To Be a Businessman
In 1939, my Aunt Beatrice needed to sell her house in Brooklyn, NY. The Great Depression was loosening but Europe was under the shadow of war. Banks turned down one after another buyer, so she decided to hold the mortgage herself.
Aunt Bea had a Victorian properness with her coifed white hair, dark dress, white collar, and cameo brooch. Inside she was a tough lady. When she and her bookmaker husband separated, with two sons to raise, she learned how to sell molasses by the barrel in Alaska. The Volstead Act—Prohibition—was the law of the land, but what they did with the molasses was not her concern. When she had enough money, she bought a five-bedroom house in Sheepshead Bay, where I lived ages 10 through 15.
Eventually a woman with five kids, no husband, to whom no bank would give a mortgage, convinced Aunt Bea to take the mortgage herself. Aunt Bea remarked, “The worst that can happen is I’ll have to take the house back.” But the buyer never missed a payment.
In 1982, Mitt Romney, Harvard law and business degrees in hand, bought into something called “The Gem Plan.” Pitched to “affluent free enterprise capitalists,” the prospectus claimed that tax shelter benefits alone would be worth twice the amount of cash required each year. Without putting up a dime of his own money, Romney took ownership of five modest rent-to-own houses in Missouri, Texas, a Houston suburb. All he had to do was pay down the mortgage held by a local bank, an amount covered by what each rent-to-own occupant would pay. He could also take depreciation and mortgage interest deductions. In 1997, Tim and Betty Stamp rented one of those houses.
When the Bush Depression struck, real estate collapsed, people lost their jobs, and four of his five renters walked away, To his horror, Romney had to keep paying with his own money! Only Tim and Betty Stamp stayed, hoping to buy their house. But Tim had lost his job and although his wife, a nurse, had hers, the bank said no. Romney, annoyed that he’d fallen for the scheme and hating the idea of losing five out of five, called Tim Stamp personally, offered to loan him the money, and hold the mortgage himself. The Stamps said yes, and got a $50,500 mortgage, paid $600 a month, check made out to Willard M. Romney.
Romney earned only $2,500 interest a year on that loan, but it was better than selling at a loss like the other four houses. The Stamps are paying Mitt Romney to this day.
From then on, Romney never went into a deal until he’d checked out every detail with the deep analysis techniques he’d learned at Harvard. Soon after that he started Bain Capital and the rest is history.