BofI: Risky Loans To Undisclosed, Off-Balance Sheet SPEs Found Disguised Within Mortgage Warehouse Portfolio

Nov. 19, 2015 2:34 PM ETAxos Financial, Inc. (AX)44 Comments
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  • BOFI's large mortgage warehouse business is widely believed to be extremely safe. Footnotes, however, reveal that $297 Million of far riskier lender-finance loans are disguised as belonging to this category.
  • The article examines BOFI's undisclosed relationship with Center Street Lending which specializes in highly suspect, single family "fix and flip" loans requiring "no doc", "no FICO", and "no income verification".
  • The apparently unlicensed Center Street was recently accused of "Enabling And Assisting" the perpetuation of a ponzi-scheme that was shut down by the SEC earlier this year.
  • Documents confirm that BOFI is funding Center Street via another undisclosed, off-balance sheet, special purpose entity that is also the subject of a recent lawsuit.
  • BOFI's sponsorship of Center Street appears to contradict management's public statements and introduces enormous potential risks.
We continue to maintain our conservative underwriting criteria and have not loosened credit quality to increase loan volume"

BOFI's CEO, Greg Garrabrants. October 29th Earnings Call


Last week, I published an article on Bank Of The Internet (NASDAQ:BOFI) titled, Boiler Rooms, Bad Loans, And Off-Balance Sheet Maneuvers Underpin Poorly Understood Risks. The article exposed how a network of boiler rooms and undisclosed lending relationships has facilitated hundreds of millions worth of highly suspect, BOFI-originated, small business loans that have flooded the courts with defaults. Furthermore, the article examined how BOFI's financing of at least one undisclosed, off balance sheet, Special Purpose Entity ("SPE") appears to have boosted (short term) reported profits while obscuring the risks of BOFI's fast growing C&I business from investors. For additional background and context, I would direct readers first to that article which essentially serves as a "Part 1" to this piece.

This writing examines BOFI's large Mortgage Warehouse credit book which is widely believed to be ultra safe. Apparently the opposite, the article examines how BOFI has disguised nearly $300 Million of risky lender finance loans (amounting to nearly half it's tangible common equity) within it's mortgage "warehouse and other" portfolio. While Mr. Garrabrants has repeatedly assured investors of BOFI's extremely disciplined credit standards, BOFI appears to have directly contradicted his public statements by clandestinely funding "hard money" single family lenders making highly suspect "fix & flip", "no doc", "no FICO", "no income verification", type loans. Structured as facilities to newly discovered and undisclosed, off-balance sheet Special Purpose Entities, BOFI has reported "zero" credit delinquencies while earning high yields. Led by a senior management team that has collectively been involved in two of California's largest bank failures (Imperial & Indymac), BOFI has set aside only minimal loss reserves. It appears that BOFI's increasingly insatiable

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In-Depth ResearchNo affiliation with Aurelius Capital Management.

Disclosure: I am/we are short BOFI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Additional disclosure: This article represents the opinion of the author as of the date of this article. The information set forth in this article does not constitute a recommendation to buy or sell any security. This article represents the opinion of the author as of the date of this article. This article contains certain "forward-looking statements," which may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated," "potential," "outlook," "forecast," "plan" and other similar terms. All are subject to various factors, any or all of which could cause actual events to differ materially from projected events. This article is based upon information reasonably available to the author and obtained from sources the author believes to be reliable; however, such information and sources cannot be guaranteed as to their accuracy or completeness. The author makes no representation as to the accuracy or completeness of the information set forth in this article and undertakes no duty to update its contents. The author may also cover his/her short position at any point in time without providing notice. The author encourages all readers to do their own due diligence.

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