When the 500-Year Flood Arrived

In my world of real estate lending, uncertainty and economic turmoil are the norm.  When evaluating the best way to mitigate or hedge risk from loss, as part of the due diligence process, a prudent investor runs at least 3 different potential outcomes: (a) the “base case” scenario where results are more in line with expectations, (b) the “worst case” scenario in which the results are much worse than expected and (c) the “best case” scenario in which the results are much better than expected.

In real estate when you buy a home near a river or stream that falls within a flood prone area FEMA provides homeowners with some form of catastrophic insurance from events that occur within the “100 year flood plain”.  For homes in much lower risk areas less because they are farther away from a river or stream FEMA also has a separate classification called the “500 year flood plain”.  FEMA never considers that to be much of a risk because, well, they don’t expect a flood to occur in this area more than once every 500 years.

So with full knowledge of these risks, combined with more than 25 years’ experience in real estate law, commercial lending, workouts, foreclosures and investment banking I decided to form a bridge lending platform to make short term, commercial bridge mortgage loans in 2005. I  partnered with 2 very sophisticated individuals, one of whom had been a public bank CFO for more than 2 banks that were bought out and the other had a 30 year track record in fixed income sales.  We invested more than $2.5 Million in our company to ensure our investors that our interests were aligned with theirs. I thought we knew more than anyone and with such complementary skills we would be very successful and, from 2005 until mid-2007 we were very profitable and growing.

While the money was important to me, it was not my primary motivator; my professional reputation was. I wanted to prove to others that I was a smart, successful and profitable entrepreneur.  My personal ego trip.  My objective was to make our commercial real estate bridge lending business a professional operation with written guidelines, committees, forms, lawyers, accountants, etc. In other words a really professional operation.  My goal was to combine intelligence, experience and professionalism to create a profitable and reputable business that treated its borrowers and investors with respect.

We never made loans to consumers or took mortgages on primary residences.  We never wanted to throw someone out of the home.  Commercial real estate was different-it was pure business.

My partners and I raised more than $10Million in capital and then secured a $40 Million warehouse line from a large money center bank.  We were returning more than 14% net to our investors and growing by leaps and bounds until June or July 2007.

That’s when the 500 year flood hit.

I remember waking up at 5 a.m. and turned on CNBC and was shocked to hear Lehman Brothers had filed for bankruptcy.  I was concerned but not that much because Lehman’s problems stemmed from the subprime residential mortgage crisis and we were in the commercial mortgage lending business.  In my feeble mind, there shouldn’t have been a correlation between residential and commercial loan defaults. Then a tsunami started forming and Lehman’s demise was quickly followed by Bear Stearns, AIG, Countrywide, Merrill Lynch, Fannie Mae, Freddie Mac and many, many others.

My world was crumbling around me and for the first time in my life I felt truly helpless.  I started working day and night to try to find solutions.  My warehouse lender called in a workout specialist who, after spending a week poring over my loans, concluded there was nothing he could do to assist.  I vividly remember him telling me “let it go… you’ve got to move on”.

It’s easier said than done.  Shortly after the dominoes started falling, my partners walked away leaving me to handle the mess with investors, lenders and borrowers.  The investors were my partners’ friends and family and he left me to clean up the mess.  I realized that he was distancing himself from the mess we created so that at the end of the day, he had moved on and reinvented himself.  I couldn’t do that.  I had taken investors’ funds and I was determined to do everything in my power to recover as much as I could for them until there were no more options.

I spent 2 years of my life working for free to save my reputation and recover funds for my lender and my investors.  The next 18 months my lender was paying me to liquidate what was left of the portfolio.

At the end of the day I bought a lawsuit against an attorney (not mine—it was one of my borrowers’ attorneys), spent $50K of my own money advancing legal expenses to bring the case to trial.  After being deposed for 8 hours and spending an additional 7 months of my life, we settled the case for almost $1.5 Million.  After the attorney took his cut I was left with $990K

You know what I did with the money?  I wrote checks to each of my former partners and told them I was sorry I couldn’t have collected more.  I never told them that I bought the lawsuit in case we lost.  I needed to manage expectations.  If we lost it would have been another $50K down the drain.  I kept $40K which is the amount I would have received had the partnership still been in existence.  I didn’t have any obligation to tell my investors anything about this and didn’t have to give them any money.  But I did anyway because I couldn’t live with myself if I profited from them at their expense.

I’m not sure I’m ever going to recover my self-esteem or reputation.  I’m now in my mid-50s and I’m unemployable, overqualified and can’t seem to shake this disaster.  I would appreciate some sage advice on how to overcome my perception that I’ve permanently destroyed my professional reputation.  Thanks for reading.