You Can't Cheat an Honest Man - James Walsh [85]
Charging such high rates, Landbank didn’t have much trouble making money. It collected delinquent accounts aggressively. Business was good. So good, in fact, that Landbank was able to secure a seal of approval in 1982 from the Federal National Mortgage Association, a quasi-government agency better know as Fannie Mae.
By meeting the strict requirements of the agency, Landbank gained prestige, and was able to secure insurance on its loans from a California company called Balboa Insurance. The insurance prompted Perpetual American Bank of Washington, D.C., to offer Landbank a $10 million line of credit to make new mortgages. It also allowed Landbank to resell its otherwise risky mortgages to conservative entities like savings and loans, which saw the insurance as a guarantee that any losses would be repaid.
At this point, the scheme had grown large enough that Runnells’s shady personal history wasn’t an issue. But it should have been. Once the big credit line was in place, Landbank started growing its business recklessly. Misrepresentation was routine.
Though it promised investors that its lending and appraisal practices satisfied Fannie Mae standards, Landbank often loaned money on the basis of informal, “drive-by” appraisals. Landbank would inflate the value of collateral property. Its loan processing people would regularly overstate a borrower’s ability to repay. Creditworthiness was—as one court put it—“a welcome but unnecessary trait” in borrowers. Landbank didn’t mind these issues because it made most of its money up front.
This was all more than just aggressive growth. Landbank’s practices violated federal truth-in-lending laws in numerous ways. These violations made its loans vulnerable to legal challenge.
Runnells never mentioned any of this. Even though they’d been running Landbank for only a few years, he and his Hungarian-born wife Marika started living a lavish lifestyle. As he explained to some employees, they were “taking some of our chips off the table.” They bought a big house, a couple of expensive cars and other symbols of wealth.
Landbank was far from a self-sustaining business, though. There were some major flaws in the scam. The riskiness of privately-backed pools of mortgages forced Landbank to offer high interest rates to investors who could choose less risky government-sponsored mortgage securities. And the company’s default rates started creeping up.
“It’s hard work to keep these low-quality loans from defaulting,” says one Virginia banker familiar with Landbank’s story. “When they were small and regional, they spent the time and effort to keep their loans current. After 1982, they grew so fast they couldn’t keep up the effort. By that time, though, I don’t think they cared.”
Landbank made 10,000 mortgages between 1982 and 1985 in Virginia, Maryland, Alabama, South Carolina and Georgia. Within three years, half of its mortgages were in default. Runnells handled the default problem by leaping headlong into a Ponzi scheme. He paid “principal and interest” payments to investors out of fees for new loans, while falsely telling investors and his insurance carrier that default rates were low.
As in all Ponzi schemes, the pyramid could stand only as long as more new money was coming in. As long as it did, Bill Runnells took chips off of the table. Unfortunately, he put a lot of the chips on other tables—in Atlantic City and Las Vegas. And he wasn’t able to take those chips back.
The pyramid scheme began to unravel in early 1985 when Balboa Insurance alerted Landbank investors that it was considering canceling its mortgage insurance because it suspected Landbank of violating state and federal lending laws.
Balboa Insurance also passed along copies of some of its correspondence with Landbank. In one letter, Balboa complained to Landbank management that appraisals were too high, yielding an artificially low loan-to-equity ratio. In another, Balboa detailed the manner in which Landbank’s up-front fees violated