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6 July 2004
"Under the Loan Warrantee Program offered by
DFF International, you pay a fee of 17% of your mortgage loan upfront, and in 60
months they cut you a check for the original loan amount. If you pay a fee of
25% of the loan, they cut you a check for the loan amount in 36 months. Can this
be on the level?"
No possible way!
They tell you that if you take out a
new mortgage loan for $200,000 and pay them $34,000, they will pay you $200,000
in 5 years. That�s a return of 42.5% a year. If you pay them $50,000, they will
pay you $200,000 in 3 years. That�s a return of 58.7% a year.
How can they earn returns this large
� indeed, they have to be even larger if they are going to make a profit? On
their web site, they associate themselves with hedge funds, insurance companies
and other sophisticated investors who can earn large returns. But none of those
entities consistently earn anything like the returns promised by the Loan
Warrantee Program (LWP).
"�Is this a Ponzi scheme?"
Promoters of Ponzi schemes collect
your money upfront by promising you a mega-return in the future. They pay the
promised return to very early entrants, thereby attracting new investors who
provide the funds needed to pay the old ones. But when the money coming in from
new investors no longer exceeds the money going out to old ones, the promoters
shut their doors and flee with what they have.
Whether the LWP is a Ponzi or not
depends on the intentions of the promoters, which I don�t know. But I do know
that the promises of 42.5% and 58.7% returns are ridiculous and not to be
believed.
I called IFF International to ask,
among other things, whether they were able to refer me to any participants who
had been paid off the full amount promised. The person who responded to my call
said "no", but that they would have some soon. Even if this is true, it would
prove nothing, since paying off a few investors in order to stimulate more to
participate is a standard feature of all Ponzi schemes.
I also asked how they could be sure
of being able to pay the promised returns. The rep said that the returns were
not guaranteed, and referred me to some fine print on their web site. It says
"No one can guarantee the outcome of the Loan Warrantee Program, but the
principle amount is guaranteed so you risk nothing." The rep referred to this as
a "worst case scenario".
Strange, my dictionary says that
warranty and guarantee mean much the same thing. Given the risk of losing it all
if this is a Ponzi scheme, I would say that getting back your original
investment is a best case scenario.
Another question I asked was whether
they could refer me to one or two of the 300 lenders that they claim to broker
loans for, who I could talk to about the LWP. The rep said that the lenders have
nothing to do with the program and knew nothing about it. That is not
surprising, for reasons explained below.
The LWP is offered in connection
with home loans so it can be presented as a warranty, like the warranty you buy
on an automobile or vacuum cleaner. Indeed, the rep I spoke to used the analogy
of an automobile warranty to explain the program to me. A warranty does not fall
under the jurisdiction of the Securities and Exchange Commission.
In fact, there is no resemblance
between the two. An automobile warranty is tied to the automobile and couldn�t
exist without it. The LWP, in contrast, has no connection to the mortgage loan
with which it is associated except in the minds of the participants. The LWP is
an investment masquerading as a warranty, but it is not an investment I would
consider.
Copyright Jack Guttentag 2004
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