Reverse Mortgages, Michael Hild, Live Well Financial, an Arrest and a Brilliant Scheme
LM, 9.10.19
Below this summary you will find articles and additional reading related to the Hild arrest. In short, Michael Hild was charged with a variety of frauds related to a reverse mortgage scheme. Constructed as a reverse mortgage, to be explained below, Hild lent people money and he then borrowed money and/or secured investments against the collateralized properties by overvaluing the properties for his investors. What makes this so interesting, however, is that in the context of reverse mortgages and cash advance/fast-cash/reverse loans, it was both clever and quite simple. The loans themselves are quite legal, albeit in our view somewhat egregious. It was not illegal until he overvalued the collateral.
Cooking his books for investors meant, in the simplest terms, playing with the spreads between actual fair market value and perceived value of the collateralized instrument, which in the case of reverse mortgages is property. In the case of fast cash or what are sometimes referred to as MCA loans, the collateralized instruments are receivables. Both types of loans, from our perspective, are potentially dangerous to a Borrower, who in both cases is generally cash poor, has a poor credit rating, not enough income or for some other reason cannot obtain a bank loan. Both types of loans generally have the added twist of significant fees drawn on the initial principal draw and then added to the principal calculation, which means that the fees are also valued when the respective lenders start calculating interest against the borrowers. Again, this is all quite legal, unfortunately.
Moreover, if the lenders are using the collateral to obtain other lines of credit, obtain additional investments or to purchase securities, they are getting the benefit of the loans multiple times, sometimes triple-dipping. We hope that the Hild arrest, and an explanation of the framework by which the entire scheme was constructed, will help us provide readers with an understanding of the dangers of entering into reverse mortgages and high interest rate cash advance loans and of investing in companies that engage in these types of loans, absent a clear understanding of the pitfalls.
We note that we have seen far too many people exploited. Reverse mortgages and cash advance/fast-cash loans (or reverse loans) provide the borrowers with money and the lenders with interest, initial fees and then a method of calculating interest accumulated on those fees and then obtaining a benefit of borrowing against inflated valuations – a triple dip. It’s all legal until the valuations are inflated. The spreads between truth and fiction are malleable and the ability of many of these lenders to defraud is remarkably easy. Hild would not have been caught had the valuations not at some point crossed the line from believable to unimaginable.
Under most reverse mortgages, the borrower (the “Borrower”) is typically elderly and cash poor but owns a home. Often the Borrower does not have family or does not qualify for Medicaid. The reverse mortgage lender (the “Lender”) offers a solution for a homeowner who is cash poor, namely instant access to cash. Many Borrowers of reverse mortgages are vulnerable to all manner of schemes. Typically, the Lender comes offering the Borrower money in exchange for value. In many cases the associated fees and other things, including exorbitant interest rates are not disclosed or clearly enumerated for someone who is not savvy. The Lender will first have the home appraised and then provide the Borrower capital with which to live, on some formula of the value of the home versus life expectancy, generally giving the Borrower somewhere between 20% and 40% of the appraised value of the home.
It should be noted, most appraisals are conducted for these purposes on the lowest end of the spectrum, to benefit the Lender to the detriment of the Borrower. The Lender will generally also take substantial fees up front, sometimes as much as 10% on the actual home’s value. In some cases, the Lender deposits a lump sum into the Borrower’s bank account and in other cases, the Lender provides loans in tranches or multiple deposits which can generate multiple fees. The backing or collateral for those loans is the value of the home; and the interest on the loans can be as high as any state will allow. In many cases, the lender will add all kinds of service fees which can increase that interest rate exponentially but because they are not characterized as interest, they are not deemed usurious. Again, this is all legal.
The financial hopes of the Lender is that the Borrower will live a short time and die without heirs and beneficiaries to come and sell the home and repay the loan and interest and fees that have accrued. In that case, the Lender takes possession of the home at a significant discount. The Lender can also gain possession of the home if the person becomes sick requiring a lengthy stay in a hospital or rehabilitation facility. The Borrower’s family, heirs or assigns can have as long as one year to sell a home after the Borrower dies or gets sick but during that time the loan is still increasing with interest and fees. The ultimate payoff amount includes interest and fees that grow exponentially each year.
Often, the Lender of reverse mortgages severely under-values the home to the Borrower, convincing someone with, for example, a property work $450K to accept a $250-300K valuation. In the best scenario, the borrower may get $80K-$100K on the house. We have seen a borrower who got $35K for his home after being told that there was a problem with his credit worthiness.
The difference in value of the home between the low end of the appraisal and the high end of the appraisal spectrum can be as much as $200K for a house valued at $450K and in the Michael Hild case, he was showing his investors a portfolio at the highest range of the spectrum, even so much as inflating the value well beyond that. In addition Hild was investing in properties for his own personal portfolio using the money of investors in the fund, an easy play really, when you look at the valuation spreads.
Michael Hild was inflating the value of his portfolio to convince investors, securities dealers and legitimate lending institutions to provide him and his partners/officers greater sums of working capital. He was using that capital to increase his lending portfolio (of reverse mortgages) and then using that increase to induce greater investment and at the same time adding significantly to his personal portfolio. Given the malleability of his market, what was believable had wide parameters.
We will follow this story. We caution our readers against loans taking loans against homes or receivables without the strict and cautious review of an attorney who understands these instruments. They can be addictive as a means of easy cash, until they aren’t. And the money made by Lenders who are successful both in the reverse mortgage and in the cash advance/fast cash (MCA) space is almost inconceivable. And to reiterate, it is legal.
Read on…
Feds targeting dozens of Hilds’ Southside properties for potential forfeiture
Live Well Financial founder pleads not guilty in multimillion-dollar bond scam
Live Well Financial CEO Michael Hild accused of orchestrating $140 million fraud scheme that led to lender’s collapse
SEC Charges Private Lender and CEO with Fraudulent Mismarking Scheme
Former CEO Of Live Well Financial Charged In $140 Million Bond Fraud Scheme
Former Chief Financial Officer and Head Trader Have Each Pled Guilty and Are Cooperating With the Government.
Geoffrey S. Berman, the United States Attorney for the Southern District of New York, and William F. Sweeney Jr., the Assistant Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), announced today the arrest of MICHAEL HILD, the founder, former chief executive officer, and controlling shareholder in Live Well Financial, Inc. (“Live Well”). HILD’s arrest was in connection with a scheme, from in or about September 2015 through in or about May 2019, to fraudulently inflate the value of a portfolio of bonds owned by Live Well in order to induce various securities dealers and at least one financial institution into loaning more money to Live Well – through repurchase (“repo”) agreements and collateralized loans – than they otherwise would have had they known the actual value of Live Well’s bond portfolio. The scheme allowed Live Well to grow its bond portfolio exponentially, from approximately 20 bonds with a stated value of $50 million in 2014 to approximately 50 bonds with a stated value of $500 million by the end of 2016. In May 2019, in conjunction with an effort to wind down the company, Live Well wrote down the value of its portfolio by approximately $141 million.
In addition, Mr. Berman announced today the unsealing of charges against ERIC ROHR, the former chief financial officer at Live Well, and DARREN STUMBERGER, the former head trader at Live Well, for their participation in the scheme. Both ROHR and STUMBERGER have pled guilty and are cooperating with the Government.
HILD was arrested in Richmond, Virginia, this morning. HILD will be presented and arraigned later today in the United States District Court for the Eastern District of Virginia. HILD’s case is assigned to United States District Judge Ronnie Abrams. ROHR’s case is assigned to United States District Judge Edgardo Ramos, and STUMBERGER’s case is assigned to United States District Judge J. Paul Oetken.
On August 28, 2019, the Government obtained a post-indictment restraining order restraining assets – including various real properties and business interests in the Richmond area – owned directly or indirectly by HILD and, as alleged, purchased with proceeds of the scheme.
Manhattan U.S. Attorney Geoffrey S. Berman said: “As alleged, Michael Hild orchestrated a scheme to deceive Live Well’s lenders by fraudulently inflating the value of its mortgage-backed bonds by over $140 million. This allegedly enabled Live Well to borrow money well over the value of the collateral it put up. In turn, Hild used these ill-gotten funds to gain control of the company and increase his own compensation by nearly 700 per cent, while exposing lenders cumulatively to $65 million in unsecured loans to the company, which is now in bankruptcy.”
FBI Assistant Director William F. Sweeney Jr. said: “As CEO of Live Well Financial Inc., Hild allegedly inflated the true value of the company’s bond portfolio and used this false information to obtain loans the company otherwise would not have been able to obtain. The dealers and financial institution that lent the money are now in the possession of bonds that don’t hold the value promised as collateral. The FBI is committed to working with our law enforcement partners to ensure this type of behavior ceases to exist.”
In a separate action, the Securities and Exchange Commission (“SEC”) filed civil charges against HILD.
As alleged in the Indictment unsealed today in Manhattan federal court and other public court documents:[1]
Live Well’s Bond Portfolio and Repurchase Agreements
Live Well was a Richmond, Virginia-based company that originated, serviced, and securitized government-guaranteed reverse mortgages known as Home Equity Conversion Mortgages (“HECMs”). In or about 2014, Live Well acquired a portfolio of approximately 20 bonds, each entitling the holder to receive a portion of the interest payments, but not the principal payments, from a particular pool of reverse mortgages (“HECM IO bonds.”). Live Well purchased the HECM IO bond portfolio for approximately $50 million. At the same time that Live Well purchased the HECM IO bond portfolio, HILD established within Live Well a New York City-based trading desk to manage and grow Live Well’s bond portfolio. STUMBERGER supervised the trading desk.
Live Well financed the acquisition and growth of its bond portfolio through a series of loans in which Live Well used its bond portfolio as collateral. The majority of Live Well’s lenders were securities dealers whose lending arrangements with Live Well were structured as bond repurchase agreements, also known as “repo agreements.” A repo agreement is a short-term loan in which both parties agree to the sale and future repurchase of an asset within a specified contract period. The seller sells the asset to the lender with a promise to buy it back at a specific date and at a price that includes an interest payment. Functionally, a repo agreement is a collateralized loan in which title of the collateral is transferred to the lender. When the loan is repaid by the borrower, the collateral is returned to the borrower through a repurchase. Additionally, at least one of Live Well’s lenders was an FDIC-insured bank, and its lending arrangement with Live Well was structured as a secured loan, with certain bonds held as collateral by a third-party custodian.
The Scheme to Mismark the Bond Portfolio
Live Well’s financing agreements with all but one of the lenders required that any bond that Live Well sought to borrow against be priced by a third-party pricing source in order to determine the market value of the bond as of the measurement date. The lenders then used the value of the bond, minus 10% to 20%, generally, to determine the amount of money to lend Live Well.
The lenders generally relied on a particular widely utilized subscription service (the “Pricing Service”) to price various securities. In or about September 2014, HILD, ROHR, STUMBERGER, and their co-conspirators embarked on a scheme to cause the Pricing Service to publish valuations for the bonds that far exceeded actual market prices. By doing so, the conspirators induced the lenders to extend credit to Live Well far in excess of the prices for which the bonds could be sold in the market. The inflated prices were based on a set of market assumptions that the conspirators called “Scenario 14.”
HILD was aware that if the lenders had known that the Pricing Service was publishing bond prices that did not reflect fair value (meaning the price at which a lender could sell the bond in the market if necessary to recoup its capital), they would have refused to use those prices in determining how much money to loan to Live Well. To prevent the Pricing Service and the lenders from learning that the prices did not reflect market value, HILD directed ROHR, STUMBERGER, and others to take steps to conceal their provision of inflated marks to the Pricing Service. Ultimately, due to the asset overvaluation and the purchase of additional bonds using the capital generated by the scheme, Live Well grew the purported value of its bond portfolio to $500 million by December 2016.
In addition to using the liquidity generated by the scheme to expand Live Well’s bond portfolio, in or about September 2016, HILD used $18 million generated from the repo lenders to buy out the preferred stockholders in Live Well. The elimination of the preferred stockholders gave HILD exclusive control of the company and allowed him to substantially increase his personal compensation. Accordingly, HILD’s compensation jumped from approximately $1.4 million in 2015, to approximately $5 million in 2016, approximately $9.7 million in 2017, and over $8 million in 2018.
In or about late 2018, ROHR resigned as chief financial officer of Live Well. In or about May 2019, the company’s interim chief financial officer informed HILD that he would not sign the company’s interim financial statements because he believed that the company’s carrying value for the HECM IO bond portfolio was significantly overstated. On or about May 4, 2019, Live Well announced that it would cease operations and unwind. After the announcement of Live Well’s closing, Live Well’s interim chief financial officer provided a balance sheet to Live Well’s lenders showing that Live Well had reduced the value of its bond portfolio by approximately $141 million. As of May 31, 2019, the debt Live Well owed to its lenders on the bond portfolio exceeded the portfolio’s carrying value by approximately $65 million.
On June 10, 2019, three of Live Well’s lenders filed a Chapter 7 petition for involuntary bankruptcy against Live Well in the United States Bankruptcy Court for the District of Delaware. See In re Live Well Financial, Inc., 19-11317 (LSS). On or about July 1, 2019, the bankruptcy court appointed a trustee for Live Well.
* * *
HILD, 44, of Richmond, Virginia, is charged with five counts: one count of conspiracy to commit securities fraud; one count of conspiracy to commit wire and bank fraud; one count of securities fraud; one count of wire fraud; and one count of bank fraud. Count One carries a maximum sentence of five years in prison, Counts Two, Four, and Five each carry a maximum sentence of 30 years in prison, and Count Three carries a maximum sentence of 20 years in prison. The charges also contain a maximum fine of $5 million, or twice the gross gain or loss from the offense.
The maximum potential sentences are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendant will be determined by a judge.
Mr. Berman praised the investigative work of the FBI and also thanked the SEC and the Department of Housing and Urban Development, Office of the Inspector General for their assistance.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Jordan Estes and Scott Hartman are in charge of the prosecution.
The charges contained in the Indictment are merely accusations, and the defendant is presumed innocent unless and until proven guilty.
[1] As the introductory phrase signifies, the entirety of the text of the Indictment, and the description of the Indictment set forth herein, constitute only allegations, and every fact described should be treated as an allegation.
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