney’s Office and an impaneled federal grand jury, according to court documents.
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The companies are called “hard-money” lenders because of their ability to provide money to borrowers more quickly than banks but at higher interest rates, typically around 12 percent to 14 percent. The lenders pool investor money into securities backed by real estate deeds and were considered a high risk/high return investment.
The Central Coast has seen more failures of hard-money brokers this year than any other place in the state, according to California Department of Real Estate spokesman Tom Pool. Estate Financial and Pacific Coast Mortgage
Paso Robles residents Karen Guth and Joshua Yaguda of Estate Financial, who were arrested in October 2008 on suspicion of fraudulent business practices in their $340 million company, pleaded guilty this year to 26 felonies and received 12 and eight years in state prison, respectively.
“It seems incomprehensible that any crimes of larger scale than this could occur locally in our lifetimes,” said county prosecutor Steve von Dohlen in a report to the county’s Probation Department.
Santa Maria’s Mike Wilson of Pacific Coast Mortgage first made headlines at the end of February when he had to be rescued by the Coast Guard after falling from his boat into chilly ocean waters off Ventura. He was arrested in July and pleaded guilty to 147 felony counts, including embezzling tens of millions of dollars from dozens of local investors. He now faces up to 20 years in prison.
“Your money was stolen the moment you gave it to him,” Senior Deputy District Attorney Jerry Lulejian told Wilson’s investors.
Damage to investors
Collectively, Central Coast hard-money lenders raised more than half a billion dollars from thousands of mostly local, retired investors. Many of those investors who spoke to The Tribune this year believed the real estate market was easier to understand than the stock market, and they had faith in their lenders as honest people they could trust with much, if not all, of their nest eggs.
As long as interest payments and their principal investments were paid off, they had no reason to complain, investors said. But as real estate values plummeted and building projects stalled, builders defaulted on their payments and a multitude of fraudulent practices by at least two of the lenders, Estate Financial and Pacific Coast Mortgage, were exposed.
Von Dohlen described the crimes of Guth and Yaguda in a letter to the Probation Department this fall: “Through their repeated pattern of illegal acts, misstatements and omissions, Guth and Yaguda created a false picture of … (Estate Financial’s) projects, in a deliberate attempt to bring in more money from new and repeat investors, as a means to cover over a crumbling base of borrowers, decimated by defaulting builders and hamstrung by the defendants’ own pillaging of the very construction funds meant to enable the builders to finish the projects.”
How much money has been lost by investing with the companies is still unknown.
Some investors who have a clear claim on the real estate deeds held by the companies say they are getting between 20 to 30 cents on the dollar, after the properties are foreclosed on and sold by the bankruptcy trustees. Others who are victims of improperly recorded or falsified deeds, as was the case for Estate Financial and Pacific Mortgage investors, may get less than that, according to bankruptcy experts.
Superior Court Judge Jac Crawford described the impact of Guth and Yaguda’s wrongdoing when he sentenced the mother and son in early December. “I have received heart-wrenching letters (saying) placed trust (in Guth and Yaguda) is now betrayed,” he said. “Far too many victims ... made investments that changed their lives. They have been forced to sell homes, give up retirement to take jobs, and have lost college funding for their children.”
Many of the investors who are elderly or disabled say they won’t live long enough to re-earn the dollars they have lost. Others said the experience of losing their money contributed to other life crises, such as poor health or depression.
To avoid another hard-money meltdown in the future, investors, attorneys and other financial experts say increasing oversight by state regulators is necessary.
“With the increased regulation, this set of circumstances will likely not repeat for a number of decades hence,” said Estate Financial bankruptcy trustee attorney Roger Frederickson of Sinsheimer, Juhnke, Lebens and McIvor. “It seems to run in cycles and tends to increase when the government reduces regulation and enforcement.”
California Department of Real Estate Commissioner Jeff Davi told The Tribune that his state agency has increased penalties for real estate violations and put in place stiffer requirements to limit misleading advertising by lending firms. Also, every loan originator on residential property will soon have to register in a national database, which raises the bar to qualify people to enter the mortgage industry, according to DRE spokesman Tom Pool.
But, as San Luis Obispo financial adviser Robert Wacker told The Tribune, “Sometimes you can’t detect fraud, even with due diligence, if the perpetrators are good at it.”
His advice to avoid the disintegration of one’s savings:
• Always diversify and never bet the farm. More than 15 percent of your investment assets in one investment is likely too much.
• Make sure you understand why something works and what could go wrong — if you don’t understand it, don’t do it.
• If you are relying on advice, make sure the person advising you is both competent (which does not include your neighbor who has “had good luck with this”) and has no conflict of interest. Many Estate Financial investors relied on Guth’s advice, which was hardly disinterested. She wasn’t an adviser but a saleswoman.
• Don’t assume that the world will always act like it did the past few months, or years — for example, that real estate never loses value.