Bloomberg Anywhere Remote Login Bloomberg Terminal Demo Request


Connecting decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world.


Financial Products

Enterprise Products


Customer Support

  • Americas

    +1 212 318 2000

  • Europe, Middle East, & Africa

    +44 20 7330 7500

  • Asia Pacific

    +65 6212 1000


Industry Products

Media Services

Follow Us

Bloomberg Customers

Businessweek Archives

The Fall Of The House Of Freedlander

Top of the News


Freedlander Inc. always had ambition. It started out as a family-owned Richmond (Va.) real estate firm, then mushroomed into one of the nation's largest second-mortgage lenders. Its ad jingles throughout the South promised that "Freedlander always has money to lend." One year, the firm sponsored its own professional stock-car race, the Freedlander 200. And its civic-minded principals acted as patron saints of hometown charities.

But now that empire, which spanned 33 states and built a loan portfolio topping $675 million, has crumbled. On Feb. 13, the emperor himself, Eric M. Freedlander, age 43, was arrested in Los Angeles on federal fraud charges of orchestrating a $200 million investment swindle that allegedly victimized some of the nation's best-known financial institutions. "He maintains his innocence and is going to defend himself against the charges," says his lawyer, Russell Williams. Freedlander's arrest caps a three-year probe that has already netted guilty pleas on fraud charges and jail time for his younger brother, Benjamin, and his mother, Eve.

The case is far more than an alleged Virginia investment scam. The affair raises troubling questions about the lax oversight of the second-mortgage industry. And it shows the pitfalls that loom even for sophisticated players such as the Federal National Mortgage Assn. (Fannie Mae) and Federal Home Loan Mortgage Corp. (Freddie Mac).

HIGH LIFE. At their peak, the Freedlanders lived the high life. College dropout Eric transformed his mother's real estate agency into a go-go financial services operation. He enjoyed the trappings of luxury: a corporate jet, a 500-acre Virginia horse farm, antique cars, and a jacuzzi-equipped office.

The firm found its formula in the late 1970s, when it began originating second-mortgage loans, which allowed cash-strapped homeowners to tap the equity of their homes. The company sold loans to investors and persuaded friends and pension-fund managers to buy interest-only notes that paid up to 16% a year.

The notes seemed to be safe investments based on second mortgages whose income would finance the interest payments. But Richmond oral surgeon Allen B. Schwartz and his wife learned otherwise. They bought a $130,000 note on a house purportedly worth $250,000 only to learn later that the mortgage had never been recorded and that there were already two other liens on the property. "The airwaves were inundated with Freedlander commercials," says Schwartz's wife, Rona. "You just assumed that things were O. K."

Freedlander also allegedly duped bigger fish. In the early 1980s, Fannie Mae agreed to buy more than $215 million in loans from the firm based on false information, according to the indictment.

The catalyst for Freedlander's meteoric rise may have been NCNB Corp. in Charlotte, N. C., a regional banking power that provided it with a $125 million credit line. "NCNB was the deep pocket," says a former Freedlander employee. "They made Freedlander."

By the mid-1980s, with banks jumping into the home-equity loan market, the Freedlanders took greater risks, lending money to lower-income homeowners already swimming in credit-card debt. For this, they sometimes charged borrowers more in fees than the value of the loan, court papers say.

But the riskier lending soon took its toll. Nonperforming loans grew to one-third of the firm's loan portfolio by early 1985, according to court papers. David A. Silver, whose Richmond firm services many former Freedlander loans, recalls seeing some properties in Tennessee that had been "trashed and abandoned."

HARD FALL. Prosecutors allege the Freedlanders masked their problems through computer programs designed by Benjamin that enabled the company to keep two sets of books--one real, and, for investors, another that claimed only 5% of loans weren't performing. Meanwhile, prosecutors say the firm covered interest payments to noteholders by paying them with money from new investors.

According to court papers, when Fannie Mae noticed many of the loans didn't meet its standards, the Freedlanders blamed the problems on computer errors. Fannie Mae nonetheless suspended the firm in 1985. The Freedlanders then turned to Freddie Mac and some small New Jersey thrifts, which bought $40 million in loans. But Freddie Mac soon grew suspicious and pulled out of a pending $100 million purchase. A year later, NCNB cut its ties to Freedlander.

That broke the enterprise. In April, 1988, the firm filed for bankruptcy, with liabilities outstripping assets by $154 million. Fannie Mae alone lost $20 million on the mortgages it bought. It says that it has stopped purchasing second mortgages after "some bad experiences." NCNB, citing pending litigation, declined comment.

Despite the prison sentences for his relatives, Eric Freedlander remained undeterred. At the time of his arrest, he was still peddling mortgages in Southern California. But his Midas touch had run out. Unable to post $150,000 in bail, he languished in jail for a week.


Among the items in an 83-count indictment:


Federal prosecutors charge that Freedlander conspired to defraud a number of financial institutions by misrepresenting the quality of second mortgages


They charge Freedlander pretended investors' returns came from mortgage payments, but they actually came from sales to new investors

DATA: BWDean Foust and Tim Smart in Washington

blog comments powered by Disqus