Loan Mod: what terms would you use here?

Question

I own this paper and the borrower made a solid offer to start paying $6000 up front and $700/month.  He has a 6-figure income and can afford it.  Here are the other numbers:

MV = $50k and decliningUPB + arrears = $211k (that is not a typo)I paid $34kI think I would want to hold this note as long as possible and just collect the payments.  How would you structure the mod and forbearance? Thanks.

Mike Hartzog · Answer

Hi Gabe,

Doing a forbearance up front is a good idea if you are reducing principal or forgiving any arrears, or if the property taxes are not up to date.  I tend to use 6-12 months as the period.  You can put whatever conditions you want on these.  I use the forbearance as a way to get the borrower to prove to me that they will follow through on their responsibilities once the loan is modified.  Generally I am looking for the payments to be made on-time throughout the forbearance period, and I may also ask the borrower to bring taxes up to date as well if they are behind.

For the mod, the problem you have is that the payment the borrower is offering is too low relative to the principal.  If I make the assumption you are extending the term to 30 years, that payment corresponds to an interest rate of 1.42%.  To give you an idea, if you were to finance the 205K at 7% over 30 years, the payment would be 1363.87.  So, I think you need to decide on the rate you want to use here.  In a loan mod you have principal, rate, term, and payment amount to play with here so you run some what-if scenarios to come to the right combination.

If the property is deeply under water and you want the note to be marketable in the future, you might consider reducing principal.  I do this as a matter of course with NPNs which I have purchased at a deep discount to principal balance and are underwater with regard to collateral value.  I recently reduced a loan balance of over 200K down to 75K.  I still get an eye-popping yield and the borrower now has a reason to continue paying the loan.

Gabe K. · Answer

Bill Gulley

Team, we have a signed forbearance and loan mod as follows:

12-months to put $12000 down, then 15 yr fixed at 9.9%, principle reduced to $65k.  This is a win-win for us and the borrowers.

Mike Hartzog · Answer

Gabe,

Sounds like you picked a good note.  NPN modifications are the holy grail in my view.  Too often I end up owning the property.

Here are some ideas for you:

• If you haven't already done this, have your borrower fill out an income and expense statement so that you can get a feel for their financial situation.  Their payment shouldn't be more than about 30% of their gross income.  Your servicer should have one of these forms available.
• I tend to favor a higher interest rate over higher principal, and generally shoot for the 9% range, knowing that if I sell I will probably need to discount to a minimum of a 12% yield.  So for your situation, you could reduce the principal down to 85K. With a 9% rate over 30 years, you end up with a payment of $683.93. That puts your yield at just over 29% (assuming 28K cost basis with the 6K up front).  Not too shabby.  If you need to sell, you can sell a front portion to keep the ITV for your buyer reasonable. 
• You want the borrower paying very consistently.  To influence this you could offer the mod at 9.25% without ACH and 9% with ACH.
• Set the mod up with a  tax escrow so you don't have to monitor taxes.
• Since the borrower is up to date with tax and HOA, you could probably limit the forbearance to about 6 months, requiring the 6K up front and 100% on time payments during the forbearance.
• If the collateral is in an HHF state, you can encourage the borrower apply for it during the forbearance period.  That could potentially net you an additional 25K or so, depending on the state.  I would offer the borrower an additional principal reduction as an incentive if the HHF application is sucessful.

I just posted a blog on math for notes which you might find helpful in playing with different principal and interest rate values.

Wendell De Guzman · Answer

The question is: why did he fall behind in the first place with his 6-figure a year income? Is his hardship temporary and over now?

If you're confident that now he can pay because his situation has improved, then by all means your structure makes sense. If however, this is not the case, given the market value is declining fast, I would just sell the note for whatever I can get out of it.

Gabe K. · Answer

@Jesse T. Hi Jesse, It's in DC. Rentals are around 900-100 so after tax and hoa I don't think he'll be cash flow positive for a while.

@Mike Hartzog @Andreas Mirza

Account Closed We are going with 85k prin, 9.5%, 30 yr, 715/mo pmt.  That's an IRR of 28%.

Gabe K. · Answer

Account Closed Hi Andreas. Borrower has a lot of emotional equity in the property and wants to keep it as a rental so he wants to start paying now. Foreclosure is near the end so he is motivated.

Gabe K. · Answer

@Jesse T. You nailed it, a condo right in the city.

Bill Gulley Hi Bill, I use a licensed servicer to do everything: borrower communication, forbearance, loan mod, etc.  I do own these notes as a business in an LLC but I rarely ever talk to the borrowers myself.

Wendell De Guzman · Answer

Sounds good.

Mike Hartzog · Answer

Nice work!  :-)

Brian H. · Answer

@Gabe K. Would you mind sharing who you're using for servicing? Have you been happy with them?

Loan Mod: what terms would you use here?

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