There is a comfort, or maybe a luxury, in maintaining a successful mortgage lending business for nearly 50 years. It’s a given that no matter how the customers’ needs change, they still need you to fund their loans. No matter which direction the laws are bending, you can adapt. When you drive to work in the morning, your long-time employees, some of whom have worked there almost as long as you, will still greet you upon arrival. And most of all, there is comfort in the assurance that your reputation for transparency, fairness and trustworthiness is, and always has been, intact.
Chuck Hershson and Fidelity Mortgage Lenders of Los Angeles have been through it all: four recessions, including the 1980s with 22% interest rates, the 2008 humdinger of a real estate meltdown and the resultant Dodd-Frank law, and a couple of smaller ones in between. They challenged his principles and cash reserves, but Hershson never wavered from his conservative business model and his lending mantra: equity, equity, equity. Today, Fidelity Mortgage Lenders is one of the few with that type of longevity, and Hershson — or Uncle Chucky, as he calls himself — is regarded as a stalwart of the private lending industry.
The Advent of Hard-Money Lending
After several years in the mortgage industry, Hershson founded Fidelity Mortgage Lenders in 1971, funding strictly residential loans, and soon morphed into the commercial loan arena. “In those days, banks couldn’t write junior liens (second trust deed loans), only first mortgages, That’s how this industry started,” says Hershson. “We did seconds behind their firsts.”
The average second trust deed loans in the 1970s was between $2,500 and $4,500, when homeowners didn’t want to touch their low interest rates on the firsts, which were 30-year loans. For those who needed quick cash, Fidelity Mortgage Lenders was a dream: The company could fund the loan in two weeks and didn’t require financial statements. Poor credit didn’t matter, because Uncle Chuck had a different rule of thumb. “There are only three things my company is interested in,” he says. “Equity, equity, equity. Not location, location, location.”
Equity and a clean title, not financial health, are the main criteria needed to fund a loan, and only a few pages of paperwork: proof of fire insurance, escrow authorization, statement of information and some disclosure statements. Fidelity lends only 55% loan -to-value (LTV), and maybe 60% on an unusual case (industry standard for hard money lenders is 65%; for banks it’s 75% on a commercial property). This keeps Fidelity’s risk low, and in the event of a foreclosure, allows for a quick exit.
Fidelity’s 55% LTV has mitigated exposure in some of the worst financial crises. In 1981-83, the prime rate rose to 22%, and CDs were providing a 15% return. These were rough times, Hershson says. “By some divine magic, we had a nice cash reserve, and I used to advance payments to investors so they wouldn’t lose any money. Somehow, I survived. And believe me, I was hanging on by my fingernails and fumes. But I did not want my investors to lose money. Because if you lose the investors, you have no way to fund loans.”
Many companies didn’t survive that period. But that recession prepared Fidelity for the next one: the 2007-08 real estate debacle. Even though the major banks were to blame, companies like Fidelity took the hit. “And that was very trying,” he says. “You’ve got to stick to your model, and that can be difficult. Let’s say business is slow, and we get a call from a guy who needs a 65% loan. It’s very tempting, because I’ve got to cover my costs. But we have to stick by our model of 55%. It’s what we do.”
The resulting Dodd-Frank Act was particularly painful because it eliminated the Company’s ability to fund consumer loans. That tightened his business and the market, and hurt single-family residential owners because they didn’t have access to money. So Hershson’s focus now is private lending commercial loans or residential loans strictly for investment or business purposes.
Along with a strict LTV, Hershson says the Company consistently delivers what it promises: delivery of funds in the specified time frame (7 to 10 working days) with clean title and loan servicing for the life of the loan (Fidelity never sells off loans ). And in the rare event of a foreclosure, Fidelity stays with the property until the end and pays off the investors at the foreclosure sale.
That consistency has brought a wealth of trust from returning customers and investors. Rewrites are common, he says, and Fidelity’s been around long enough that the company is now servicing loans made by the children of original customers. “Our reputation is stellar,” he says. “We do not take advantage of our borrowers. We deliver what we promise. We’re very transparent.”
Five decades has brought Hershson plenty of wisdom and refined methods in building trust in Fidelity Mortgage Lending’s brand, marketing strategies and predicting the future.
On building trust, Hershson says there are four areas he concentrates on: fairness to borrowers, transparency with investors, generosity with employees and collegial broker relationships.
“We’ve always been very fair to borrowers, even if they’re desperate,” he says. “We could charge more and they’d be thrilled with it, but we don’t do that. And they are very appreciative.
“We’re very transparent with our investors since we fund our loans with private investors. Since they know the stability of Fidelity, they always know what’s going on.”
Employees are equally important to Hershson as investors and borrowers and he cites the Company’s generosity to them. “The average employee has been here 17 years, and some have been here 30 years. They basically leave in one of two ways: They either retire or they go out in a casket. And I pay ALL of their health insurance and 100% of their pension. The most important thing you can have in business is loyal employees, especially in a service business like myself.
“Lastly, we have very strong collegial relationships with brokers. We depend on them because they’re out on the front lines. When they make a sale or have a client who needs to refinance, and they don’t have time to qualify with an institutional lender or they have other problems, they call us because they know we’ll perform. If I tell a broker we’ll close in 10 days, barring unforeseen events with the title, they know Fidelity will deliver the goods. And we’ve established this relationship over many years.”
Fidelity’s marketing efforts elicit trust as well. Hershson gains brokers and prospective clients through various networking groups and by serving on industry panels at seminars and conferences. He also courts large real estate companies such as Lee and Associates and Voit Commercial Real Estate to tell them why they might need Fidelity for a future client who doesn’t qualify but needs additional capital.
In addition to your traditional borrowers Fidelity targets those businesses that large banks steer away from: churches, motels, retail stores, restaurants, industrial buildings and houses, and particularly cash businesses such as liquor stores. Most don’t show much income, he says, because they pocket much of the cash, and this makes it difficult to qualify for a traditional loan. Banks, he says, don’t want the exposure if a church or temple goes into foreclosure. But Fidelity doesn’t have a problem with that risk as long as the equity exists.
Fidelity is one of the few that will lend on a fixed rate up to 20 years, fully amortized, or 30 years amortized and due in 15 years at a fixed rate – and no prepayment penalty. This, he says, is what makes Fidelity unique in the hard money industry, and particularly attractive in the face of rising interest rates and competitor offerings.
“We are going into a higher period of interest rates and we are cautious about making new loans,” he says. “And as you know, in California, prices have gone through the roof. Property is super expensive. A lot of investors have gone to Arizona, Texas, New Mexico, Oregon and Washington because they can’t get a return here. So if I get a call today, I’m looking ahead three to four years. I think the market is going to drop a good 20% between 2019-21.
“By the way, Uncle Chuck predicted in 2004 that there would be blood on the streets. When I saw negative amortization rates from the banks, where payments would go up a third, I said that can’t go on. And banks were lending up to 120% of the value. It was insanity. It didn’t take a brain surgeon to understand. So I feel the same way now, but it may not be as severe this time, that the market will drop 15%-20%. A lot of companies will go kaput because they were too aggressive in their lending. And the consumer will pay the price because they were leveraged too darn high.”
So given the current outlook on the industry, and his experience gained in the last five decades, what advice would he give to others starting out in the loan origination business? “It’s much more difficult than you think. First go to work for a mortgage company, learn the ropes and you’ve got to have a lot of investors with money looking to invest.”
Chuck has been successful, but he realizes that other people may be less fortunate. So, Chuck and his wife, Hella, are heavily involved in philanthropy. He was a long term board member of the Cancer Support Community, supports the Harmony Project which provides musical education and instruments to inner-city school children and The Jewish Home for the Aging, where he helps raise money to ensure the elderly are housed and cared for appropriately. In addition he’s a member of the Board of Governors at Cedars Sinai and on the Board of American Friends of Hebrew University (AFHU).
A weekend spent de-stressing will likely include a drive around Los Angeles. Once a month he drives to Malibu to hang with friends, but mainly for the meditation. Taking a Sunday drive allows for a bit of basking in the comfort of 50 years in business, beating the worst of recessions and maintaining that stellar reputation. “I get in the car and say, ‘Chuck, you are one lucky son of a gun.’”
Contact Fidelity Mortgage Lenders at fidelityca.com or 800-752-9533.