Cold calling for note leads
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
So I've begun researching purchasing notes, and found a few different threads with the suggestion of cold calling people that are in contact with note holders. Bankruptcy attys, financial planners, CPAs, title companies and the list goes on and on. Now other than an afternoon and the risk of rejection in person, I've figured out this is probably the best way to start finding note leads.
Now as I'm beginning to plan this out I find myself with a question. When you call on say a CPA and you walk in and his secretary is there, how do you get face to face with him for a couple minutes to actually talk about what you're looking for. Obviously just dropping off a business card with the secretary is not as effective as taking 5 minutes of his time.
So what do you do once you're in the door to "seal the deal" with the person you really need to talk to?
David Beard the roles in the market place of each of those firms is a little different. Granite and Kondour are investing firms. Those firms have funds and purchase pools of loans. The performance status of the loans can range across the board from performing including sub and re performing along with non-performing. Granite is more geared to purchase and turn around and resell the loans in a 'Downstream' trade opposed to owning and working the loan. Kondaur sells and manages their loans in little more of a 'regular' manner where working the asset is as high of a priority as re-trading the asset.
FCI is a loan servcing company which also has an internet market place called FCI Exchange. This is a brokering function, FCI does not own the loans. The owner of the loans lists the assets on the FCI website.
Loans in all performance status and other marketable characteristics trade in bulk. It is a little easier to understand that loans trade in three ways. Premium or more than the UPB. Par or for the UPB. Discount or less than the UPB. UPB stands for Unpaid Principal Balance. Generally a loan trading for a discount has some sort of defect. That defect can be in the paperwork or the borrower's performance. Point is, the loans do not HAVE to be NPN's to trade in bulk, they can have some form of performance to them as well.
FNMA/FHLMC sell their loans through an approved loan sale advisory firm. Examples are DebtX, First Financial and Garnet, but there are many others. FNMA and FHLMC are in the business of taking new originations which trade for a premium and par and pooling those together and teaming up with a Broker/Deal like JP Mortgage or Citi and selling the RMBS or MBS. The RMBS or alike are sold in the form of bonds in the fixed income market by the B/D sales force.
If the loan is pooled within a securitized pool, the loan is not considered 'whole' any longer. When the loan is pooled into a security different portions of the loan such as interest payments or servicing rights can also be bifurcated from the loan and sold separately. The investor only owns a partial interest in the loan and their interest is in ratio to the number of bonds issued minus any portion of the loan that might have been sold outside of the security.
RMBS/MBS trustees typically do not conduct loan sales. If an investor purchased a majority share of the security, they may elect to try and unwind the security but first would have to purchase the outstanding issues of the security and make it whole again. To deal with these instruments a securities license is required.
A hedge fund and distressed asset fund or any fund is really just and investor. The label 'distressed asset fund' simply notes what type of investing they are doing. Any investment fund can hedge. Moral of the story, for the most part, those are all the same thing.
A broker and a trade platform are pretty similar in most cases. The trade platform, such as FCI above, doesn't own the loans but knows a seller and finds a buyer. FCI does this through their website and sales staff. Brokers do the same thing. They find sellers and then go find buyers. That said, not all brokers are made the same. Many have zero experience selling a loan or owning a loan. Since the crash, many folks have migrated to the distressed loan sale market place in some broker form in hopes of turning quick profits. This creates ghostly deals, pools of loans floating around and eventually had folks pretending to be principals when they indeed were not. Because of that, which still takes place in some corners of the market, makes legitimate investors ability to find real deals or assets to purchase difficult and frustrating. Those brokers who step outside of their role and try and 'wholesale' loans like wholesalers of real property have a very very small chance of actually trading. There is simply too much complexity to a loan trade for this to really be effective without being an owner. I suppose some of the broker scene was filled with folks who misbelieved that the discounts to these assets would always be so great that there is plenty of room to jump in the middle. Not true.
Loan from of a private nature or originated by a private lender such as a hard money lender or even seller financing can be sold in any performance status. That said, typically these are PAR trades as a private hard money lender doesn't have an interest in taking the loss for trading at a discount. Neither do some seller financed folks. Although on the Seller finance side of things you do find Seller's whose cost basis into the real property which they agree to finance is less than the loan amount in the instrument so selling at a discount is not unreasonable in those cases.
Institutional loans have more of a conventional underwriting process and can include conforming loans and non-conforming loans or prime and sub prime. There are much more institutional grade loans that trade as performing and sub/re preforming loans than private. There are simply more institutional grade loans although the private loan market is pretty sizable, it's not the size of the institutional market which is in the trillions. Due to the size and nature of the investor who owns the institutional loans it may seem like more there are tons more non-performing and sub/re performing loans trading that are institutional in nature than private. The institutional investor is more inclined to take a loss on bad loans and sell at a discount.
You can track loans down in all sorts of ways. Certainly one of those is look up in public record who the Mortgagee is and make an inquiry about a sale. Additionally, you can work with some of the firms above or firms like the firms above in accordance with their role.
You don't purchase "through" Granite (specially), Granite owns the loans they sell so you are purchasing from them. They simply might have only owned the loan for a couple of days. Same with Kondour. You purchase 'through' a firm like FCI as they do not own the loans. Same with any other broker.
The question about returns is not a simple answer. It does depend on performance and paper grade. The point of a loan is lend money and have it paid back. Those loans which have good credit grades where the risk of default is small will trade for more money as a percent of the UPB. As the credit grade goes higher on the scale the price for the loan will approach 100% or more of the UPB (Par and Premium). Since there is no discount to the principal balance the only return will be from the interest payments. At par a 7% interest rate loan will pay a little less than 7%. You could sell that same loan for say 102% of UPB which might drop the yield and total return down to 6%. (made the numbers up)
I want to make a terminology distinction. I sometimes see folks refer to their investment level as "LTV". That is not the correct concept. LTV is simply the loan to value, the UPB divided by the value of the real property. Not to be mistaken for the idea of "ITV" or Investment to Value, which would be the amount of capital into the loan (say purchase price and due diligence) divided by the real property value.
So the example of a $50k SFR at 75% means the UPB is $50k and the property is valued at $67k. The loan is at 75% loan to value. That loan purchased at PAR will return, in the form of yield, a little less than the interest rate of the note.
If what you were describing was the mix up and your example was purchasing the $50k note for a 25% discount or at a 75% ITV then the return will be what ever the yield turns out to be plus any collection of the discounted principal. The question did not include an interest rate for the loan. Let's say it's 7%. Then you would purchase the loan for $37.5k and the yield would be around 10%. The total return of the loan, depending on how you disposition the loan can be more than that since you have the discounted principal now function as a portion of your return. So there is $12,500 hanging around out there which the borrower owes to you but you didn't capitalize. Depending on when and if you collect those funds your total return will increase.
Don't know where you got that lead from, most CPAs don't have anything to do with notes, so walking in will sure be a waste of time.
I suggest you just go to the courthouse and look up private notes, 6 months old and older. At least you know who you call on the phone has a note.
Those others are better approached by mail as to the services available, same with tax folks, you can also figure out a referral fee for notes.
Hate to see you spin your wheels. :)
Thanks Bill Gulley , it was just in a long (a very long) list of possible sources on one of the other threads here in someone else's post a few months back.
You were one of the posts I had read that suggested cold calling that was a good way to start getting leads with the different atty suggestions. So you would cold call note holders directly, and for professionals that can refer a note do direct mail ect to generate leads from them.
http://www.biggerpockets.com/forums/70/topics/81157-how-to-find-notes-worth-investing-in
Don't think I touched on how to contact those leads in that thread.
Learn to use the phone! Contact note holders by phone, if you can't call, send a letter.
All others are to obtain referrals to note holders, call or use a letter and then follow up with a call.
Cold calling professionals like an attorney or CPA can be insulting, assuming they are not busy, walking in asking them for time like some tooth brush salesman. Call and state your business and ask for an appointment.
But really, while you can go beat the bushes, if you're interested in notes in an area that means any note worth buying is going to be filed in the courthouse, why not just pick the ones you're interested in and get with the note holder?
As to ther sources, let them know what you do so that if they come across a note they think of you. I mean, someone could move into your area from who knows where and see thier new attorney about estate planning and tell the attorney the have a note from the past. If there is a need to sell that note that attorney knows where you are! :)
Thanks Bill, that's exactly what I was wondering. I work in a professional type office (engineering) and we get cold calls for people wanting us to spec their product for our clients, and they never make it past the front door because that's not how it works, our developer clients tell us what they want, and we design for them not the other way around.
So I was hung up on how someone like an atty was going to just want to spend time talking to a "salesman" that just dropped by.
Networking!
I visited someone in a nursing home ad did stike up a conversation with the Administrator and walked out with an appointment for someone to bring a note to me. You can call the "benefits administrator" or "benefits coordinator" who qualify clients for benefits, they may not have anything but they usually will sometime so leave your info with them.
And Matt, I think we talked about this some, using other peoples money or facilitating thedeal can be brokering! :)
Nope no brokering here, at least not yet and if I do it will be as a licensed broker. I tend to look for your posts to hear the regulatory side of things, I prefer to stay inside of those boundaries and ethics so I sleep well at night knowing no one can touch what I've worked for.
Matt Devincenzo are you interested in finding notes to purchase for yourself?
If so, what do you think you are looking for in terms of geography, loan performance and any other criteria?
I'm looking at purchasing for myself, and for my retirement acct(SD Roth IRA).
My parents live in Orlando, FL so the central FL area has kind of been my target area for investing since it is helpful to have family that can look in on stuff since I live in CA and I know the areas best since I grew up there.
I'm still in the intro stages of research so as far as what yield I am looking for, I'm not sure yet what is really realistic. I would like to get somewhere around 15-20% by buying at a discount at least initially, and as I gain experience focus on getting a few really good notes for even higher returns.
Matt Devincenzo Instead of cold calling people, why not just by from servicing companies or funds? You're still buying at a discount and you're saving yourself a hell of a lot of legwork.
What type of notes are you looking for? 1st or 2nds? Residential or commercial?
I could give you some clarity of who to contact with more info.
Best,
Dave
Matt, do your due diligence and learn what you need to do, I suggest you consider having the notes serviced as that's another issue. If you can find some notes in your geographic area of interest, then going the broker route might be a good idea as Dave suggests, I suggest you start with first positions if you can as with any second, you'll need to take out the first to protect your interest and that can happen quickly, so you don't want to tie up reserves for contingencies. Might as well be the lead dog! Dave and Dion may know some brokers to work with. No daisey chains guys....agreed? LOL And, Matt, the purchase price is something you negotiate, like anything else... :)
Dion DePaoli & Dave Van Horn I appreciate the help. As far as 2nds it's something I'd like to get into at some point. The more I research, and the longer I own rentals and continue to search for more, I'm realizing the note investing aspect of real estate is an awesome area to "play" in. I'm planning on going with residential firsts to start off and then I can grow into the other area that require a little more knowledge.
Bill Gulley I'm absolutely planning on having the note(s) serviced. I actually have about 8 tabs open on my computer for different companies from my 2:00 am BP search of note servicers. My parents have 2 notes from property they sold on owner financing, and I just told my Mom yesterday she needed to have them serviced so we'll start by getting those serviced and then when I start buying some notes I'll get mine done as well.
I want to thank all you guys for the help, I'm excited learning this whole new area of RE to me.
Good plan, good luck, you know where to find me. :)
Narrow your purchase criteria down as you learn. Feel free to ask more questions on BP. Happy to point you in the right direction when the criteria is a bit more resolved.
Matt Devincenzo I agree with Dion, keep us posted!
Just want to clear a few things up, in reference to Bill Gulley's previous comment: You can buy from brokers but you're most likely going to be paying more. I was suggesting that you should buy from servicers or funds that take title and own the notes. A great one for residential 1st mortgages is Granite Loan Solutions (http://granitels.com/mortgagenotes.html)
Also just wanted to clarify that from our experience when buying 2nds you do NOT always have to "take out the first to protect your interest," we buy and work thousands of notes and very rarely do we payoff a first or even make a payment to a first for that matter. At most, we occasionally will reinstate a first. It's a common misconception about 2nds that I just wanted to clear up.
Best of luck,
Dave
I understand Dave's position, institution to "institution" where you have state laws that may apply to a junior lien holder Dave is correct, I've simply taken the lead on foreclosure paying off the coordinated process and assumed many as needed. An individual who has a seller financed second is usually in a different boat as well where a first holder allows assumptions and stays, but when that seller financed note is purchased it changes colors and an individual may need to payoff senior liens if others move to foreclosure. So, while what Dave is saying is very true, it can be a case by case basis with a different flavor for some holder on the street. Even as a mtg co, we have had to payoff 1st mtgs in some cases. I'd also say Dave is in a better position to interact with senior lien holders than an individual.
In Mo, it's pretty well accepted for a bank not to leave an individual junior note holder in the cold. Bad PR too. Just be aware.
Very good suggestion of getting with servicers, if they will sell on the street, many don't. A very big plus in dealing with institutional types is the recourse nature, they can buy one back, buying from an individual note holder, you may not collect. :)
GLS...?? Lamb to the slaughter house, IMO. Not an ideal place to find your first trade.
Matt, remember the whole loan market is not normalized so the data that is shared and the flow of a trade is not the same for all sellers. Transaction structures that seem like a fire drill or do not allow for proper exclusive due diligence are not good places for a newbie to start.
Lots of my friends work in this industry and I trade with them, however a trade is a trade, sort of like a one on one basketball match, we both play to win. Do lots of research like you are doing and be careful. Questions are free here on BP and you have three guys here willing to give some good guidance. Take your time and remember you are the only one who will care the most about your assets and capital, protect them at all times.
Dion DePaoli I agree to disagree with you on Granite, especially because my main point in mentioning GLS was to suggest a trade desk platform because it's MUCH simpler than calling courthouses, accountants, etc. I also should have clarified that Matt should probably not be making a trade of a pool of assets when first buying, but he could cherry pick one or two loans from a servicer or fund and learn from there.
No matter where you buy from, whether it's from a broker or a trade desk it's still a "Buyer Beware" industry to an extent and it's always best to have some knowledge of how to buy before purchasing. Just keep in mind though, it's a learn by doing business. We bought 4 loans when we started out years ago: 2 loans we lost money on, 1 was a homerun, and 1 was a grand-slam. Even though we were wiped on half the loans, we still learned a hell of a lot more than if we never bought at all. So my suggestion would be do your due diligence as best as you can, but don't be afraid to take that leap and buy something.
Best,
Dave
Thanks all I definitely appreciate all the advice and resources.
I've looked at FCI, Granite and Kondour. I'm planning on finding an individual note and going through the negotiation, DD and purchase myself(with BP help of course) to understand what I need to look for. I won't know what I don't know until I just do it and get a chance to go through the process.
After I do a few I know I'll have a better understanding and can start looking into different notes like NPNs or 2nds and different exits and how to structure those. I've seen a lot of good info on Dave Van Horn site and that helped me understand the different ways to plan an exit for a note, and at some point would love to get into notes that need more work but also have more upside to them.
Dave Van Horn and Dion DePaoli
As far as these note-selling companies that Matt noted, we're talking about non-performing or re-performing notes that were originally purchased as non-performing pools from banks or servicers, is that correct? Trying to understand the relative position of the players: banks, loan servicers, FNMA/FHLMC, trustees for MBS/ABS, hedge funds or distressed asset funds, note trading platforms, brokers, etc. (Perhaps there's a nice writeup out there that you can point to.)
If you want performing notes, is it fair to say that these are mostly, or almost entirely, private financing deals that you might come across through networking and tracking down private lenders in the public records (as Matt started out talking about above)?
Can you give an idea of returns that might be expected in purchasing through a company such as Granite (on average for an informed intelligent buyer with reasonable experience, so I'm trying to avoid the 'it depends' answer :)) for NPNs and RPNs on SFRs at 75% LTV for a $50K note. If this is too general, please qualify it or break it down as needed.
Thanks.
David Beard the roles in the market place of each of those firms is a little different. Granite and Kondour are investing firms. Those firms have funds and purchase pools of loans. The performance status of the loans can range across the board from performing including sub and re performing along with non-performing. Granite is more geared to purchase and turn around and resell the loans in a 'Downstream' trade opposed to owning and working the loan. Kondaur sells and manages their loans in little more of a 'regular' manner where working the asset is as high of a priority as re-trading the asset.
FCI is a loan servcing company which also has an internet market place called FCI Exchange. This is a brokering function, FCI does not own the loans. The owner of the loans lists the assets on the FCI website.
Loans in all performance status and other marketable characteristics trade in bulk. It is a little easier to understand that loans trade in three ways. Premium or more than the UPB. Par or for the UPB. Discount or less than the UPB. UPB stands for Unpaid Principal Balance. Generally a loan trading for a discount has some sort of defect. That defect can be in the paperwork or the borrower's performance. Point is, the loans do not HAVE to be NPN's to trade in bulk, they can have some form of performance to them as well.
FNMA/FHLMC sell their loans through an approved loan sale advisory firm. Examples are DebtX, First Financial and Garnet, but there are many others. FNMA and FHLMC are in the business of taking new originations which trade for a premium and par and pooling those together and teaming up with a Broker/Deal like JP Mortgage or Citi and selling the RMBS or MBS. The RMBS or alike are sold in the form of bonds in the fixed income market by the B/D sales force.
If the loan is pooled within a securitized pool, the loan is not considered 'whole' any longer. When the loan is pooled into a security different portions of the loan such as interest payments or servicing rights can also be bifurcated from the loan and sold separately. The investor only owns a partial interest in the loan and their interest is in ratio to the number of bonds issued minus any portion of the loan that might have been sold outside of the security.
RMBS/MBS trustees typically do not conduct loan sales. If an investor purchased a majority share of the security, they may elect to try and unwind the security but first would have to purchase the outstanding issues of the security and make it whole again. To deal with these instruments a securities license is required.
A hedge fund and distressed asset fund or any fund is really just and investor. The label 'distressed asset fund' simply notes what type of investing they are doing. Any investment fund can hedge. Moral of the story, for the most part, those are all the same thing.
A broker and a trade platform are pretty similar in most cases. The trade platform, such as FCI above, doesn't own the loans but knows a seller and finds a buyer. FCI does this through their website and sales staff. Brokers do the same thing. They find sellers and then go find buyers. That said, not all brokers are made the same. Many have zero experience selling a loan or owning a loan. Since the crash, many folks have migrated to the distressed loan sale market place in some broker form in hopes of turning quick profits. This creates ghostly deals, pools of loans floating around and eventually had folks pretending to be principals when they indeed were not. Because of that, which still takes place in some corners of the market, makes legitimate investors ability to find real deals or assets to purchase difficult and frustrating. Those brokers who step outside of their role and try and 'wholesale' loans like wholesalers of real property have a very very small chance of actually trading. There is simply too much complexity to a loan trade for this to really be effective without being an owner. I suppose some of the broker scene was filled with folks who misbelieved that the discounts to these assets would always be so great that there is plenty of room to jump in the middle. Not true.
Loan from of a private nature or originated by a private lender such as a hard money lender or even seller financing can be sold in any performance status. That said, typically these are PAR trades as a private hard money lender doesn't have an interest in taking the loss for trading at a discount. Neither do some seller financed folks. Although on the Seller finance side of things you do find Seller's whose cost basis into the real property which they agree to finance is less than the loan amount in the instrument so selling at a discount is not unreasonable in those cases.
Institutional loans have more of a conventional underwriting process and can include conforming loans and non-conforming loans or prime and sub prime. There are much more institutional grade loans that trade as performing and sub/re preforming loans than private. There are simply more institutional grade loans although the private loan market is pretty sizable, it's not the size of the institutional market which is in the trillions. Due to the size and nature of the investor who owns the institutional loans it may seem like more there are tons more non-performing and sub/re performing loans trading that are institutional in nature than private. The institutional investor is more inclined to take a loss on bad loans and sell at a discount.
You can track loans down in all sorts of ways. Certainly one of those is look up in public record who the Mortgagee is and make an inquiry about a sale. Additionally, you can work with some of the firms above or firms like the firms above in accordance with their role.
You don't purchase "through" Granite (specially), Granite owns the loans they sell so you are purchasing from them. They simply might have only owned the loan for a couple of days. Same with Kondour. You purchase 'through' a firm like FCI as they do not own the loans. Same with any other broker.
The question about returns is not a simple answer. It does depend on performance and paper grade. The point of a loan is lend money and have it paid back. Those loans which have good credit grades where the risk of default is small will trade for more money as a percent of the UPB. As the credit grade goes higher on the scale the price for the loan will approach 100% or more of the UPB (Par and Premium). Since there is no discount to the principal balance the only return will be from the interest payments. At par a 7% interest rate loan will pay a little less than 7%. You could sell that same loan for say 102% of UPB which might drop the yield and total return down to 6%. (made the numbers up)
I want to make a terminology distinction. I sometimes see folks refer to their investment level as "LTV". That is not the correct concept. LTV is simply the loan to value, the UPB divided by the value of the real property. Not to be mistaken for the idea of "ITV" or Investment to Value, which would be the amount of capital into the loan (say purchase price and due diligence) divided by the real property value.
So the example of a $50k SFR at 75% means the UPB is $50k and the property is valued at $67k. The loan is at 75% loan to value. That loan purchased at PAR will return, in the form of yield, a little less than the interest rate of the note.
If what you were describing was the mix up and your example was purchasing the $50k note for a 25% discount or at a 75% ITV then the return will be what ever the yield turns out to be plus any collection of the discounted principal. The question did not include an interest rate for the loan. Let's say it's 7%. Then you would purchase the loan for $37.5k and the yield would be around 10%. The total return of the loan, depending on how you disposition the loan can be more than that since you have the discounted principal now function as a portion of your return. So there is $12,500 hanging around out there which the borrower owes to you but you didn't capitalize. Depending on when and if you collect those funds your total return will increase.
David Beard I think you got your money's worth on that question. :)
Dion DePaoli thanks for the time you put into that post. I think I knew(sort of) alot of that information, but having you lay it all out in one post and how the different pieces work was great. I had a lot of the pieces to the puzzle but didn't really understand how they fit together.
I really appreciate the description of what the different players in the field do as well. I hadn't thought to ask but now it makes more sense as far as what Granite and Kondour do.
Dion DePaoli - Dion, I second the thank you for the great note market overview. Can you clarify a few points?
Also, where does Gemini fit in this paradigm?
As far as these kinds of companies, are they mainly handling loans that were originated and sold into the secondary market at one time? Are there also sizable amounts of bank portfolio loans and/or private loans? I guess I think of secondary market loans as either being on Fannie/Freddie's balance sheet, or repackaged into MBS, as you discussed, so wasn't sure if these types of loans ever ended up at companies like Granite, where they could be purchased by individuals.
I would think that the note's coupon rate in relation to prevailing market rates would be a strong driver of any premium or discount as well. Do banks actually sell performing loans to companies like Granite? If so, why? And if they do, I assume these would be loans that are ineligible for some reason to be resold into the typical secondary market (FNMA/FHLMC)? OK, help me mere. Are you saying that once a loan becomes part of a securitized pool and is no longer "whole", that it will not be available for purchase as a NPN/RPN by a private investor from Granite or some other company/trade desk? What about the loans that are on Fannie/Freddie's balance sheet (not securitized). Can they end up being sold to Granite? (Even if through DebtX, etc.) From what I've gathered, the idea is to find motivated private note holders that are tired of receiving small mthly payments and need/want a lump sum. Did you mean non-performing in the first sentence above? So it seems the outsized returns can be had from purchasing NPNs and either (a) working with the borrower to return the loan to performing status, get their credit rectified somewhat, and get them refinanced with a bank at a huge premium to your purchase price (I think Mark Ferguson's article on Granite talked about the borrower's potential ability to get a HAFA refinance after a short period of making payments), (b) foreclosing or DIL and get the property, or (c) simply flipping the note.Thanks again for sharing your expertise, Dion.
David Beard let me address your questions in order:
1. Re Performing simply means the loan was in default and is now performing again. That does not mean the loan is not delinquent. That does not mean the loan was modified or is in forbearance. Although, both and neither can be true. Simply stated, the loan use to perform, stopped and is now performing again.
Sub performing is when the loan has a slow or spotty payment history. Where 12 payments are due in a year, the loan might have only had 9 payments or perhaps the borrower catches up waves of delinquency every so often, like missing two months payments then making 3 payments every 90 days.
2. Kondaur's motives are not always anchored into selling the loan. That is the real takeaway. Not every action is based on a future re-trade value many times it is simply the best disposition option for the loan to recover maximum value. That said, certainly adding value will increase the value of the asset. So a loan that progresses from non performing to re performing will have a gain in value from the borrower being reinstated and the loan cash flowing again.
The point is/was there are firms which really purchase with only an intent on re-selling. Other firms do a bit of both, work the asset and look at re-trading opportunities as exits.
Gemini is a newer player. They have recently been in the market place with some of their pools. They seem to be trying to figure out how to capitalize on somewhat of a velocity model. They are not much of a market force right this second.
The real contrast is pricing and value within these two types of models. One model, the re-trade, seems to really base its price and value on what the downstream trade will give for any asset. The problem then lies in unsophisticated bidders and buyers bidding and buying these assets which might not be the same bid or purchase price of a more seasoned loan investor which is aware of the costs and values of various disposition strategies.
3. Let's make sure we understand the terms. The primary loan market is the market where the borrower and the lender exist. This is also the retail market. Lenders compete for borrowers on various interest rates and program designs.
The secondary market is where loans trade or sell amongst investors. Whether that is among private or institutional investors, it is still all the secondary market. The purpose of the secondary market is to provide liquidity to the lenders to provide more capacity or an on-going capacity to make loans to borrowers in the primary market.
Loans can be sold off as whole loans or as securitized bundles of loans. Both are secondary market. Fannie/Freddie generally do not hold onto whole loans for very long. They purchase the loans and put them into securities and then sell the bonds off to investors.
4. It is not that FNMA/FMLC or any other whole loan investor sells performing loans to a company like Granite as much as a company like Granite would buy performing loans.
Performing loans have been trading for decades. It is not new. An investor can purchase performing loans in whole or in part through securities.
Loans that are rejected by FNMA/FMLC are considered scratch and dent loans or near miss loans. The loan doesn't fully meet the criteria for FNMA/FMLC to purchase the loan. The defect might be simply a missing document or signature and not much to do with performance. In fact in most cases, reject reasons are for performance as delinquent or defaulted loans are not eligible for sale to the GSEs.
The coupon does influence the purchase decisions but remember than most of the loans are securitized. So one loan's coupon being up or down from market does not mean the bond will be up or down. Although market rates help firm up demand on fixed income.
5. If a loan is securitized, the loan is owned by the securitized trust. That is the investor who owns the loans. The natural person, as an investor, purchase partial interest in the security. A security can have 40 investors inside. So the ownership is split amongst all the investors. None of the investors are managers, they are all silent members. The management is directed by the security documents and enforced by the trustee and mortgage servicer.
Fannie/Freddie do not own loans which stay in the whole state for very long. The loans are purchased in put into a security pretty quickly. So you really do not "buy" loans from FNMA/FMLC. In fact, you don't even buy the bonds from them either. They are a bit more administrative in their secondary market function pooling the loans and issuing a security through a broker dealer for sale as bonds which recapitalizes the institution to buy more loans. The same is true for the origination lender, they lend money and sell their loans so they have the liquidity to make new loans. If we didn't have this system banks and lenders would have to raise new capital as soon as they put all of their capital to work. That would be a pain since the instruments are long term instruments.
In some of the securities, FNMA/FMLC offer buybacks and payment guarantees which means sooner or later they do end up owning loans of lesser performance. FNMA/FMLC offers these pools to the market through an auction. Any approved bidder can bid a pool. Getting approved is not a walk in the park.
6. A note seller is a note seller. The instrument can be institutional in nature or private in nature. That does not change the need or desire to sell the asset in the market place.
7. No, I mean the difference between institutional grade and private grade. The institutional mortgage market, mortgages that follow formats similar to FNMA/FMLC, FHA, VA or alike is much larger than that of the private market or Bob seller financing his property.
8. I think what happens is real estate folks want loans to be explained and make sense in a real property fashion. Well, too bad, they are not the same. This promotes confusion and allows for 'Guru's' and mentors to make statements or infer concepts that are not always true. One of the bigger ones we see, even here on BP, is folks who expect to get the house as a function of foreclosure.
When you buy a loan, you are buying the debt the borrower owes. You are secured by the real property which means the real property can be used as a resource to recover the amount the borrower owes. You are only entitled to the debt, not the real property.
This is also the case when concepts attempted to be dumb downed which really can't be. You as a Mortgagee (Investor) can not rectify the borrower's credit. Only the borrower can do that. Additionally, you can not control who or where a borrower refinances or if the borrower qualifies for a refinance. HAFA is misunderstood by most. HAFA is a program that was rolled out to help create a base of treatments for loans that are alternative to foreclosure. Offering refinance and short (pay/sale) programs alternatives. Additionally, the program help pave the way for a bit more of a standard approach to modification and what that means. In most cases, private mortgagees will not spend the time nor resources to see if their borrower will qualify for the program. The frontline of the program is really at the mortgage servicer. The servicer and investor can get incentive pay from the government if a loan qualifies into the program. In order to do so, the program parameters must be met for the loan which include the way and time it is handled and the final outcome/structure of the asset. It is not really a retail program, even though the way the media carries on about it, one might think that it is.
When an NPN is properly priced out, the price reflects the expenses and time that it will take to enforce the remedies provided in the note and security instrument. Generally speaking, there are not 'Home Runs' when it comes to this price. An investor can create better than average returns by reducing the expenses or shortening the time to disposition. Nonetheless, the NPN has a price that follows based on all of that. That price is the 'lowest' price or value you will find in the marketplace for that type of asset. If the asset evolves in performance, it becomes another thing and has a value increase since now there is cash flow from it.
I guess the best advice, is if you look into this asset class, do some diligence on your own so you understand what these programs are and things are and not overly rely on someone in a meeting to sell you on what it means, which might be more of a sales pitch than an actual program.