Every Loan Tells a Story
In my many years of buying and selling loans, I have found that the due diligence process is like opening a new book to reveal the story and it’s many chapters.
Let me explain...after I’ve completed my due diligence, where I have eliminated the loans that don’t fit my criteria, I then decide which of the remaining loans I want to purchase and at what price.
I start at the very beginning of each row and move across the spreadsheet telling myself a story as I hit certain fields. By the end of the row, based on the story I have told myself, I usually have a better idea if I want to buy the loan. At this point, I’m able to develop short and long-term strategies for each loan.
Below are the fields I stop upon and examples of the stories I tell: FICO (Credit Score)I love the FICO score as it gives you an overall picture of how the borrower is doing financially. Even more, is the ability to compare a FICO score from six months to a year ago to a current one. This way, I can see if their financial health is improving or declining. Besides the status of the senior lien, it’s the next most important factor.
State
personally don’t put that much thought into what state the loan is in. Some investors care whether it’s a “Judicial” or “Non-Judicial” State. For me, this is less important because I don’t usually take my loans to the foreclosure stage. If you are a “foreclosurer” then I would think it does matter where the loan is located.
Interest Rate
If I see a loan that has a high interest rate, I’m thinking in the back of my mind that this would be a good “refi” or “loan-mod” candidate. Conversely, if they have a low interest rate, there’s not much strategy we can implement.
Note Date
From the Note Date, which is when the note was originated, I’m able to surmise how long the borrower has lived in (or owned) the property. Granted, it’s based on the second mortgage and not the first mortgage, which would give me a more accurate idea, but beggars can’t be choosers. Either way, this helps with my decision making because someone who’s lived in the property for a while has “emotional equity” and will work hard to stay in the home versus someone who’s only been in the house for a short period of time.
Last Pay Date
From the Last Pay Date and Note Date I can determine how many years the borrower has made payments. The longer the period, the more confident I am in the borrower.
Maturity Date
This date tells me how much longer I would have this loan assuming I can get the borrower paying.
Original UPB & Current UPB
From these two figures, I can tell how much of the original UPB was paid off. In most cases, not much, if any, is paid off. I also have a personal "sweet spot" of where I usually like my loans to be which. is between $25,000 to $40,000.
Monthly & Adjusted Monthly Mortgage
If the borrower’s monthly mortgage is over $300, you’ll probably never get that amount. You’ll end up having to negotiate and be happy with a $300 per month payment. It’s important to be realistic with these numbers otherwise you’ll pay too much for a loan and expect to be paid pre-maturely.
Bankruptcies
Aside from Chapter 7’s and Chapter 13’s that have been “Dismissed”, in general, I try to stay away from Chapter 13’s. With 13’s, they’re allowed to turn your “secured” loan into an “unsecured” loan if there’s no equity. It’s a sad, but true story. The only somewhat saving grace is that about half of the borrowers who file for Chapter 13 never end up completing their plan and so your “unsecured” loan magically turns back into a “secured” loan again.
Senior Lien Amount “(UPB) & Senior Lien Status
These bits of data are by far the most crucial when telling the borrower’s story. Regardless of if the borrower has equity, if they are current and have been current steadily with their first mortgage, this information is pivotal to your decision to buy this loan.
Fair Market Value (FMV)
Make sure you have enough information regarding the value of the borrower's home. Just because the seller has provided you with their numbers doesn't mean it's gospel. Use another online real estate company, e.g., Zillow, to compare the two numbers and make sure they're close enough. Being more accurate is going to help with your CLTV and overall impression of the loan.
CLTV (Combined Loan-To-Value Ratio)
Even though we're going to find that most of our second mortgage loans are "under-water", we want to be able to perhaps eliminate those loans that are beyond hope. I usually eliminate loans where the CLTV is greater than 140%-150%.
However, in telling the borrower's story, I do look "peripherally" at all the other fields to see if I absolutely should delete the loan based on CLTV. Let's say the borrower has a high CLTV, but also has a high FICO score and is current with their first mortgage. However, sometimes it's just a gut call.
Break Even Point (BEP)
The BEP is just one indicator that tells you based on how much you’re paying for the loan divided by the Adjusted Monthly Mortgage, how many months it will take to get your initial capital back. If it’s too many months (usually over 40), the odds may be that the borrower has lost his/her job, or there’s a financial setback and they can’t afford to pay their second mortgage. It’s a good indicator, but it’s only one aspect of your decision-making process.
Here’s an example of a loan and the story I’d be telling myself:
Borrower: Gomez, Lilian
City, State: Doral, FL
Birthday: 6-10-1951
FICO: 773
Note Date: 6-1-2007
Last Pay Date: 5-1-2015
Next Pay Date: 6-1-2015
Original UPB: $52,628
Current UPB: $51,899
Monthly: $660.19
Adj Monthly: $300.00
Interest Rate: 14.88%
Current BK: 7 Discharged
Sr. Name: SPC
Sr. UPB: $199,808
Sr. Status: Current
FMV: $175,000
CLTV: 144%%
Bid Offer %: 27%
Bid Offer $: $14,000
BEP: 47 months
LILIAN GOMEZ’S STORY
Meet Lilian Gomez, who is 69 years old and lives in Doral, Florida. She’s been living at this address for about 13 years and has a good credit score of 773. She took out her second mortgage back in June of 2007 and made payments for about eight years. She hasn’t made any payments for almost five years so her past due balance is about $39,000 (60 months times monthly of $660).
She has an interest rate of 14.88%, which means we could do a refi (refinance) on this loan since she has a high FICO score and is current with her first. She had a Chapter 7 bankruptcy, which was discharged so that doesn’t affect me.
She's has a first mortgage with SPS for $199,808 and is current. Her house is worth about $175,000 so she is underwater with no equity. Even though the CLTV is pretty high at 144%, she's current with her first mortgage, has a good FICO score and has lived in the property for over 13 years.
I'm going to bid 27% of the Current UPB, which will cost me about $14,000. Even though her original monthly mortgage is $660.19, I know I'll never get this amount, so I'll adjust this amount to $300. Based on me paying $14,000 for this loan and dividing this number by $300, my break-even point (BEP) will be about 47 months.
Even though the BEP is a bit high, I believe if I could get this loan performing and have at least two years pay history; I could nearly double my investment by selling this off to another investor. Thereby, I don’t have to worry about getting my money back in 47 months.
Telling yourself stories about the borrowers is a great way to make final eliminations, come up with creative potential solutions and even is an excellent way to get to know your final candidates.
And while I know every loan can’t have a happy ending, you’ll be surprised at your results!