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Did Cit Just Get A Predatory Debt Workout?

Reading today's Journal story on the $3 billion workout CIT negotiated with its bondholders, I couldn't help thinking of today's excellent Times story on predatory mortgage-modification outfits.

First, the Times:

Despite making promises of relief to homeowners desperate to keep their homes, FedMod and other profit making loan modification firms often fail to deliver ...

“Our job was to get the money in and then we’re done,” said Paul Pejman, a former sales agent who worked out of FedMod’s two-story headquarters in Irvine, Calif. ... “I had people calling me crying, and we were telling them, ‘You can pay me or you can lose your house,’ ” Mr. Pejman said. “People were giving me every dime they had, opening credit cards. But I never saw one client come out of it with a successful loan modification.” ...

The California Department of Real Estate warns consumers that many dubious loan modification companies have organized themselves as law firms solely to allow them to collect upfront fees, even though the lawyers have little, if anything, to do with the services provided. ...

Mr. Pejman and his fellow agents urged homeowners to send FedMod $3,495; the agents were promised a 30 percent commission for fees they took in. Most clients could not come up with more than $1,000 and agreed to a payment schedule for the rest. Assurances of relief from a homeowner’s loan terms were typically extravagant, Mr. Pejman said.

So the mortgage-modification scam artists would basically extract large upfront payments from desperate people about to default on their debt, then do almost nothing to help them stay afloat.

Now the Journal on CIT:

Under the proposal, CIT would likely pay interest rates 10 percentage points above the London interbank offered rate, said these people. (As of Friday, three-month Libor stood around 0.5%.) CIT has also agreed to pledge some of its highest-quality loans as collateral on the $3 billion package. ...

Another advantage for the CIT bondholders lending the money is that they hold large chunks of bonds that come due in the next few months and will see that debt paid off in full, even if they bought it at a steep discount recently, while also being paid high interest on their loans.


If you're interested, Felix Salmon walks through more gory details here. The only thing I'd add is that it's not obvious to me where CIT's revenue is going to come from going forward. Last week the Journal reported that the bank's small and medium-sized clients could see their money frozen in bankruptcy court if CIT went belly up:

CIT is a lender to 950,000 mostly small and midsize businesses. It is one of the nation's biggest players in supplying credit and cash advances to retailers and manufacturers, a business known as "factoring." CIT provides them cash upfront and over time, taking over the collection of their receivables and invoices.

If CIT were to seek bankruptcy protection, scheduled payments to customers could potentially be frozen by the court. ...

Assaf Cohen, a wholesaler of T-shirts and jeans who has been working with CIT for years, said his company, Tradewinds Simply Irresistible, has more than $1 million in receivables held with CIT. He said he isn't sure whether his company will ever see its money if CIT files for bankruptcy. He has suspended shipments to all CIT-backed retailers until at least Monday to see how the situation turns out. "This is hurting my business dramatically," he said.

Under those circumstances, who would keep using CIT?

--Noam Scheiber