questions about buying notes/paper

8 Replies

OK, this idea intrigues me. I was browsing FCI Exchange today.

Questions:

1. If I want to buy notes, do I have to be licensed as a lender or servicer per the SAFE Act??

2. Would I have to service the loans? Or is there a third party that can do this for me?

3. Is there opportunity in modifying non-performing loans (presuming the number work?)

4. This is the BIG question...if I am truly interested in the property moreso than the note, I assume I can't buy a note with the INTENT to foreclose, as that would be more predatory than you could imagine, however, what about a situation where I buy a non-performing note at, say 40 cents on the dollar, modify their balance to a lower figure, then, myself offer to the owner to BUY the property off of them, which would be a voluntary transaction on their part? Is that legal to do? Something like:

Loan balance $392,000
Property Value $300,000
Purchase note for $198,000

Offer to buy property off of owner for $230,000, write down payoff to $198,000, then seller gets to walk away with cash and I get a property at a 25% discount.

I assume I can't buy a note with the INTENT to foreclose, as that would be more predatory than you could imagine,

I would think that would be exactly your plan when you buy a non-performing note for a property you want. If you can work something out with the borrower (deed in lieu of foreclosure, or a writedown like you suggest), great. Assuming there aren't other liens you could wipe out with a foreclosure. But foreclosure would be your most direct path to taking possession.

In your example, I would start with an offer of a deed in lieu.

I know people using this strategy right now. It's got a lot of moving parts and what turns into an actual deal is a pretty low percentage, but it can be profitable. Seems like finding quality access to the note pool is the most challenging part of the process.

1. No, not as an investor if set up properly through a broker, but if you are in the business you may need a license. Check you state laws as well.
2. Yes, Yes get a servicer who has a license
3. Yes, I have done hundreds of modifications to bring them into performing status and then refinance them later on for the discount.
4. Absolutely, but the paper business is not buying the property. If you go to foreclosure you can be outbid (not in this case as it is underwater). All you are entitled to is the money to payoff the liens and any overage can be due the borrower, if any.

You can certainly approach the borrower and use the note as leverage to buy the property or as Jon suggested obtaining a deed-in-lieu, but be carefull of other liens doing that.

Originally posted by Bill Gulley:
1. No, not as an investor if set up properly through a broker, but if you are in the business you may need a license. Check you state laws as well.
2. Yes, Yes get a servicer who has a license
3. Yes, I have done hundreds of modifications to bring them into performing status and then refinance them later on for the discount.
4. Absolutely, but the paper business is not buying the property. If you go to foreclosure you can be outbid (not in this case as it is underwater). All you are entitled to is the money to payoff the liens and any overage can be due the borrower, if any.

You can certainly approach the borrower and use the note as leverage to buy the property or as Jon suggested obtaining a deed-in-lieu, but be carefull of other liens doing that.

How difficult is it to do a lien search?

Have any of you attempted (yourself or via your servicing company) to make sure the payments, once modified and on-time, report to the borrower's credit report in an attempt to make refinacing easier?

Originally posted by Jon Holdman:
I assume I can't buy a note with the INTENT to foreclose, as that would be more predatory than you could imagine,

I would think that would be exactly your plan when you buy a non-performing note for a property you want. If you can work something out with the borrower (deed in lieu of foreclosure, or a writedown like you suggest), great. Assuming there aren't other liens you could wipe out with a foreclosure. But foreclosure would be your most direct path to taking possession.

In your example, I would start with an offer of a deed in lieu.

Assuming the numbers work, is there any legal issue to offer a small chunk of cash, say $5000, or whatever, as an incentive to the delinquent borrower to take the deed in lieu and vacate the property?

Just to recap:

1. In some states such as Georgia a license is required by the investor. In most of the states no license is required.

2. If you own a small collection say 5 notes, you could get away with not having a licensed servicer. I would not recommend this. A licensed servicer will keep you compliant with most laws. FCI is the cheapest servicer on the block right now and as such, the services they offer are the least. If the assets are in your back yard and you have the supporting service providers such as foreclosing attorneys, etc FCI might make sense for you. If you will need additional support then I suggest speak to a couple different servicers to see what costs you will have. Average NPN/REO is going to cost around $75 per month at a full service mortgage servicing company, FCI is around $25.

3. There are two primary disposition strategies when purchasing non-performing loans. (#1) foreclose and (#2) modify. Because the non-performing loan will have the largest market discount the opportunity for high yield is present. There are regulations around modifications and having a servicer who is licensed or an experienced real estate attorney will be required. Creating a loan that has some additional secondary market value after modification is important or you might be stuck with the loan until they can refinance. This is also where an experienced servicer can help you. Even further, FCI for example, does not report mortgage trade lines to the credit repositories, so if the strategy is to see them refinance away from you, ensure they are getting credit for making payments on time via your mortgage servicer.

4. Your concept of purchasing a non-performing loan as being predatory is not true although it is refreshing that you are not a blood sucking vulture :) There are varying lots of borrowers that are defined in non-performing some desire to work out the loan, some just want to walk away and some are undecided. In the event you purchase a NPN which you desire to own the deed do not modify the loan, if they comply with the modification terms you would have to reset any foreclosure proceedings that have taken place along with the default timeline. The unfortunate truth is, in the event a borrower has defaulted they responsible to pay you the lender off or you can proceed with foreclosure. In most cases you do not have obligation to modify or reinstate their loan unless they pay the loan and advances either current or off totally.

Offering a DIL with a money incentive is always a good path. Sometimes you can get a DIL by agreeing not to pursue a deficiency judgement on the borrower, provided the state allows them. I personally have never offered $5k, more of a $1,200 to $2k tops guy, but I have peers that I know who will go that high. None the less, you can strike what ever deal you want including showing up on moving day and helping them.

As briefly discussed, when you purchase any mortgage typically you will get title abstracts or title opinions to ensure your lien position and see if there are any other liens or encumbrances. It would be your responsibility as the mortgage/note owner to protect your position by paying any taxes and liens due. As well you would want to pursue Lender Placed Hazard Insurance which is a little different than your typical Vacant Hazard Insurance.

One last piece of advice, if you have not purchased loans before, find someone to help you. Purchasing from FCI Exchange does not mean you will have any advocate looking out for your best interest in price and file condition.

Good Luck.

Originally posted by Joe Smith:
...
4. This is the BIG question...if I am truly interested in the property moreso than the note, I assume I can't buy a note with the INTENT to foreclose, as that would be more predatory than you could imagine, however, what about a situation where I buy a non-performing note at, say 40 cents on the dollar, modify their balance to a lower figure, then, myself offer to the owner to BUY the property off of them, which would be a voluntary transaction on their part? Is that legal to do? Something like:

Loan balance $392,000
Property Value $300,000
Purchase note for $198,000

Offer to buy property off of owner for $230,000, write down payoff to $198,000, then seller gets to walk away with cash and I get a property at a 25% discount.

Originally posted by Bill Gulley:
...
4. Absolutely, but the paper business is not buying the property. If you go to foreclosure you can be outbid (not in this case as it is underwater). All you are entitled to is the money to payoff the liens and any overage can be due the borrower, if any.

You can certainly approach the borrower and use the note as leverage to buy the property or as Jon suggested obtaining a deed-in-lieu, but be carefull of other liens doing that.

Just to elaborate a little on what Bill wrote and the determination of overage - I'll use the example from the OP above.

Note purchased for $198K, goes to foreclosure auction. "Sane" bids might go as high as the property value - so likely won't exceed $300K. Noteholder can bid as high as $392K, if necessary to outbid the other bidders. The overage only occurs when that $392K debt is exceeded by some bid; and if you're the noteholder, and you got outbid in this example to the point where there is an overage, you should be HAPPY to have been outbid by almost $200K above what you bought the note for - take the money and run, and let the former owner get the overage "pocket change".