Debt Elimination - Dupes Apply Here
December 19, 2005, Revised February 14, 2008
Success Trust and Holding was a scam that relieved investors of millions of dollars before being shut down by the SEC. The story they told investors was completely implausible, but people who believe in a financial tooth fairy will believe anything.
"A firm called Success Trust & Holding LLC has offered, for $4500, to make my mortgage payments for 3 years, at which point my mortgage will have been completely paid off. In addition, they will pay me an amount equal to the value of my house at that time."
Among the early mortgage payoff scams I have looked at in recent years, this is perhaps the most outrageous.
The STH plan makes other early payoff plans look benign in comparison. The others ask you to pay them for showing you how to accelerate the repayment of your mortgage with your money. Their deceit is in making you believe that you couldn’t do it without them.
In contrast, STH makes a promise they cannot possibly meet. If you pay them $4500 upfront, have 20% equity in your house, and add them to your deed as a co-owner, they will make your mortgage payments for 3 years. At the end of that period, they will deliver a paid-up mortgage to you, remove their name from your deed, and cut a check to you for the current appraised value of your house.
To illustrate the absurdity of this, assume I have a $300,000 mortgage balance on a $400,000 house. If I believe them, my investment of $4500 would grow to $700,000 in just 3 years! That’s a return of 438% a year, without any assumed appreciation, and without counting the interest payments they made for you. If they could really earn this kind of return, they would do it for themselves, not for you.
Because the appeal of the STH plan is the out-sized return on investment, rather than an accelerated pay-down of the mortgage balance, it should be classified as an investment scam. It is similar in many respects to the mortgage loan warranty programs I have written about in the past (see Is This Mortgage Warranty on the Level?). However, STH promises returns three or more times higher than the warranty programs.
Investment scams require a story. Even the most gullible consumers, who secretly believe that some day a good fairy is going to solve all their financial problems, need an explanation of how such a high return is possible.
The STH story is based on an erroneous interpretation of fractional reserve banking. Its interpretation is that any commercial bank has the capacity to expand its deposits and assets by a multiple of an increase in its cash reserves.
For example, if banks must hold reserves against their deposits of 12.5%, a bank at which STH deposits $100,000 of home owner equity convertible into cash could create $700,000 of additional deposits. In the process, it would add the same amount of loans or investments, which will fund the outsized returns STH promises its clients.
There are three fatal flaws in this story. First, it is not possible for an individual bank to expand in the manner described above. The bank receiving a cash deposit of $100,000, which is subject to a reserve requirement of 12.5%, can increase its earning assets only by $87,500, not by $700,000. This is what every banker will tell you, and they are right. Anyone interested in the technical details will find them in the note appended to the end of this article.
The second flaw is that even if it were possible for a bank to expand in the manner assumed by STH, the bank couldn’t possibly earn enough to pay the returns that STH promises. If their deposits were costless and they earned 9% on their assets, they would have to expand by a factor of 20 (not 6 or 7) just to cover their cost.
The third flaw is that STH cannot deliver the cash reserves that banks need to expand their loans and investments. There is no legal way that partial ownership of a mortgaged home can be converted into cash assets of use to a bank.
STH claims they are working with 250 banks, but will not identify any of them.
While this is a scam without any question, I am not sure how they intend to execute it. My guess is that they intend to borrow as much as possible against clients’ identity and property, and then disappear.
In response to my inquiry, STH said that it was dropping its requirement that they be placed on the deed. However, they will have your credit report, social security number and copies of your deed, mortgage, note, and appraisal. In unscrupulous hands, these permit an enormous amount of mischief.
If you have $4,500 and want to pay down your mortgage, send it to the lender marked "apply to principal." This will work for sure.
Many scams use as a point of departure the ability of commercial banks to expand their deposits and earning assets by a multiple of any increase in their reserves. They ignore the warning given in all money and banking textbooks that because a system of banks can do this does not mean that any one bank can -- unless that bank is a monopolist.
Consider a monopoly bank that has a reserve requirement of 10%, meaning that for every $100 of deposits it must hold $10 of reserves, which I will assume is currency of the type you have in your wallet. Suppose you find $100 of currency hidden in an old book and deposit it in the bank. The bank can now make loans of $900, paying the borrowers with $900 of newly-created deposits.
At the end of the process, the bank's balance sheet will show $1,000 of additional deposit liabilities, and $1,000 of additional assets, of which $100 is the reserves you deposited with them, and $900 is the additional loans they made. Of course, this assumes a lot of things, including that the recipients of loans did not want to hold any currency. But never mind that, the principle that a monopoly bank can expand loans and deposits by a multiple of any increase in reserves is well established.
If the bank that receives your currency is only one of many, however, it can only expand its loans and deposits by $90 rather than $900. The reason is that any borrower will use the deposit it receives from the bank to make payments to a third party, who in all probability uses a different bank. This means that as the bank makes loans, it will lose an equivalent amount of deposits and reserves.
If the bank lends $90, for example, and the borrower uses the $90 to buy a gadget from a customer of another bank, the lending bank will see $90 of deposits shifted to the other bank, and will have to send that bank $90 of the $100 of currency that you deposited. The other bank will now have excess reserves that it can use to expand loans and deposits, so the process will continue. The banking system can expand loans in the same manner as a monopoly bank, but no one bank can.
Postscript: The SEC Takes Action
On August 3, 2006, the SEC filed a complaint against Success Trust and Holding, putting it out of business. See SEC Complaint.
Success Trust and Holding was a scam that relieved investors of millions of dollars before being shut down by the SEC. The story they told investors was completely implausible, but people who believe in a financial tooth fairy will believe anything.
"A firm called Success Trust & Holding LLC has offered, for $4500, to make my mortgage payments for 3 years, at which point my mortgage will have been completely paid off. In addition, they will pay me an amount equal to the value of my house at that time."
Success Trust and Holding Is a Scam
Among the early mortgage payoff scams I have looked at in recent years, this is perhaps the most outrageous.
The STH plan makes other early payoff plans look benign in comparison. The others ask you to pay them for showing you how to accelerate the repayment of your mortgage with your money. Their deceit is in making you believe that you couldn’t do it without them.
In contrast, STH makes a promise they cannot possibly meet. If you pay them $4500 upfront, have 20% equity in your house, and add them to your deed as a co-owner, they will make your mortgage payments for 3 years. At the end of that period, they will deliver a paid-up mortgage to you, remove their name from your deed, and cut a check to you for the current appraised value of your house.
The Absurdity of Their Offer
To illustrate the absurdity of this, assume I have a $300,000 mortgage balance on a $400,000 house. If I believe them, my investment of $4500 would grow to $700,000 in just 3 years! That’s a return of 438% a year, without any assumed appreciation, and without counting the interest payments they made for you. If they could really earn this kind of return, they would do it for themselves, not for you.
Because the appeal of the STH plan is the out-sized return on investment, rather than an accelerated pay-down of the mortgage balance, it should be classified as an investment scam. It is similar in many respects to the mortgage loan warranty programs I have written about in the past (see Is This Mortgage Warranty on the Level?). However, STH promises returns three or more times higher than the warranty programs.
The Success Trust and Holding Fairy Tale
Investment scams require a story. Even the most gullible consumers, who secretly believe that some day a good fairy is going to solve all their financial problems, need an explanation of how such a high return is possible.
The STH story is based on an erroneous interpretation of fractional reserve banking. Its interpretation is that any commercial bank has the capacity to expand its deposits and assets by a multiple of an increase in its cash reserves.
For example, if banks must hold reserves against their deposits of 12.5%, a bank at which STH deposits $100,000 of home owner equity convertible into cash could create $700,000 of additional deposits. In the process, it would add the same amount of loans or investments, which will fund the outsized returns STH promises its clients.
There are three fatal flaws in this story. First, it is not possible for an individual bank to expand in the manner described above. The bank receiving a cash deposit of $100,000, which is subject to a reserve requirement of 12.5%, can increase its earning assets only by $87,500, not by $700,000. This is what every banker will tell you, and they are right. Anyone interested in the technical details will find them in the note appended to the end of this article.
The second flaw is that even if it were possible for a bank to expand in the manner assumed by STH, the bank couldn’t possibly earn enough to pay the returns that STH promises. If their deposits were costless and they earned 9% on their assets, they would have to expand by a factor of 20 (not 6 or 7) just to cover their cost.
The third flaw is that STH cannot deliver the cash reserves that banks need to expand their loans and investments. There is no legal way that partial ownership of a mortgaged home can be converted into cash assets of use to a bank.
STH claims they are working with 250 banks, but will not identify any of them.
While this is a scam without any question, I am not sure how they intend to execute it. My guess is that they intend to borrow as much as possible against clients’ identity and property, and then disappear.
In response to my inquiry, STH said that it was dropping its requirement that they be placed on the deed. However, they will have your credit report, social security number and copies of your deed, mortgage, note, and appraisal. In unscrupulous hands, these permit an enormous amount of mischief.
If you have $4,500 and want to pay down your mortgage, send it to the lender marked "apply to principal." This will work for sure.
Note on Bank Credit Expansion
Many scams use as a point of departure the ability of commercial banks to expand their deposits and earning assets by a multiple of any increase in their reserves. They ignore the warning given in all money and banking textbooks that because a system of banks can do this does not mean that any one bank can -- unless that bank is a monopolist.
Consider a monopoly bank that has a reserve requirement of 10%, meaning that for every $100 of deposits it must hold $10 of reserves, which I will assume is currency of the type you have in your wallet. Suppose you find $100 of currency hidden in an old book and deposit it in the bank. The bank can now make loans of $900, paying the borrowers with $900 of newly-created deposits.
At the end of the process, the bank's balance sheet will show $1,000 of additional deposit liabilities, and $1,000 of additional assets, of which $100 is the reserves you deposited with them, and $900 is the additional loans they made. Of course, this assumes a lot of things, including that the recipients of loans did not want to hold any currency. But never mind that, the principle that a monopoly bank can expand loans and deposits by a multiple of any increase in reserves is well established.
If the bank that receives your currency is only one of many, however, it can only expand its loans and deposits by $90 rather than $900. The reason is that any borrower will use the deposit it receives from the bank to make payments to a third party, who in all probability uses a different bank. This means that as the bank makes loans, it will lose an equivalent amount of deposits and reserves.
If the bank lends $90, for example, and the borrower uses the $90 to buy a gadget from a customer of another bank, the lending bank will see $90 of deposits shifted to the other bank, and will have to send that bank $90 of the $100 of currency that you deposited. The other bank will now have excess reserves that it can use to expand loans and deposits, so the process will continue. The banking system can expand loans in the same manner as a monopoly bank, but no one bank can.
Postscript: The SEC Takes Action
On August 3, 2006, the SEC filed a complaint against Success Trust and Holding, putting it out of business. See SEC Complaint.