'Hard money' lending has sordid past in Nevada County
06/06/2011 12:00 AM
10/01/2014 2:21 PM
NEVADA COUNTY – For three decades, the promise of easy money lured residents of this region's Gold Country towns to invest in an obscure corner of the real estate industry – "hard money" lending.
Some of those investors entrusted their entire life savings to brokers who used the money to make high-interest loans to people who either didn't qualify for a traditional bank loan or who needed money fast.
The practice has flourished in Nevada County, even though the industry has been rife with unscrupulous brokers and outright fraud.
"Nevada County was full of wealthy retirees who thought they were making these real safe investments," said Jeffrey Ingram, an attorney who represented one of the county's many victims. "The scope of people who have lost money is just tremendous."
The recession laid bare the dangers of hard money lending. As large, risky loans went bad, many investors lost their money and were left with nearly worthless land. Unlike banks, brokers carry no insurance and receive no bailouts. Regulatory and legal filings show that hard money investors lost more than $50 million in Nevada County.
Law enforcement agencies have tried, with limited success, to address what they see as a statewide problem of large proportions. State officials recently ordered a Sacramento hard money operation, VLD Realty, to cease operations. A Santa Rosa broker has been accused of stealing millions from investors. The U.S. attorney's office indicted a Monterey County broker in late 2009 for operating a Ponzi scheme.
At the market peak in 2005, roughly 340 of the biggest hard money brokers in California loaned $5.8 billion. While that represents a small slice of the overall lending picture, the California Department of Real Estate spends disproportionate resources investigating and disciplining bad hard money brokers, officials said.
A Bee review of licensing records found that one in four of the biggest hard money brokers operating when housing prices peaked has been accused of wrongdoing or sanctioned by the department in the past decade – a far higher rate of violations than for conventional mortgage brokers.
The problems are perhaps most evident in Nevada County – historically home to just one locally based bank but numerous large hard money brokers. Such brokers played a central role in converting a scenic rural area into a once-booming haven for developers.
Since 1991, four Nevada County brokers have gone to prison, four others have lost their licenses, and four borrowers have been either charged with or convicted of bilking investors.
"Is there anyone who has lent money in this town that hasn't gone to jail?" local attorney Stephen Munkelt recently joked. Munkelt defended one of the brokers who went to prison and is now defending a contractor accused of misusing investor money.
Roots in retiree influx
Hard money lending began to make some Nevada County residents rich and impoverish others in 1979, said David Timoney. That's when Timoney moved here, he told The Bee, and opened his own brokerage.
He is the son of Donald Timoney, co-author of the hard money guide, "Borrow, Lend and Get Rich." He and other brokers took advantage of Nevada County's vast territory for development and influx of retirees with savings to invest.
From 1980 to 2010, census figures show, the county's housing stock increased at more than double the state pace, while the median age rose to more than 12 years older than the state as a whole. The opportunities for development and the number of people looking to invest grew, beckoning hard money brokers.
David Timoney apparently was also the first area broker indicted for defrauding investors. In 1991 he went to prison for creating false loan documents to embezzle funds. A few years later his father and two of Donald Timoney's borrowers were convicted of effectively running a Ponzi scheme – skimming investor money from projects and using funds from newer investors to cover the misuse.
Keith Hysom, who had worked for the younger Timoney, went to prison in 2006 for fraud involving his own company. The Department of Real Estate revoked the license of Brian Powers, an agent who had worked for brokers David Timoney, Philip Lester and Hysom. Powers got into trouble after losing a lawsuit alleging fraud and elder abuse.
Some brokers said their problems started with one bad loan that they tried to cover using money from new investors. Steven Gourley, former chief deputy commissioner of the state Department of Corporations, who co-wrote the hard money lending regulations, called it "the inadvertent Ponzi scheme."
"Then there are the people that are just plain thieves," Gourley said.
Hard money brokers operate under a weak, loosely monitored set of regulations riddled with loopholes and jurisdictional confusion and conflicts. The state Department of Real Estate oversees some brokers, while others fall under the purview of the Department of Corporations. Activities one agency deems illegal might be permitted by the other.
Tom Pool, a Department of Real Estate spokesman, said a larger enforcement staff would help root out fraud. But when something seems too good to be true, he advised, investors should exercise common sense.
"That's sophisticated stuff," Pool said. "You need to understand what you're getting yourself into."
Borrowers became sleuths
The real estate bubble drew hundreds of local investors to put up more than $130 million, according to public records and brokers. When that bubble burst, the money vanished.
"A real correction is going to bring out every mistake ever made," David Timoney told The Bee.
As losses mounted, borrowers such as Melissa Kaput and investors such as Margaret Fowler began pressuring regulators and law enforcement to act – turning into advocates and part-time sleuths to investigate their own brokers and the industry as a whole.
In part due to Kaput's efforts, in 2009 Thomas Hastert, an attorney and broker, pleaded guilty to 59 felony counts of embezzlement, securities fraud and selling unregistered securities. He is now serving time in state prison.
Other local brokers recently have been accused of misdeeds or had their licenses revoked by the Department of Real Estate.
Philip Lester was one of the county's leading businessmen, a prominent construction lender and local philanthropist. His business has collapsed and late last year he surrendered his license to the Department of Real Estate.
His brother, David Lester, surrendered his own license just months earlier.
David Lester, operating under the name Able Home Loans, had brokered several million dollars in loans.
He made some of those loans to himself. Lester acknowledged in an interview that he took a $380,000 loan from his investors. He said he used the funds to pay for his wife's medical bills. He defaulted on that loan. Investors said they were unaware that Lester was going to take their money for himself until after the fact.
"If they had said anything I would have taken it back out," he told The Bee.
In June 2010, the Department of Real Estate accused Lester of not recording a deed of trust – the legal document that secures a piece of property as collateral for a loan and gives the lender the right to foreclose if the borrower defaults – for a $10,000 loan. He had brokered that for investor Lisa Wheeling.
When the loan went bad, Wheeling sued Lester in small claims court. She won but was unable to collect after he filed for bankruptcy protection, she said. In his bankruptcy filing, Lester claimed about $677,000 in assets as compared to $5.3 million in liabilities – mostly investor money.
"The heartbreaking part for me is I don't come across that kind of money very easily," Wheeling said.
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