THE RISE AND FALL OF PINNFUND USA
Long before Michael met Kelly, the mortgage-lending firm PinnFund, USA, was the brainchild of Fanghella and Oakland real estate attorney James Lester Hillman. Today Hillman is a silver-haired 63. He has lived since 1965 with his wife and children in Oakland, where he sold securities in real estate partnerships. Fanghella, though not a lawyer, earned a B.A. degree in business administration from Thiel College in 1973. (He has claimed a graduate degree in Finance from Monmouth University, but records show he attended only one semester.) since 1978, Fanghella had sold securities in real estate projects in Illinois and California. He an Hillman met in 1983 and partnered to syndicate real estate. At one time both were licensed to sell securities by the National Associaton of Securities Dealers.
In 1992, with very few assets, the pair met again in Oakland, and Hillman told Fanghella he had an innovative idea- to create a home mortgage lending business. Instead of borrowing money from banks, they would use money from private investors to fund loans. It was Hillmans idea to ride the comet of subprime lending. Subprime is synonymous with less-than-perfect credit. The prime, or A, borrower is one with a good credit history, few debts, and not defaults. Subprime borrowers, given A- to C ratings, are a riskier clientele- mostly low income individuals who are first-time purchasers or are refinancing. Some lenders target such borrowers with excessively high rates.
This business plan is solidly American-profit from consumers credit blemishes. By the end of 1999, consumer debt had reached $1.4 trillion, while consumer spending had exceeded personal income, creating negative savings. PinnFund would eventually boast in its ads that its rates were an attractive alternative to the substantially higher interest rates charged by credit card companies. (PinnFund did not specify how much lower its rates were.) Indeed, sub-prime lending was booming: home mortgages had grown from $200 to $280 billion during the 1990s, and the subprime sector had more than doubled its share to 20 percent.
Why did Hillman want Fanghella? Simple. Fanghella was, one observer noted, an excellent salesman, a talented motivational speaker who could rouse a staff of salespeople on this new idea an have them in turn sell mortgages to borrowers in distressed neighborhoods across America. Hillman had his own métier-convincing wealthy friends and relations to invest.
Fanghella set up Pinnacle Funding in 1993, in Del Mar Heights, and in 1998 moved the company to Carlsbad, across from Palomar Airport. He renamed the company PinnFund, USA. His associate, James Hillman-described by insiders as Mikes moneyman-set up Peregrine Funding in Oakland. Hillman brought in the platform capital to securitize a loan. Under a Spot Loan Funding Agreement between Peregrine and PinnFund, Peregrine funded the loan before Pinnfund sold it, in large bundles of loans, to one of the big mortgage buyers like GMAC or Bank of America on secondary market. To entice borrowers, Pinnfund staffed offices in low-and middle-income neighborhoods through out the country with seasoned salespeople to seek the subprime client and, as one broker described it, to bother with the paperwork and aggravation of closing. The goal was to have Peregrines money complete the cycle-from origination to sale of the mortgage-three or four times a month. This turnaround was their advantage: the faster they turned the money, the more pofit they made.
Each time a loan was sold, a 2 percent premium was earned, divided 75/25 btween PinnFund and Peregrine. On a $100,000 mortgage, PinnFund received $2000. PinnFund received $2000. PinnFund kept $1500 and sent Peregrine $500-Hillman got $300 and the investors $200. The investors, though, did receive more. They got an added 10 percent per year. All told, each $100,000 invested made roughly $1500 per month, $18,000 per year.
Eighteen percent per annum drew a lot of players. Dr. Bert Rettner, a 72 year old physician in Los Gatos, California, said he was in heaven for three years, garnering monthly checks based on a $1 million investment. Like clock work, Rettner received a check every 30 days for $15,000. Who else did Hillman solicit? His immediate family poured in $1.7 million and Hillman himself put up nearly $1 million of his retirement fund. some of the biggest investors-tax attorneys, real estate developers, investment bankers, and accountants, one of whom worked on a multibillion-dollar debt restructuring deal for Donald Trump-bought individual inflows of
$11 and $27 million, while one family ponied up $60 million.
Under Peregrine, Hillman set up three subsidiaries, the funding entities: Allied Capital Partners, Grafton Partners, and (later) Six Sigman, which he opened to super-qualified investors, those with a $5 million net worth and a first-time $500,000 investment.
Hillman crafted an Exclusive Capital Raising Agreement between the investor entity Peregrine and the mortgage lender PinnFund. This agreement enhanced Hillmans lucre as the only fund-raiser as well as the investors clout, since Peregrines money would be the only money that PinnFund could use to fund loans. The sum was kept in a special account which Fanghella controlled, though Hillman and accountants-those at PinnFund and those hired to perform yearly audits-could review as necessary. When loans sold, Hillman earned a commission: during 2000 his haul rose to $975,000 per month. So flush with cash was Hillman (so in need of cash was Fanghella) that, according to Fanghella, Hillman agreed to loan him money, either from Peregrine or from Hillmans personal account.
This was the money-an astounding $90 million, more than half of what Hillman had raised through 1999-that Fanghella claimed Hillman had actually signed over, money on which Fanghellas opulent lifestyle depended. With Hillman replenishing the trough at a rate of $10 to $15 million every month, Fanghella could respond to his wifes ongoing divorce filings with blasé candor: She knew tht we had no income from PinnFund and that we were living an inflated lifestyle funded by borrowed money. It was-and is-all smoke and mirrors. Fanghellas bluster renewed Patrices ire. She rallied her lawyers to dig deeper. After all, as one of three shareholders
in the company, some portion of that $90 million was hers.