Hello there!
I am considering investing in discounted notes and I need some advice and directions.
I got inspired by several articles written by Jeff Brown (AKA The Bawld Guy) where he explained in great details how notes are supposed to work while glossing over the most important topic: where to find them.
Hence my question to the notes investors out there: where do you get them from?
What I am looking for is a note with 50-60% LTV that pays 12% or more based on the price I would pay for it. For example, if the property has a FMV of 200K and outstanding loan of 200K at 6% APR, I'd like to buy it for 100K. This would satisfy my LTV requirement as well as interest rate (6% on 200K is 12% on 100K).
Is this example realistic? If not, what is a realistic one?
I signed up with the PPR Notes company hoping that they have a few notes to choose from but found out they sell 2nd position notes with almost no equity in them.
Thanks
Nick
A loan that trades for a discount has a discount for a reason. The discount sets off some characteristic of the loan such as paperwork defects or borrower performance defects or underlying collateral defects.
If the loan you want to target has a current LTV of 60% a performing loan may not have much to discount for. The equity already affords a mortgagee the ability to enforce the mortgage and collect what is owed. There are caveats to that but we will set that aside.
If your yield requirement is your driving force at 12%, you could be fine simply finding a loan written for 12% that has a current LTV of 60%. No discount needed. In a situation like that, there should be minimal defects.
A loan written at 12% has some inherent risks in it already though. Since the prevailing market rate is closer to 5%. So the borrower agreed to take on 12% instead of getting a better rate. That could be a Seller financed deal. Equity may not be as much in such a situation, where the borrower puts down very little unless the loan is seasoned for a long time.
Some hard money or private money lenders will achieve that type of rate and obtain equity close to what you are looking for. In some of those cases, the loan is based more heavily on the underlying collateral and less on the borrower. They also tend to be shorter term loans.
Trying to find more of a conventional loan can be done but the defects will be present and you will have to deal with them. A seller of a loan has no duty to sell you nor take a haircut. The deeper that discount is the more of a defect. What you end up with here is really the reality check of the idea of return that the investor wants. Just because you want a 12% return doesn't mean you will get into a trade since someone else is happier with 8%. Now, put that idea in contrast with where prime conventional loans trade which is around 4.5% in today's market. I know many guru teachers like to say you can just pick your yield and viola, but that is not reality. Competition in the market place, just like in real property puts downward presumes on those return ideas.
So can you get a 12% return? Sure. But you have to reconcile how active you want to be and how much risk you want to take. Neither of those are meant to push you into super high risk investments but there is a relatioship that must be recognized.
Here's something to start off with:
Kudos,
Mary
Nick, let's start here.....are you buying with your own money to hold as an investment or are you doing anything else?
A loan that trades for a discount has a discount for a reason. The discount sets off some characteristic of the loan such as paperwork defects or borrower performance defects or underlying collateral defects.
If the loan you want to target has a current LTV of 60% a performing loan may not have much to discount for. The equity already affords a mortgagee the ability to enforce the mortgage and collect what is owed. There are caveats to that but we will set that aside.
If your yield requirement is your driving force at 12%, you could be fine simply finding a loan written for 12% that has a current LTV of 60%. No discount needed. In a situation like that, there should be minimal defects.
A loan written at 12% has some inherent risks in it already though. Since the prevailing market rate is closer to 5%. So the borrower agreed to take on 12% instead of getting a better rate. That could be a Seller financed deal. Equity may not be as much in such a situation, where the borrower puts down very little unless the loan is seasoned for a long time.
Some hard money or private money lenders will achieve that type of rate and obtain equity close to what you are looking for. In some of those cases, the loan is based more heavily on the underlying collateral and less on the borrower. They also tend to be shorter term loans.
Trying to find more of a conventional loan can be done but the defects will be present and you will have to deal with them. A seller of a loan has no duty to sell you nor take a haircut. The deeper that discount is the more of a defect. What you end up with here is really the reality check of the idea of return that the investor wants. Just because you want a 12% return doesn't mean you will get into a trade since someone else is happier with 8%. Now, put that idea in contrast with where prime conventional loans trade which is around 4.5% in today's market. I know many guru teachers like to say you can just pick your yield and viola, but that is not reality. Competition in the market place, just like in real property puts downward presumes on those return ideas.
So can you get a 12% return? Sure. But you have to reconcile how active you want to be and how much risk you want to take. Neither of those are meant to push you into super high risk investments but there is a relatioship that must be recognized.
You are asking for a performing note which might be as high as 75% or higher. You be better off buying 1st non performing notes to get your feet wet.
@Mary B. , thank you for the article. Here is the one that inspired me: http://www.biggerpockets.com/renewsblog/2013/09/25/separate-note-portfolios/
@Bill Gulley , I'd like to buy a note with my money or pull in friends if the note amount is too high. The objective is to hold it till maturity or foreclose if the borrower defaults.
@Dion DePaoli , my understanding of the discount notes origin is this:
A mortgage was originated by a big bank and later the borrower defaulted. The bank sold the non-performing loan along with many others to wholesalers for 10 cents on a dollar. Wholesalers then reviewed the notes and sold some of the better quality ones to notes re-performers (not sure if this is the right term) for 20 cents. Now these entities worked with defaulted borrowers and modified the loans for borrowers to be able to pay again. The new notes were then sold to investors for 50-60% of the outstanding unpaid principal.
Is this a correct picture?
I also read that low LTV is the best risk mitigation tool that a note investor may have. Hence, I'm looking for notes that meet this criteria first and foremost. In the worst case scenario (foreclosure) I should be able to sell the property at a wholesale price and still recoup my investment.
@Account Closed , if I buy a non-performing note, what should I do with it? Try to negotiate better terms with the borrower or foreclose? These seem to be the only options.
I was told that new investors should never even try to buy a note on their own as they may not be able to do all the due diligence that is necessary. Instead they should buy per-screened notes from reputable note brokers.
Thanks
Nick
Best to buy from a note broker that can provide all the paperwork.
Joe Gore
Well, we can buy all the notes you like with YOUR money, but pull in friends money, which is why I asked the question, means you are getting into brokering, you need a license. This ain't the wild west anymore where you can just go get your poker buddies to buy notes with. You really don't want to go there.
Buying notes are not like sharing pork belly purchases among friends. :)
There is no law against borrowing money from a bank to buy notes and if there is I need someone to point it out to me in case law not hears to say.
Joe Gore
How do I find reputable brokers? I heard about PPR as being a good notes company. Is there anybody else? How to compare notes brokers?
Regarding friends' money, I'd rather buy a note on my own if the price is below 20K. However, I'd prefer to split the risk and profit with someone else if the price is significantly higher.
What if we form an entity (e.g. LLC) and buy notes in that entity name, does it require licensing of any kind? Or just have an informal agreement and one person would act as a sole purchaser as if all the money was his?
BTW, @Account Closed , you mentioned elsewhere that you buy notes for 25% of their UPB. How does it translate into LTV? Is UPB in your case always less than FMV?
Thanks
Nick
I don't go by LTV. I look at the FMV and the UPB.
Joe Gore
In your story, the bank sold loans to a 'wholesaler' for 10 cents on the dollar. We will assume the dollar you are talking about is the remaining principal balance of the loan. This is fairy tale, it's not true and is a over exaggeration of reality. When a loan is made, the point is for it to be paid back with interest. The principal balance is the banks or some other investor's capital that was invested. Not paying that principal back is a loss for that investor (or bank). No investor takes a loss laying down, as such, they will work to minimize the loss as much as possible. This might include them dispositioning (resolving) the asset themselves or it might also mean they would rather sell the asset for a small loss and get back to the business they are in of lending money offsetting the loss with new profits. This is still a mitigation of loss. That does not mean there is a unreasonable fire sale at 10%. If you gave me a $100 and I simply only gave you back $10, would you be happy? I think not. Same goes for the investor.
Any new Investor (you called him a wholesaler) that is interested in purchasing the defaulted loan will want a discount which protects their invested capital and any additional capital costs they will have in order to finish foreclosure and protect their interests in the property. So a discount will be applied. It will include the cost categories I mentioned and will also take into consideration time it takes to complete this process. The faster and less expensive the process is to finish foreclosure and recapture what is due, the less of the discount the Seller will accept. The longer the process takes and more costly, the larger the Buyer will want in discount. So they are at odds. The Seller owns the asset and can finish the process themselves, so if the Buyer's bid is lower than the amount the Seller can reasonably collect, all things considered, there likely will be no trade. It would not be mitigating costs to sell for much less than the number the Seller can recoup within reason on their own.
A "re-preforming loan" is a loan that was in default at one point and was reinstated and is performing now. That can be born by either the Borrower or the Mortgagee under different ideas that I am not sure this post is ready for or Bill will make fun of me for taking up too much room. The point here is, a loan with cash flow is worth more than a loan with no cash flow. Usually loans that cash flow means no additional capital must be injected into the investment to gain a return and thus risks are reduced.
Any Seller is either out to mitigate their loss to as little as possible and any profitable sale is to make as much profit as possible. So the general idea of the step up from 10% to 20% to 50% is flawed. Those are not the realistic numbers. Would you buy a house for $10 and sell it for $20 when it is worth $100? I think not. The detailed mechanics of what you are describing are not ready for the basics we are covering here in this thread so far. So I will skip them.
As I mentioned, if we presume the average house in an average neighborhood and the average cost and time. NPN's will run around 55%. A re-performing loan will run around 65% and a more seasoned distressed loan will be around 75%. All of those can generally be applied to the value of the real property. Those are NOT meant to be static prices since not all things are always equal and no two assets are alike in all things. Total balances, negative equity, positive equity, interest rates, seasoning and a whole slew of other ideas will affect those prices going up and going down.
If I owned a NPN with equity at 50% LTV, I would not discount the sale price of that loan much at all since any new investor has enough equity (at 50% LTV) to recoup the costs that will occur to collect on the debt. This idea, having equity to help offset the cost of enforcing the agreement is the reason for the discount and is also the reason loans have down payment requirements. It is one of the driving forces of the discount.
The premise missing from your story is that a Seller is simply happy with a huge loss and that is not reality. Banks or any other investor have no duty nor a requirement to take such a loss. Additionally, you miss that anyone making a profit is simply happy to cut off the profit potential to some level and give it to someone else, essentially for free. That is more of a charitable idea than an investment idea.
Nick, you have been feed some misinformation and it is clouding your reasonable logic and judgement. There is no magic in mortgages. These are investments for the investor, they will respond like investments just like any other.
I see you are new to BP. Welcome. There are many threads here which discuss many aspects of investing in whole loan mortgages and a variety of sub topics related to the same. Take this base of knowledge you have found (hopefully not paid for), and throw it to the way side and start new reading here. As you go, feel free to ask questions based on what you take to understand. We are happy to provide you with commentary and you will get more proper and correct information than what you have gather so far.
@Nick B.
Do yourself a favor and go look around on some other threads before you drive down a road that doesn't exist with more bad ideas. Frankly, you are not ready to make any type of loan investment, you don't understand some of the basics. That can be dangerous and costly. I am not discouraging your egerness, but I am telling to practice more prudence and gains some knowledge of what you are trying to do.
You are correct on most of what you say except the banks sell NPN at 55% that is an incorrect statement. I buy from banks at the lot less, and I am not new to the note business, and a new comer might pay a higher price from the note broker because they don't have enough money to deal direct with the banks.
Joe Gore
Joe Gore
Unsecured, yes there is. :) Read the brokerage requirements, your own funds by definition means your assets Joe. Unsecured loans not based on your assets pledged is not from your assets but credit extended to you. But, I'm not going to argue the point, if push ever comes to shove you'll find out. Good luck. :)
@Account Closed
I am not interested in a futile debate Joe. The tourette statements that get made from left field after you fail to read a post seem to resolve any need to do so.
Please tell the counter-parties you know, who seem to have endless supplies of cheap assets at static prices, I will never hold funds in their vaults due to the lack of capital preservation practices they seem to practice.
In the meantime, I will continue to rely on my experience, math, logic and reason to produce my statements. ; )
I understand you see it from experience but the banks will do what they want if we like or not. I keep doing what I do and you keep doing what you are doing and everyone is happy. Not willing to debate this other then give my many years of experience in the business. Take care and happy holidays.
Joe Gore
Thank you for your post. Just to clarify, when I said "10 cents on a dollar" I meant 10% of the outstanding loan principal.
You call it "fairy tale" but this is where I got it from: http://www.pprnoteacademy.com/free-training/note-investing-101/find-deals/
They cite 0.055-0.125/UPB as the wholesale price of the defaulted mortgages.
I don't know how true or not true these numbers are but I thought that no one would put an outright misinformation on their website if they value their reputation.
If you know any negative info about this company, I would like to know it too. I may buy notes from them and so far I could only find positive reviews.
It would also help me tremendously if you posted stats on several notes that you own. We could then discuss them as real-world examples instead of reviewing some fictitious notes.
Thank you
Nick
@Nick B.
My commentary is around first liens. PPR invest in second liens. Liens in second position trade for less since they are in second position when they fall under distress. Some seconds can be worthless from a security stand point, only being able to collect what is due through unsecured means.
The last series of second liens I owned and sold, I purchased a collective UPB of around $3.5 Million for $600. Those liens were included in a pool of first liens that we purchased, essentially we paid $10 each. I sold them to a fund which invested in second liens, ran by a friend of mine. They paid a little over 1% of the balance. It was a nice trade for us and not so nice for them. That fund specialized in seconds and eventually closed due to lack of profitability.
I do not investor or trade second liens in any manner, only first liens. Second liens can trade for as low as 1% to 2.5% of UPB for NPN's and upwards of 20% to 25% of UPB for preforming the last time I cared to look which has been a bit. As with my same statement above, it is very difficult to put a static price idea on a loan without factoring in the other inputs. Better collect-ability warrants a higher price, just the same as with first liens. So concepts like equity in the property or lesser amounts of negative equity will influence the price amongst other things.
Many folks are attracted to second liens due to the low capital demands and barrier of entry for the same. Dave has a good reputation around BP and many folks around here are pleased with him and his program.
You are jumping from concepts held in a first lien with the amount of equity you expressed you desired to now moving to concepts around second liens. Those are not the same thing and in note investing details matter. This is why I made my statement, you do not seem ready to make an wise decision in investing just yet. Continue to gain knowledge and understand the lay of the land, as you do that you will gravitate to what makes sense for you and will be able to manage your expectations better for qualities within the loans you seek.
Posting random "stats" seems a little bit of a wide brush. I have stories but that would be more like telling war stories and is not really my authorship style. Bill in this thread as well has many stories and years of experience. I have spent most of my career within the instutional ranks of whole loan investing and origination. The universe of whole loan mortgage investing has many subsets within it from private to institutional from first to seconds from prime to distressed and from performing to non-performing. I have bought loans and lost money and bought loans and hit home runs (do the IRR on the above trade). There is a lot to learn and know. I can understand it is difficult for a new interested investor to separate fiction and non-fiction ideas at times. The good news, you have BP to ask questions and some pretty experienced folks will give you feedback.
For the record, and all things considered, if I owned a NPN with a UPB of $120k and FMV of $100k with no foreclosure start in the state of California you would pay over $65k and in Florida $45k. The $30k offer would not even get a phone call back and likely not an answer the next time you call either. As you progress, don't look for the easy answer, like some static number, look for the understanding on how to come up with a number. When you can do that, you will understand what it takes to invest in loans. It is not rooted in magic.
Regarding friends' money, I'd rather buy a note on my own if the price is below 20K. However, I'd prefer to split the risk and profit with someone else if the price is significantly higher.
What if we form an entity (e.g. LLC) and buy notes in that entity name, does it require licensing of any kind? Or just have an informal agreement and one person would act as a sole purchaser as if all the money was his?
BTW, @Account Closed , you mentioned elsewhere that you buy notes for 25% of their UPB. How does it translate into LTV? Is UPB in your case always less than FMV?
Thanks
Nick
Nick, any business entity formed that buys notes won't be considered an "investor" it will be a business and licensing is extensive for residential notes, but still a license issue for commercial.
Going in with your brother-in-law is still pooling funds and your arrangement may then fall under SEC requirements as well as mortgage brokerage activities. To be an investor, so long as you have liquid assets available and the ability to buy any note you'll be fine. You can borrow money where you put your assets at risk, in other words provide collateral, and use those loan proceeds to invest, just as you can borrow from the box with your stock broker and buy additional securities. But, taking on unsecured debt without having your assets at risk is not buying with your money, that becomes a conduit or credit line which is a brokerage activity.
You really need to know and follow the rules to the "T". If you buy a note, then need to foreclose and that borrower fights you, you can end up in court where an attorney will dissect your acquisition of the note, there are so many requirements that an attorney will seek to find your non-compliance. If you broke the laws applicable to the transaction, kiss your note and money goodbye.
Buying notes has been, for the most part, unregulated until the mid 90s, broker laws came into being for originations, if you modify a note that can be a new extension of credit and originating a loan. As to buying and selling, states governed the activities and those laws were not to hard to meet or avoid. The new laws are very well defined, intertwined with other regulations and very difficult to be in the business of buying notes. Speaking of being in the business, don't know what your day job might be, but if you begin making more money or a significant amount of your income comes from buying and selling notes, the IRS can determine that you are in the business, from there it goes down hill.
So, IMO, 99% of all the note buying/trading books and schemes written are probably only good for starting a fire in the fireplace, they will probably be laced with bad information or illegal tactics. There are reputable mortgage brokers and entities, just ensure what you study wasn't written years ago and is current.
I won't address the inquiry to Joe or what he does, but the spread between the market value and the UBP is a LTV. As you become more aware of the note world you'll want to look at the original LTV as it provides an indication of various risks. The only notes I ever purchased with a recent appraisal were from lenders considering foreclosure or from new notes. You'll find that some note sellers exaggerate the value of the property in a short period without justifications, I'd not trust any BPO conducted or provided by a note seller and if you rely on such claims you can be in trouble. So, considering the age of the note, is the UBP in line with the original LTV, if there is a big difference you need to look for additional payments made or why there is a difference.
As to Dave mentioned above, he has a good reputation here on BP, I've never dealt with him but I've not heard anything in a bad light, I'd say he knows what he's doing and knows the business. :)
You really need to know and follow the rules to the "T". If you buy a note, then need to foreclose and that borrower fights you, you can end up in court where an attorney will dissect your acquisition of the note, there are so many requirements that an attorney will seek to find your non-compliance. If you broke the laws applicable to the transaction, kiss your note and money goodbye.
Buying notes has been, for the most part, unregulated until the mid 90s, broker laws came into being for originations, if you modify a note that can be a new extension of credit and originating a loan. As to buying and selling, states governed the activities and those laws were not to hard to meet or avoid. The new laws are very well defined, intertwined with other regulations and very difficult to be in the business of buying notes. Speaking of being in the business, don't know what your day job might be, but if you begin making more money or a significant amount of your income comes from buying and selling notes, the IRS can determine that you are in the business, from there it goes down hill.
So, IMO, 99% of all the note buying/trading books and schemes written are probably only good for starting a fire in the fireplace, they will probably be laced with bad information or illegal tactics. There are reputable mortgage brokers and entities, just ensure what you study wasn't written years ago and is current.
Bill,
What happens if a borrower tries to sue the lender after the foreclosure? On what grounds could the borrower who was in default win?
If I buy a note that had something wrong with it from the time of origination, does it give a borrower an upper hand? What if the borrower did something wrong at the time of mortgage origination (e.g. misstated his income)? Does it give me an upper hand in the case of foreclosure?
Also, you mentioned "being in business". Is there a limit of how many notes an individual can buy and sell in a given year without licensing? What about buy and hold? Is there a limit there?
What are the general risks involved in the 1st position non-performing notes that are secured by equity (E.g. a wholesale value of a property is 100K, the UPB is 120K and the note was bought for 30K)?
Sorry for so many questions all at once. I probably need to read a good book on notes or should I start from Dodd-Frank?
Thanks
Nick
Good morning Nick,
In those states that have non-judicial FC a borrower can file suit and force you into a judicial process or defense of that suit. After FC it's tougher but they can sue for a wrongful FC and that could arise from an endless number of situations from noncompliance.
If you buy a worthless note, one that is defective, obviously you lose but you do have recourse against the seller of that note, winning or being reimbursed is another matter. By defective, I don't mean typos or mistakes where Johnny C. Smith is a junior or senior, but a loan that is deemed predatory or violates law.
If a borrower commits fraud, that is a separate issue from FC, a non judicial the matter is moot as it doesn't apply in the process, but if you go through court for a the FC the issue may arise and the conduct of the borrower would probably be taken into consideration and the judge may lean more toward your position.
"Being in the business" is a determination under the tax code and in regulatory compliance matters where a tax payer or individual becomes subject to laws applicable to business operations. Several factors may be considered, the amount of money made compared to other income, the IRS may consider you in the business if more than half of your income comes from some activity. In that same measurement regulators may also look at the number of transaction, frequency, period of time. Another factor is the amount of time devoted to an activity and how active one is in producing the income. This may include considerations such as your advertising, how your activities are structured and if your means to conduct transactions is similar or the same as those regulated. If you walk like a duck and quack like a duck, you'll be seen as a duck, the totality of your conduct and actions will determine your position.
So, if the majority of your money is earned from buying and selling notes, your net worth is significantly made up of your note portfolio, you actively engage in seeking transactions and conduct related activities you may be considered as being in the business rather than a passive investor as you would be in buying other securities. There is no law against making money as an investor, you can buy and sell stock through a broker and do very well and you won't be seen as being in the business as far as needing a broker's license, unless you circumvent brokerages to buy securities as this is also a common and accepted practice. Buying notes is not an area of public trading and it's much easier to bee seen as conducting brokerage operations in notes.
What are the risks in that note? That's a pretty good discount on a performing 1st, almost unbelievable for a performing loan. Is the note lawful, in compliance and properly secured with a perfected security interest? Has there been a proper accounting and has servicing of the loan been compliant, who you buy from can violate law and impact the collectability of a debt, like fair collection practices. The due diligence involved has little to do with a great discount or values, except in the verification that values are correct. If you were buying that note at 75K, you might consider interest rate risks (usually not an issue to market rates in a discounted note as the return is so high) but if the note rate were low where a borrower would never want to refinance and it was a long term note, you might be collecting payments to the end. That means those funds will be tied up long term at that yield. There are other risks, insurance losses, taxes unpaid, child support liens may step ahead of your note by state law. Even at that purchase price it's not risk free but risks are certainly reduced considering the upside.
As to a good book, sorry, it probably hasn't been written yet for small note investors. The American Banker's Association has educational materials, problem is you must be a member and that means being in banking, but you might find materials second hand on courses but they will be designed for the institutional side, still good stuff.
I don't know of any text book that provides technical information other than papers written by finance types or attorneys. Other than schools for regulators or regulated lenders I've never seen a book devoted to note transactions. The market is full of guru materials, none of which meets my standards of good technical writings, none of it, as they don't go into details (probably because they don't have a clue). Some reputable note brokers have newsletters that might be good for getting up to speed, the problem with such material is that it's usually put out in small bits and publications over time are hard to compile as a study guide. You also need to understand the marketing side, the agenda of a broker is to do business so they really aren't educators. What ever you read, be very critical of the author's credentials, someone saying they have been in the business a thousand years really isn't a qualification, neither is saying the bought 10 billion in notes and made a 100 million. Depends on what those types are writing about You need to look for educators in finance and banking, attorneys or government officials in official writings or opinions.
One last note as to books, notes fall under the jurisdiction of federal laws and state laws and it's difficult to cover financing issues over 50 states. Probably the reason I've never seen a "Note Book" that really drills down technically and includes the vast number of situations that may relate to small investors. :)
Thank you for your reply. Could you please point me to the federal or State of Texas law that requires an individual to have a license to buy and sell notes with one's own money? I see conflicting opinions on this - some people say it is required and some say it is not.
Also, I would like to see the actual court case about a foreclosed borrower suing their former lender after a non-judicial foreclosure and winning the case. Again in the State of Texas, please.
Thank you
Nick
If you use your money, you won't have a brokerage problem unless you get to the point I mentioned above.
You need to do your own due diligence in Texas, if you think you can steal equity, more power to you, but you can get your tail sued off, if you don't believe me, try it, might get a couple grand or more, then you might lose the entire principal.. Good luck ! :)
@Nick B.
There seems to be a slight tone of disbelief as to the capacity for a borrower to bring a legal suit against a Mortgagee post foreclosure. The concept is referred to as 'Wrongful Foreclosure' and there are plenty of them all over the country. The grounds for the complaints are numerous from improper fees, improper notice, undervalued home price, dual tracking, lack of proper mortgage ownership, etc, etc. Anyone one of those concepts can cause the Mortgagee to be at fault and the borrower could seek restitution through the court. In regards to case law, there is plenty and not worth attempting to bring forth some list of cases.
One of the issues in Texas is that foreclosure is non-judicial and thus moves quickly. It is possible for the process to move too quickly. Yes, it is possible. An easy example, you as a Mortgagee put your borrower on default notice per the standard time and give standard time to cure. One day prior to the cure time elapses the borrower calls you and informs you of their hardship and they inform you of a letter they sent 5 days ago. You didn't get the letter. Through your conversation you ask the borrower to send in material to judge their financial position. You ask for it within 5 days. The borrower fails to deliver on day 5 and you trigger the rest of the foreclosure process. Two days later, you get their financial information. You see they have insufficient income and thus decide not to work with them. You set aside the paperwork knowing your foreclosure sale will be done within 90 days and you will be done with the problem loan. Process finishes and property goes to sale and is sold to another bidder.
Three weeks later you get served a lawsuit for Wrongful Foreclosure. The complaint alleges you dual tracked the borrower likely amongst other standard complaints. When you stand before the judge you deliver your servicing log notes and borrower correspondence. But wait, you didn't keep a good log. The Borrowers have a record of the letter they sent that you didn't get along with your call when they requested relief a second time and they have evidence they sent in the material you asked for. You failed to properly engage in the request for relief and to properly and formally respond to the requested material and relief request. In the judge's eyes the case is pretty simple and he only takes seconds to pound the gavel with his decision. Viola, you wrongfully foreclosed on the borrower. Now, restitution becomes a problem since the home sold at auction months ago, so the court can go unwind the auction sale or they can simply force you to pay the borrower for the loss of their home, the cost of attorneys and fees to bring the case to the court for the ruling. You get the idea, you lose a ton of money. Now be honest with yourself, did you see the problem in the story that would give rise to the borrower bringing and winning their case? I am guessing the answer is no and to some degree the hypothetical actions by the Mortgagee likely seemed somewhat normal and proper. That is how simple and quickly you can loose as a mortgagee.
In your post asking about purchasing a loan with some type of defect from origination. Understand that a borrower's income is only 'stated' on a loan where stated income is allowed, otherwise the loan is full documentation for income and assets. Borrower's give misinformation in almost all loan application interviews because the layman answer to "how money do you make", is not the same systematic way an underwriter calculates the income. Additionally, five years ago many people had good jobs with good income, today many do not have the same job or income level. So those types of issues do nothing to enhance the mortgagee's cause.
If the borrower knowingly defrauded the Lender at origination that is a different story. The Mortgagee would have to show such fraud and in most cases, the purpose of showing fraud would be only to serve to advance a foreclosure complaint or seek criminal charges. Most folks who commit fraud would not try and respond to the foreclosure proceeding. In general, there is not anything that really gives the Mortgagee the 'upper hand' per se. The Mortgagee is showing some breach of contract terms like not paying and then based on the contract seeking the remedy provided which is foreclosure. The idea of a mortgagee having an upper hand would not be equitable (fair) in our system of laws.
For team Borrower, there are many things which can be added to the list of affirmative defenses of foreclosure and added to the list of wrongful foreclosure. Since the mortgagee has to follow steps in order to achieve the result, errors happen and are not uncommon. The Mortgagee is the one who brings forth the action and as such there is a little more burden on the mortgagee than the borrower. In many cases when you hear in passing of a vacated foreclosure which then was refiled, that is curing a defect in the proceeding in order for it to proceed correctly. It's not a crazy mortgagee who doesn't know what they are doing. Mortgagee's have to get it right otherwise they don't win and not winning can mean not collect what is due.
In regards to the general risks of purchasing a loan with a balance of $120k and a FMV of $100k for $30k. Well, all the risks that go with investing in distressed loans. As I already pointed out, that price is grossly under market. Therefore any Seller who sells to you for that price would likely have a better understanding of the present defects than you. You thought you were getting a good deal and the Seller knows they are getting out before they hit zero. Lower than normal sale prices are present for a reason. Buying something that can be worthless or have exaggerated risk for a low amount of money, is still buying something that is worthless for more money than it is worth or the risk is worth. Don't confuse that with a 'deal'.
In a state like Texas, which seems to be a target of yours, where we own and manage a couple hundred loans around Houston and Dallas MSA's that is not a reasonable sale price for a 'normal' NPN. Foreclosure in Texas is quick and legal costs are not as high as other states so you are going to pay more in a purchase price as a percent of real property value since the amount of expenses and time value of money sort of dictate that. It's not magic, it is math.
When you negotiate that killer sale price and the parameters of the purchase and sale contract for the loan have very limited representations and warrants and call for an As Is Where Is sale and the Buyer is solely responsible for any and all due diligence, you just got picked off by a Seller. Perhaps the chain of ownership is defective. Perhaps the security instrument is not suitable under Texas law. Perhaps improper servicing of the borrower's account has occurred. This too can be a long list of 'what if'. Bottom line the enforceability and collectability of the note and security instrument may be null or may be extremely difficult to say the least. That is what prompted the price being ridiculously low, it's a lemon.
If you don't think this type of situation happens, where a more knowing Seller liquidates an asset to an unknowing Buyer under proper legal sales techniques you are massively mistaken. I talk to folks that are in this same boat pretty often seeking assistance to cure the problem. The case of they didn't know what they didn't know. Well now they know it wasn't really a deal when they see what can not be collected or the additional costs it will take to cure the defects. To that extent these fall under some of the warnings that are floating around on BP from guru type sales pitches with investing in mortgages. Like any investment, you can loose money. Unlike some investments you can loose more than you initially put in. (guessing you did think that was possible, it is) Take the story above in example.
It seems some of the newbie or want to be loan investors (in this and other threads) don't want to face some of the reality when they are told from someone with tons more experience. That's fine. However, that doesn't change reality in the real world and believing in falsehoods or proceeding with false assumptions is not working within realty it is attempting to create one that will never come to be.