Advisers see opportunity in private loans, mortgages

Providing help for those with 'decent credit'

Aug 4, 2008 @ 12:01 am

By Jeff Benjamin

As fallout from the mortgage crisis leads to tighter restrictions on lending, some financial advisers are finding opportunities to fill a void for their clients by entering the lending business. "Credit is tight, and it will get tighter — that's why [helping clients by lending money for mortgages and other business loans] is a huge opportunity for advisers," said Gibran Nicholas, chairman of the Certified Mortgage Planning Institute in Ann Arbor, Mich. "Right now, there are people with money and equity, and there are people without, and there's hardly any middle ground anymore," he added.

Private loans and mortgages represent one component of a special alternative-asset pool managed by Tom Orecchio, principal with Greenbaum & Orecchio Inc. in Old Tappan, N.J.

"In the current environment, we might be the only source of capital for some people," he said. "And for our clients, the idea is to take advantage of the diversity lending brings to a portfolio."

Mr. Orecchio's firm, which oversees $485 million in client assets, has a separate limited partnership with a pool of about $30 million to be allocated across six alternative-investment categories, including a category for private loans and mortgages. Over the past several years, the asset pool has lent money to the owners of a New Jersey Pep Boys automobile services franchise who wanted to buy the building they were leasing. The program, which has been making loans of $200,000 to $1 million since 1998, also helped finance the 2002 movie "Barbershop." "First-time borrowers and even people with decent credit are having a hard time borrowing money these days," Mr. Orecchio said. Of course, not all advisers or their clients are comfortable with the idea of migrating into the banking world. "What do I know that the banking industry doesn't know?" asked Rick Miller, chief executive of Sensible Financial Planning in Cambridge, Mass., which oversees $170 million for clients. "In effect, you're going into the banking business," he added. "Before I could do that I'd have to be confident I could out-analyze a bank credit analyst, and I'd have to feel comfortable that I was adding value for my clients in an area where I'm not an expert." No doubt about it, the reality of careful due diligence comes into play when an adviser enters the lending fray with clients' cash, but it can also introduce an allocation that is less likely to correlate to the broad equity and bond markets. "Now is an excellent time to do that sort of thing, if you know what you're doing, but the problem is there are people out there who aren't very good at it," said Richard Lee, president of Lee Financial Corp., a Dallas-based firm with $1 billion under management. "In this market there are people who just can't get a loan, or sometimes they're just in a hurry," he added. While Mr. Lee has sunk client assets into such loans in the past, he has since turned to investing with private-equity groups that specialize in lending practices. For most advisers, the loan becomes part of the comprehensive service provided in a fee-based arrangement, which means the adviser doesn't take a cut of the interest income. Mr. Orecchio explained that his firm doesn't make any money on the loan itself and any interest income is passed directly to the client portfolios. In the case of the $320,000 movie financing loan, for example, the clients earned $90,000, or a 28% return over an 18-month period. In the Pep Boys franchise example, the return to investors on a $250,000 loan was 10% over five years, with the building offered as collateral. The non-traditional lending trend has gained some momentum, thanks to firms like Virgin Money USA, a Waltham, Mass.-based unit of Virgin Group PLC., the London-based conglomerate headed by billionaire Richard Branson. Described as peer-to-peer or social lending, the Virgin Money USA strategy concentrates primarily on loans to friends and family.


But since acquiring Waltham, Mass.-based Circle Lending Co. in May 2007, Virgin Money has developed a program specifically geared toward financial advisers and their clients.

"I've recommended [the lending strategy] to some of my clients, and I've used it twice myself," said Jennifer Cray, a partner with Investor's Capital Management LLC in Menlo Park, Calif.

Ms. Cray, whose firm oversees $250 million in client assets, set up an intrafamily loan a year ago that involved a home-equity loan from her mother-in-law.

More recently, Ms. Cray and one of her business partners lent some of their own money to their financial planning business.


"We looked into the Small Business Administration and other types of business loans, but nothing worked for us," she said.

Part of the appeal of going through a third-party firm is that all of the administration work and loan servicing is outsourced and kept on a professional level, which can be important when lending money to friends and relatives. Ms. Cray said it cost her $200 to set up the $30,000 business loan.

Interest rates for such loans are set by an applicable federal rate — the rate the government sets for private loans.

The AFR — currently set at 4.58% for a loan of nine years or longer — is the minimum interest rate that must be charged to prevent a loan from being categorized as a gift for tax purposes.

Helping clients make loans has been a staple service at Wealth Management Advisors LLC in Tewksbury, Mass., for 20 years, but the current credit markets and the economy are increasing the appeal in some cases, according to company president Steve Ahern.

"The credit crunch is part of it, but it's also a matter of situations like mom and dad having money and wanting to help their kids buy a house," he said. "There's also the possibility of an intrafamily reverse mortgage."

Mr. Ahern, whose firm oversees $450 million in client assets, said he averages about four client loans per year. "If the client has enough money, these kinds of loans can fit into a fixed-income portion of their portfolio," he said.

E-mail Jeff Benjamin at


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