Notes - What Cushion Do You Look for re: LTV Ratio

3 Replies

What cushion do you look for in your LTV ratio (against a fresh BPO) in the case of a 1st Priority Note? Also, how much faith do you put in BPOs?

Sean, not sure what geography you are addressing but in any case, there is not enough details to reply to this in regards to LTV Level. A loan based only on the asset will require a lower LTV. A loan which includes a more detailed underwriting could allow for less of an LTV.

Also, "cushion" is not a well understood word in your post.  There is not cushion in LTV, it is what it is.  The Loan to [RE] Value ratio.  It makes me believe you are investing in discounted notes but I may be wrong.  

In regards to faith in BPOs or any other real property value report.  Some are good and some are not so good.  Depends on the vendor and the agent(s) along with the BPO review process, if any.  The reports are made by humans, so they can be made with error.  The reports are also made in opinion, so those can differ.  Moral of the story, you should always reconcile your BPOs by reviewing all inputs.  The first line of defense is ask for different comps or additional comps to support the value if you believe they are in different.

There was a pretty lengthy thread about the difference between BPO and licensed appraisal reports in the archives.  Might be a good read for you if you have some time.  It was pretty long from what I remember and had lots of good commentary in it.  Search for it in the Search bar, I think it was something like BPO vs Appraisal or something like that.

Thanks Dion. 

By cushion, I was referring to the ratio of the purchase price that I pay for the note to the value of the house in the BPO. I was hoping there was a rough guideline that I could use to determine a safe buffer between what I pay for a note and what % of the FMV I can expect to recover in sale/foreclosure, so I could workout the buffer for foreclosure costs in the worst case.

Originally posted by @Sean Mason:

Thanks Dion. 

By cushion, I was referring to the ratio of the purchase price that I pay for the note to the value of the house in the BPO. I was hoping there was a rough guideline that I could use to determine a safe buffer between what I pay for a note and what % of the FMV I can expect to recover in sale/foreclosure, so I could workout the buffer for foreclosure costs in the worst case.

Gotcha. So that would depend on many other factors such as the foreclosure process timeline, the amount of advances required to protect the interests of the Mortgagee. It is not as simple as all NPN's trade for 50% of BPO or something of that nature. That said, we tend to speak about trading loans in those manners which is merely a conversation unfortunate consequence.

Relying only on a level of BPO without regard to UPB can also be a not so great idea.  As buying an asset at 50% BPO which is 100% of the UPB likely doesn't bring back great returns.  

To setup your analysis properly, work backwards from the RE Value and UPB.  Factor in the known events and advances such as taxes, insurance, servicing, property preservation, etc.  Competitors will look to reduce time and expenses and time in and of itself reduces expenses not to mention time value of money.  

There are some threads in this Note & Cash Flow Discussion forum which have some good examples if you browse down a bit.  Or if you post some examples we can give you some feedback I suppose as well.  

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