Norma was worried.

The 60-year-old Inglewood resident had been on leave without pay from her U.S. Postal Service job to deal with a diabetes diagnosis. And now she was about to tap into $50,000 worth of equity at one of her rental properties to dig herself out of debt.

But after not working for nine months, her credit was a mess, and no A-paper lender would touch her. Instead, she found herself at a converted home on Balboa Boulevard in Encino, where a tiny six-person operation called Value Home Loan throws life lines to folks like her.

But at a price.

Norma had been forced into the nether world of the sub-prime market, where there is no shortage of both institutional and micro lenders and business of all sizes in between who are more than willing to part with what is called the "hard" money.

It comes with a lot of points, and interest rates that can reach 15 percent, but sometimes it's the only way to tap into equity, or even buy a first home when the Washington Mutuals of the world turn you down.

"After nine months off work, what can you say? Your credit is funny," said Norma, who requested her last name not be used to protect her identity from co-workers and tenants. "I just got in a squeeze."

Value may be the only sub-prime lender in the region plying its wares in a converted suburban house that could easily be mistaken for a home. A neatly trimmed hedge buffers the white-and-red stucco house from busy Balboa Boulevard. A water hose lies casually near its entrance. It backs up against an elementary school. But the appearances are deceptive.

High school beginnings

The company was started four years ago by Neil Gitnick, who at 34 traces his roots in real estate to his high school days, when he and a friend published a magazine containing Valley real estate listings.

Gitnick, who grew up Encino, later attended Georgetown University. (He's probably the only hard money lender with dual bachelors in art history and psychology.) But once out of school it was back to real estate, including a stint soliciting loans for another hard money lender in the mid to late 90s. The lender made mortgages to speculators who were buying homes damaged in the Northridge Earthquake, fixing them and selling them for a handsome profit.

By 1997, Gitnick decided he wanted a piece of the action himself, and started Value in the corner of a Canoga Park office in space donated by a friend. It was just him and an assistant doing everything, drawing $600,000 worth of capital he had convinced his family to invest.

The timing was right for Gitnick, with the housing market soaring upward. Speculators abounded, seizing upon a ready stock of decades-old homes ripe for the contractor's hammer. He has made some 1,100 mortgages since starting up his own shop, many to the legions of real estate agents, mortgage brokers and others in the business who make a side living repairing and selling fixer uppers. Given the speculative nature of the transaction they can't secure A-paper financing.

"They come out of the woodwork during a run up in home value," is how Gitnick plainly puts it. At the same time he adds: "If we weren't taking the risk of loaning to speculators to fix up houses that look really bad, then they couldn't be fixed up and sold to first time home buyers. I am proud of that."

Then there are the Normas of the world, who Gitnick says are making up a growing percentage of his business, perhaps half these days, as the stock of fixer uppers in the current boom is depleted, and the economy softens.

It's also the Normas, the consumer side of the business, who are proving to be the thorn in the industry's side. The speculators are experienced, pros who know the turf and will gladly take a 15 percent short term, interest-only mortgage with a balloon payment due at maturity, knowing they plan to flip the property long before that.

"It's all fair game with them," says Gitnick. "They are perfectly able to negotiate the numbers."

Underside of business

But when it comes to the hard-up homeowners looking for that second, or a novice home buyer, the industry has given itself a black eye. Sub-prime lending has become for some the same as predatory lending.

That's the kind of lending, for example, that targets the poor, or elderly with loan packages that include hidden fees, or payments so high the borrower is almost destined to default.

California Atty. Gen. Bill Lockyer recently sued First Alliance Corp., a defunct Orange County sub-prime lender, claiming it engaged in predatory practices. Up in Sacramento, there's a bill that would put a halt to many of the practices, including a prohibition on lending more money than a borrower can afford to repay.

"Our industry is an industry that has some real bad people, but it also has a lot of cheap shots taken at it that it doesn't deserve," is Gitnick's assessment.

The cheap shots appear to roll off Gitnick's shoulders. The "real bad people," he says, he's constantly on the lookout for.

Most commonly, he says, they appear in the form of mortgage brokers who bring him consumer clients like Norma trying to right their finances after some catastrophe a job loss, a child's cancer, some nasty divorce.

With fees tied to the size of mortgages, the brokers push for new firsts at Value's hard money rates, up to 15 percent, when it's obvious that the company can simply write up a much smaller second and allow the homeowner to retain his cheaper first.

"A predatory lender will say to them, 'The only rate I can get you is 13 and then arrange a new first for the whole thing,''' he says. "We just write them up for the $10,000 second."

Gitnick says he also won't get involved in another common industry practice: writing up short, three-year mortgages for owner occupied dwellings with a balloon due at the term's end that must be refinanced. The technique means more points at refinancing time, which a lender can choose not to do if the borrower's payment record has been spotty. That often means a foreclosure.

Max Linson is one of Gitnick's salesman. At 84, he's maybe the oldest full time loan officer in the business. Gitnick calls Linson his "elder statesman" and "conscience." Linson says that after 30 years, he's surprised more consumers aren't taken advantage of.

"Most of the consumers don't read the documents," he says.

Gitnick says he has no interest in such tricks. With the company so small, he is involved in every loan. He says he rather have a portfolio that smoothly performs than the headache of foreclosures, though he acknowledges the company is "very aggressive" in protecting its assets.

Tight reins

The team calls past-due mortgage holders constantly, and will file foreclosure papers on the 31st day after a payment is due. Borrowers can make it right, but find the $600 in third-party foreclosure fees tacked on the back end of their loan.

Value also has no need for illegal tricks, Gitnick says.

The company, with its $9 million capital pool, makes returns of 10 to 12 percent for its investors on about $1 million in gross revenue. Gitnick estimates his annual salary is about $300,000. Employees get perks like discounted rental rates in company-owned properties.

As for Norma, she wanted to know if there was a pre-payment penalty, a common practice among hard money lenders. She intends to pay off her second early with her son's help.

Gitnick, who believes that's another one of the industry's predatory practices, assures her it isn't so, and the woman later signs the docs for a 30-year fully amortized second mortgage at 14 percent interest.

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