It is good the thread takes on a life of it's own. I have to admit, those who have noticed that my posts tend to be long winded more so recently, I have a new technique which is gather my thoughts and then open up a Notepad document and type my post and then paste it into BP. BP has been randomly slowing response times when I type. (Perhaps to keep posts limited in size?) (Doubt it) When I do that, it is easy to loose track of the size and I type sort of fast. Take it slow. As an aside, my posts serve a purpose for me too, not just you. I find value in collecting, shaping and amending my thoughts on these matters. It is a expansive and fluid subject, I am subject to it all just like everyone else. I digress.
Before I hit topic, again, good stuff by all. Glad to see some names that I have not bumped into in a while here including Tiger, Will and Roy. Bob your story about a losing NPN, if you care to share a little detail I think would have some pretty good merit in this thread. It is not all rainbows and flowers. That is not shared enough, IMO.
The wrecked car analogy and the levels of schooling have strong relevance. In making the asset class available and open for public consumption concepts surely get dumbed down. Whether that is a function of too hard to teach or lack of knowledge of the teacher is speculative at best.
For myself, I am not an RE guy. My entry into RE was mortgages. I started on the retail side and moved into private capital and secondary markets as I grew in experience. In an interesting irony I suppose, I had some learning curves to go through when tackling non-performers in my first rodeo. What allowed me to get up to speed and excel, was actually my experiences on the retail side. I had my license, I let it lapse in the SAFE Act update didn't have time or desire to deal with the new requirements. The old stuff was a breeze, continuing education, pay the fee, poof another two years. When I actually first went out and took the class and test, I was already in the industry for a while (regs were a bit different then). To say it was a breeze is an understatment, I can still recite much of Statue 494 at will. I had the fortunate experience to be in the upper ranks of some companies dealing with all facets of the retail and secondary side including mortgage, title and appraisal. I was our principal broker, my license sponsored the company, as such I had a lot of loans (all of them) that fell under my jurisdiction and I took that very serious. That put my experience on steriods. Loan volume was pretty big help. Going through audits and inspections was eye opening. While we did compartmentalize, I sat at the head of that table. If you really pause to understand that idea, each part of the industry has it's own set of regulations and requirements so you have mortgage files, you have title files, you have appraiser files and then you have concerns from each on how you are actually intergrating (or not, as mortgage and appraisal could not co-mingle). Go tell your title insurer or your warehouse line provider that you are going to originate or insure 2 doors down the hallway and expect some visits.
I can't be sure, but I personally would presume that the idea of learning from all the wrong ways to do it is often taken too lightly. A good file was easy. Have a non-compliant file, have it get audited, panic, worry the entire rest of your production pipeline looks like that and have to go fix all of it. That is the class I sat through and it really molded where I am today. I had both new and experienced originators and underwriters and agents working for us. They all had an equal opportunity to not be knowledgeable. Not picking on anyone who newly got their license, but I employed those folks, I know what they didn't know, they still were under my license. In that regard, I think the SAFE Act took us one step back instead of two forward to some degree. It has become a little confusing for everyone and a newly licensed practitioners also suffer from not knowing what they don't know. A licensee could spend their entire career in the industry and have little or nothing to do with the actual underwriting of a loan let alone the secondary market. No affinity to real regulatory enforcement or compliance. Sorry, but I think the recent understanding of what a MB actually is tends to be more expansive than it actually is. Net branches (or equivalent) make mortgage bankers out of everyone in name only. Most would be surprised how many MBs don't actually process their own files, run their own submissions or frankly understand what this rant segment means. An interesting epidemic.
I think the volumes of applications, credit reports, borrowers, good loans, denials, issues and resolutions not to mention collateral (resi & comm) complemented with title issues filled the tool shed to what it is today. No seminar is going teach you to read what is really happening on an application or see concerns in credit reports. No seminar can last long enough to teach you to resolve some of the complications that come with issuing title insurance. Unwinding some of the wacky things both purposely and unintentionally that happen to both institutional and private loans that too is an education in and of itself. Let me be clear, that is not me being some superman, it is me having to work the proper parties (attorneys, regulators, contractors, agents, etc). Knowing what an idea doctrine is, ie - no standing, adverse possession, fraud, etc and having or being able to work through it to preserve capital is two different ideas. It is has just been a fortunate series of events for me.
I segway with some that as this thread has already drawn distinctions into institutional and private loans. There is a correlation to risk. Risk is what we do and look to understand. I can appreciate Bill's brutal brand of honesty in regards to the vantage point on simply calculating a return and then 'deciding' what return target we should have. If we are going to discuss "Why to invest in loans", then we must also discuss the ultimate expectation, the return, and in order to do so at least touch on how that idea relates to the asset class. Before we broach, I think it is important to note, this is not a unique idea or issue with just loans, it is across many asset class including real property. If we postulate, "What is my money worth?" in an attempt to talk about these ideas, I think we can also see similar trends over in the real property side as well. That said, we certainly do not want to get too far into the existential, nobody needs brain damage. Yet, it is an important concept to at least touch on.
Why is my expectation on a NPN/NPL 20%? Why is my yield requirement on a PN/PL 10%? Why not another number, any number? When is that number too high or too low?
It seems these are related in some fashion to the assessment of the risk. Yet, risk is a very difficult thing to quantify. My perception of risk can be different from the next person. If we presume that we all can do the same thing when we invest in a loan. Expenses are the same. Time is the same. Then what causes us to determine how much money we "should make"?
I think that is an interesting question because when we sell a loan, what you think you should make is of no consequence to me in some regard. Yet, there is a correlation (word of the day?) across all of the varieties of loans in the greater market place - i.e. - prime, sub-prime, private, hard money, distressed, etc. In my experience, this is a very important root of getting something done with a counter-party or not. Wrecked/damaged/Used cars have Kelly Blue Book and CarFax reports - what do we have?
Before I leave that brain food on the table, these questions, which hopefully we can give our own answers to (those who wish to), are not meant for direct answers, they are purposed to make us think and hopefully by doing so come to some understanding of quantification of just how hard our money is going to work and the affinity to risk that carries with it. If I can use Bob's bad loan as the quick easy example, the ultimate reason a loan investment losses money is simply too much money was paid for it. We all get that. So, what are our defenses to that? In its simplest translation, that really is the risk. Where does it truly lay and how can we notice it?
When you started through this thread, you didn't expect a simple list of Why and How did you?
It will be interesting to see where this takes us. Have a good weekend everyone. May you be deep in mortgages and deep in thought, LOL!
