Monterey-based hard money broker has deeply reduced interest payments, alarming hundreds of local investors who want their cash back. Previously, investors in Cedar Funding Mortgage Fund had received a rate of return averaging 10.75 percent. But cash-flow issues led Cedar Funding to cut its payments this month to a little more than 6 percent. Many investors who have claims on specific deeds of trusts received no interest payments.

David Nilsen, owner of the lending and investment firm, says investors were never guaranteed 10.75 percent, nor were they told their investments were liquid. “I never told them they could walk in and get their check,” Nilsen says. “We are not a bank.”

Cedar Funding has about 1,500 investors, most of them local, Nilsen says. The company, he says, manages about $160 million in loans secured by deeds of trust on commercial and residential real estate located on the Central Coast and other parts of California. The company has two types of investors, those who paid into the mortgage fund and those who invested in specific properties through first and second deeds of trust.

Nilsen says Cedar Funding is feeling fallout from the subprime mortgage crisis and housing downturn. In the past 15 months Cedar Funding has returned more than $20 million to investors, Nilsen says, as news of surging home foreclosures captured headlines. At the same time Cedar hasn’t been making many new loans, and borrowers have been unable to refinance because of tightened mortgage regulations.

“Most of the loans we have are construction loans and they have interest reserves,” Nilsen says, adding that the reserves are funded by new investment money that comes in every month. He says negative media coverage of the real estate market has scared off new investors. “We have a slowdown of money coming in right now.”

Now Nilsen says Cedar Funding must collect on borrowers for monthly interest payments. In an April 10 letter to investors, Nilsen says deed-of-trust investors will receive their money once the borrowers’ checks have cleared the bank.

Investors like Beverly Hartnell are anxious for the check to clear. Hartnell is retired and lives off Laureles Grade. She invested $100,000 between the mortgage fund and a portion of a deed of trust. The investment was paying off until the first week of April, when she didn’t receive her deed-of-trust payment, and the mortgage fund only paid 6.37 percent interest. Hartnell and hundreds of other investors weren’t given a formal explanation until the April 10 letter.

Now Hartnell feels insecure about her finances. “Those two dividends are actually money that I use to pay my bills,” Hartnell says. “Fortunately, I have a little bit of savings. Otherwise I’d be eating a lot of beans.”

Hartnell says she tried to pull out her money but is now at the bottom of a list to get her principal back. Cedar Funding’s operating agreement explicitly states that investor withdrawals are restricted by the availability of fund cash flow.

While the agreement spells out the risks involved, Cedar Funding consistently advertised 10.75 percent returns, with offers like “You can possess your golden goose with Cedar Funding.” The mortgage fund was established in 2003.

Hideko Graves of Pacific Grove listened to Cedar Funding’s radio ads for years. In September 2007 Graves invested $10,000 in Cedar Funding, expecting to compound her 10.75 percent interest payments. “It seemed very reliable because of [Nilsen’s] track record,” Graves says. “Maybe I trusted that to my detriment. Maybe 10.75 was more than what was realistic in this market.”

Even before Cedar Funding lowered interest rates, Graves tried to take out her money but couldn’t. Now with her interest compounding at about half of what was advertised, Graves regrets investing in Cedar Funding. “I feel like I should have done more due diligence.”

Nilsen insists no investor will lose the principal, but it could take six to 12 months to normalize all interest payments. “I’ve never lost a dime of anyone’s money,” he says. “They still haven’t lost money. Just because they haven’t received a payment this month they are still earning that interest.”

This isn’t the first time Cedar Funding has come under scrutiny. In October 2005 the California Department of Real Estate accused the real estate broker of failing to file required reports for its trust accounts dating back to 2001. The department alleges in its amended January 2006 complaint that Cedar Funding “accepted loan funds from private investors without respect to any specific loan” and “negotiated loans secured by a trust deed on real property to be made by another but failed to cause the trust deed to be recorded in the name of the lender as beneficiary.”

The department stayed a 100-day suspension of Nilsen’s real estate license in exchange for payment of $10,000 in penalties. Cedar Funding also had to pay more than $15,000 for the audit, which led to the enforcement action. The department says Cedar Funding has complied with the order and is now in good standing.

But some speculate Cedar Funding may have intermingled funds by using new investments to pay out old loans.

Nilsen adamantly denies this. “We never use anyone’s new money to pay off old money,” he says. “We don’t have a Ponzi scheme. We don’t have anything funny going on here.”

Investors like Marc Waldroup haven’t lost faith in Cedar Funding. Waldroup is a Carmel-based asset manager and developer who has invested with Cedar for the past 15 years. He says people who want to redeem their interest in Cedar Funding misunderstand the fact that withdrawals are contingent on the fund’s cash flow. Cedar Funding, Waldroup says, has been doing its investors a service by sending monthly payments before receiving payments from the borrower. “As far as I can see Cedar Funding is doing nothing wrong,” he says. “They are living up to their end of their bargain.”

Nilsen says borrowers still owe for their loans and investors will receive payments as soon as they are collected. Only a few loans are in default, Nilsen says. And even if a borrower defaults on the loan and the property is foreclosed on, investors are still secured by the real estate. “I want to make sure that first of all my investors are protected,” Nilsen says, “and make sure investments are returned, just as they have always done.”