Millions of Americans got a tough lesson about the perils of debt when the 2008 financial crisis hit and they found themselves owing their mortgage lenders more than their homes were worth. Ezri Namvar’s case was comparable, but much more extreme.
Namvar became L.A.’s highest-profile hard-money lender – financiers who make loans against hard assets – when his business collapsed. He’d been making multimillion-dollar deals across the country from his Brentwood office. He financed most of those deals by borrowing money from friends and associates in L.A.’s Persian Jewish community and then loaned it at higher rates to developers and speculators.
When real estate was booming in the middle of the last decade, everything was great. His hard-money loans were delivering double-digit returns, and he proceeded to go on his own real estate-buying spree. At its peak, his Namco Capital Group Inc. had a real estate portfolio worth about $2.5 billion.
But when the crash hit and his borrowers stopped paying, he was desperate for cash to make payments on his own real estate and was accused of embezzling money from client accounts. Now, he’s in federal prison.
“He was recklessly overleveraged,” said Dan Schechter, a professor at Loyola Law School who specializes in financial insolvency and is familiar with the Namvar case, “not only from the standpoint of his debt-equity ratio, but his cash flow cushion simply wasn’t there. Any little hiccup in the payment stream and everybody chokes to death.”
Namvar’s loans had been bringing him a healthy income stream but he was seduced by the sizzling real estate market. He used that cash flow to keep borrowing money that he could deploy in new deals, leaving him very little margin for error. When the cash stopped flowing, he was in trouble.
Most other hard-money lenders avoid leveraging. Some take outside investors, but those investors participate in the loans directly and not as creditors to the lender. The loans are still risky because they go to borrowers who have credit issues or are trying to close on speculative real estate deals – and their rates reflect that risk.
Smart hard-money lenders structure their loans to take into account borrowers who might not be able to make payments and they also build in contingencies for unpredictable market forces. For example, a typical hard-money lender will often loan only about half the market value of a piece of property and have that loan secured by the property itself. This way, even if the market were to implode, the lender could absorb a 50 percent drop in the asset’s price and still break even.
House prices in the L.A. area indeed plummeted 42 percent between September 2006 and April 2009. It was one of the biggest real estate crashes in decades, but something that would not have been catastrophic to conservative hard-money lenders who structured loans with that cushion. Namvar was not one of them.
“You have to set your loan-to-value ratios in such a way that you can weather any foreseeable downturn,” Schechter said. “You also want to get solvent personal guarantors, which I don’t think Namvar did on any of his deals.”
Once they saw the writing on the wall, a group of creditors led by Abraham Assil forced Namco into involuntary bankruptcy. When the lawyers and accountants dug through the documents, they found evidence of criminal activity. Namvar was convicted in 2011 of stealing more than $20 million from a company he owned that facilitated 1031 exchanges. He is two years into a seven-year sentence in Taft Federal Correctional Institution near Bakersfield. He could not be reached for comment and his attorneys declined to comment for this article.
Namvar was a respected member of his community and that made his creditors far too trusting, Schechter said, making them vulnerable once they handed him their money.
The investors lost hundreds of millions – about $500 million by one accounting – with no insurance fund or other safety net to pay them back.
“I feel sorry for the Namvar victims, but they did everything wrong,” Schechter said. “They simply trusted him with their money on a handshake basis, and took their hands completely off the steering wheel and let him run the show. That’s just not smart.”
Once they handed him the money, the informal nature of Namvar’s business left them in the dark until it was a lost cause.
“The old saying is: If you put all your eggs in one basket, watch the basket,” Schechter said. “But by the time you see that your deal’s in jeopardy, it’s too late.”
