Bad Management Led to Instafi.com Meltdown

Hearings slated for Instafi.com, Capitol Commerce failures

January 14, 2004

By PATRICK CROWLEY

The California Assembly Banking and Finance Committee plans to hold a Feb. 3 hearing on the failures, said Margaret Gladstein, the committee’s chief consultant.

“Essentially, we have the closures of two mortgage companies, one in August (Capitol Commerce), one in December (Instafi.com),” Gladstein said in an interview. “Both left borrowers in a lurch.”

Gladstein said lawmakers — spurred by committee chairwoman Rep. Pat Wiggins, D-Santa Rosa — want to look at “what happened in those cases, what happened to borrowers and how to prevent it from happening again.”

Wiggins and other lawmakers are particularly interested in how both companies were impacted “by the change in the interest rate environment.”

“Obviously, mortgage rates go up and down all the time,” Gladstein said. Lawmakers want to take a closer look on how that impacts mortgage lenders and borrowers, she said.

“Do we need to change California law to offer better protection?”

The failure of Instafi.com has been big news in southern California, where the company was viewed as a success. At its peak in June the company was completing 2,900 loans a month, employing 380 people and pulling in profits of $1.7 million, according to an account in the Orange County Register.

But the company abruptly shut its doors on Dec. 16, leaving debts of $38.2 million against assets of just $1.3 million, the paper reported.

“In the months before it shut down,” the Register reported,” Instafi.com bounced employee paychecks, missed rent payments, racked up debts with vendors and failed to deliver promised loans to some would-be borrowers, according to former employees, customers and court records.”

Instafi founder and CEO Sean Roberts — a 34-year-old college dropout — told the paper the collapse of his company was caused by mortgage-rate swings and poor management.

“I put the blame on myself,” Roberts reportedly said. “I got lazy when the company did well … I went through the motions. I have worked harder. I think I should have watched the expenses.”

When rates of 4.9% jumped a point in August and the company’s refinance business dropped, troubles started amid a significant slowing in cash flow. Those events sent Instafi “in a downward spiral,” he said.

Instafi has not declared bankruptcy and is liquidating its assets to pay off debt. Roberts told the Register he put $750,000 of his own money in an attempt to keep it afloat and hasn’t taken a paycheck — he earned $1 million last year — since June

The paper also reported nearly 200 complaints filed against the company with the Better Business Bureau of Southland, Calif., from May 2001 to mid-December.

Meanwhile, Capitol Commerce closed in August after rising interest rates apparently made it impossible to come through with a promised interest rate, according to the Washington Department of Financial Institutions.

Gladstein said both companies “made waves on a national front” as fast-growing mortgage companies.

Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: pcrowley@enquirer.com