All Forum Posts by: Dion DePaoli

Rick, in a NPN, not to mention, an NPN that you can likely be able to purchase, you will have foreclosure as the primary disposition. That is how you also would want to model out the economics of the asset. Obviously, a foreclosure would last longer than a DIL, so if a DIL happens than you realize your return sooner which will give you a boost.

A reinstatement (which does not always mean a modification) strategy is always an option but I don't think it is very prudent to plan for such as a primary strategy. Again, same idea, plan for the worst and hope for the best type thing.

I think DIL is a somewhat misunderstood idea by newer note investors. Bill mentioned it but I will highlight it a little more. A DIL needs to be initiated by the actual borrower. Simply stated, the borrower is in duress and that can be used against you as a Mortgagee. Often, it seems the idea tends to be treated a little cavalier. Reality is, often times DIL is not possible due to other liens.

In most institutional trades you will not be allowed to have contact with the borrower prior to purchase. In the event you find yourself in a spot where you can stumble into some allowable contact with the borrower, obviously be careful that you do not negatively affect the account for the Selling Mortgagee. I have seen these things be a double edge sword as well, where the borrower injects your discounted purchase (or idea thereof) on to their account. For us, we just don't bother with trying to reach anyone until we own in case we need to take a hard stance on the treatment of the account.

@Account Closed man do you have a bad attitude. Look, I can't help you are talking out your back side while pretending to know what you are talking about. I didn't do that, you did. What you said is and still remains poor advice. If you need to tell yourself that somehow what you said has been twisted or misunderstood, that's fine with me. I am pretty comfortable reading above and seeing, not only were your words not twisted at all, but honestly, I did a hell of a job quoting you. I actually had to contemplate whether to go with the italic or bold text format. I think the italic worked out well, don't you?

Fact is, you tried to make a point to a new note investor that using a servicer for a defaulted loan (you refer to it as delinquent) is a waste of money. I am pretty sure, since I can still read, you actually proclaimed they do and I quote, "nothing". Then, you attempted to point to Wall Street as being the origin of this idea in support. Perhaps you didn't understand my response but I was talking about what you implied. I essentially said, "you are wrong", there is no 'Wall Street' firm which advocates or practices not using a proper licensed mortgage servicer. I could have also said, stop making silly things up but I decided to let the reader judge that for themselves. In case there is any remote confusion, there is absolutely no, zero, zilch, notta, firm on Wall Street which is advocating or is even remotely implying that it is a good idea to not use a servicer for defaulted loans. I thought we resolved that rather quickly by looking to the fact that many of the real Wall Street firms actually own a servicing company and loans originated by Fannie, Freddie, FHA, VA and some of the others actually have a mandate to be serviced. I note, that you attempted to defend the idea in your last post but you can't seem to post a fund or firm name or reference the article. I will not hold my breath to see it either. So, if correcting such outlandish ideas for readers who have little to no knowledge and might think what you are saying is a good idea or rooted in some fact, then I have always been fond of the statement, "I'll be your Huckleberry".

Default servicing is referred to as 'high touch', meaning the file requires a lot of handling. I would have, before this thread, like to have thought the idea of boarding a loan with a servicer when the loan is in default was a pretty straight forward idea. High touch means, a lot of work. A far cray from the idea poised herein that the servicer does nothing but collect payments. Yet here we are. When a Mortgagee is enforcing the remedies provided in the security instrument and note, it is safe to assume usually the borrower and mortgagee are not the best of friends. As such, we can assume the borrower and perhaps their council is looking for misconduct on behalf of the Mortgagee. An improper response, demand or notice. A failure to respond in time to a request for relief. Dual tracking. I could actually argue that out of all the possible times in the life of the loan, when (if) it is in default is the most necessary time to have the loan with a servicer. This would be apposed to a loan which is paying as agreed every month. That is actually when the servicer is dong the least amount of work. Ironically, this is also why we have the fee schedule we do for servicers. Delinquent and defaulted loans cost more on a monthly basis because they are more work.

Plain and simple, always put your loan with a servicer. Any suggestion to the otherwise is very bad advise. Unless you are prepared to iterate Regulation X and it's amendments from Dobb Frank not to mention other dated federal and state rules, it is pretty safe to assume you have no business assume you are servicing the loan in compliance with all the rules.

What or who are you talking about? Do you have a link or something?

Wall Street is capitalizing on MSR's (Mortgage Servicing Rights) right now and has been for the past few years. It is safe to say, they are fairly popular.

I do not know of any security trust that does not call for the loans to be serviced by a licensed Mortgage Servicer. So that tips the scale all by itself to the majority of loans being serviced. Many of the larger capital investment funds ('Wall Street' if you will) actually own servicing companies. For instance Fortress owns Nation Star.

Now, does that mean a smaller fund has not gone out and gained the proper license to be a servicer? No. Certainly possible.

Key idea, they are getting the proper license. I think it is safe to assume, they probably have somebody doing it full time 'properly'. Let's be honest, that is the correct Do It Yourself idea there. Get the license properly. Make no bones about it, that in and of itself is not done over night.

Could there be some small guy (sine it doesn't appear to be any real 'Wall Street' firm) out there not using a servicer and advocating how much better he is doing? Sure. Is he in violation of many states servicing laws? Yes. You should stop taking advice from him.

Sorry, IMO, there is no possible way, knowing what I know whether it be everything or only some of everything that not using a servicer is justified. I deal with enough new and experienced investors to understand what damage such a silly statement could actually make. As I said, not my first rodeo with self-servicing. It's a train wreck. I am not trying to beat you up. Maybe you just learned something too.

Originally posted by @Account Closed:
@Bob Estler,
The going rate for 1st non-performing notes in Arizona is 30% of the UPB. If you are paying off the BPO, you are buying from a broker.

This is my experience.

Joe Gore

Joe, I simply love your absolute statements. So the market for NPN's with 50% equity is 30% UPB. Good to know. It's amazing anyone ever lost money investing in notes with such simple applicable ideas.

Originally posted by @Brian Winberry

Joe,

Actually purchasing on BPO or UPB is pretty evenly disbursed among the sources. It all depends on their model and what they bought from themselves. We have purchased from several Hedge funds/ owners of notes on the NPN side and it was an even split on what way the pricing went.

Michelle

Brian or Michelle...(I guess two of you use the same account) and Joe:

Let's clear this all up for the readers. This idea that one purchases a loan either rooted in Principal Balance or Value of Collateral does not exist. There is no such "either or" problem. This simply is because both ideas are just math operations and not real things in and of themselves. A loan that trades at 60% of BPO or 30% of UPB can be the same loan. Which one of those is used to describe the math equation to find the cash purchase price is all that is being done there. A $200k UPB with a $100k BPO purchased for $60k is the same $60k in purchase proceeds not matter how I say it. To imply otherwise is silly.

The tendency is to use UPB as the basis for discussion since UPB is not up to opinion. If I offer you 60% of BPO, that is only relative so long as you know what BPO number I am using. Mine, yours, the one down the street. UPB is not subjective like that, the balance of the loan is the balance of the loan.

At the same time, UPB must also be evaluated against the collateral. So, one idea with no understanding of the other is not the best practice. Like my example to Joe, a loan with 50% equity will trade for more than 30% of UPB. In experienced folks talk with about these topics and it gives the wrong impression. If I had a nickle for every time I have heard or seen someone try and illustrate a good deal based only on the percentage of UPB I would have a lot more loans. Just because you purchased at 10% UPB doesn't mean you got a good deal.

Originally posted by Joe Gore

A long time ago one of my hard-headed friends here in Dallas bought a note from a note broker and only got half the paperwork which did not include the original loan application and thought they tried to foreclosure, and the judge would not allow it. Later, I found out the note broker caught a chicken truck out of town.

Joe Gore

Joe, I suppose a long long time ago, in a galaxy far, far away Uniform Residential Loan applications were mistaken for Security Instruments and Promissory Notes. I am glad we have come so far forward. I am also interested to know why your friend purchased said file with only half of the contents. Help us understand, how did not having the loan application void the standing of the Mortgage or Deed of Trust?

Readers: a broker is not the contractual party who is responsible to deliver the file and it's contents to you. That is the obligation of the Seller, (unless you are in more of an origination setting) who is a principal to the purchase and sale contract. If a broker steps into the role of the Seller, then they are the Seller not the broker per contract. Pretty simple stuff. My advice, if you are going to join the pitchfork mob, make sure you are all headed to the right house.

In regards to the Eddie Speed program. I have glanced at some stuff about it over the past couple years. I was under the impression from other posts on this topic is that there is some smaller introduction class and fee and then the larger fee and program come thereafter. I was under the brief impression his core is rooted toward Seller Finance work. Certainly some of the ideas are applicable on both sides but users should know some differences do apply.

I think when evaluating anything we should be critical of what is ordinary and what is extraordinary. Many folks are once again turning to RE and RE related assets as a new form of income or additional form of income, etc. Jumping in to expect to make 150% returns in 6 months is not ordinary. Can you have a deal with high rates of return? Yes. Often times, those are not deals with large capital demands. Anyone and I mean Anyone, who can produce any return remotely close to 100% and repeat it in a year or a month or whatever would have more money than they know what to do with from their own investments not to mention the large amounts of job offers from investors both private and institutional. I have completed trades where our return was literately in the thousands. I am more than happy to tell the story about that ONE deal. It was less about something tricky or magical that I did and more about how it played out in the market. That trade looked and acted just like all the other ones.

Teaming up with someone with more experience and knowledge than you is always a good idea. Whatever arrangement you are comfortable with is yours to figure out. Understand results will vary from student to student and teacher to teacher. I am not sure we could fairly analyze such a thing, although it would be pretty interesting. If you spend $16k can you walk out the door and start buying loans and do well or do you need more time and support? I would think that idea would be a crucial part of the evaluation. After all, that is the question, if I invest $16k into this, how soon until I make my money back?

To address some of the OP plan:

A non-performing loan is non-performing because the borrower is not paying as agreed. You can apply that reason to all loans of this status. So #2, in the first list is resolved. It is interesting the manner in which you approach and describe it. An approach that often newbies take on. The romantic side of note investing, if you will. Solving the problems of the world one borrower at a time.

Looking for a reason in some hope to solve that reason tends to be vision of many new folks. The major reason borrowers do not pay their obligations is simply they can not afford it. The reasons behind that are infinite. You will never be able to solve them, they are not YOUR problems, they are the borrower's. How could you solve them? You only have one thing that can be adjusted, a mortgage payment. That is it. You can lower the payment. You can suspend or defer a payment. You can even forgive payment and principal requirements. Let's not act as if that is the same as life coaching the borrower in to some utopia satisfying all their obligations. Eventually, you will want the obligation to be fulfilled, so the rubber will meet the road. The borrower is ultimately in control of that destiny. You can not write the check for them to pay you.

In regards to the review and analysis of the potential investment. As Bill said, there is nor real list. I tend to refer to it as iterations. A series of cause and events. Borrower goes delinquent sets of a series of events. Borrower defaults is another set of event. Borrower files BK, same thing. Etc. You get the point.

A point in the list which I find amusing, instruct the Servicer to contact the Borrower and work to reinstate or whatever. Please ask yourself, if that is the plan of attack, what makes you believe your efforts will be more successful than the last Mortgagee?

It would seem that only chance or luck would actually influence that. If I was the old Note owner, it is safe to assume, I told my Servicer the same thing. Yet, here I sit with the same NPN. In fact, this loan can trade hands 100 times and if we all do the same thing, we would expect to see the same results.

The private loan investors who can understand this and build up their niche around that idea tend to be the best operations. Under the same idea, this is also support for investing in your backyard or with boots on the ground. In an institutional setting some of those additional vendor services get further and further out of their control into folks who care less and less. For instance, the agent who gets sent to door knock. That door is one of a hundred. It's a paycheck, let's be honest, they are not invested in the outcome of the knock per se. So, if you can build your team out more, then more of those ancillary events on the account can have impact. It is similar to why REI folks will team up with contractors and agents. My point is, don't kid yourself, if you are not going to do anything different, results may not vary.

I think one of the best tips is as you set out to align yourself with team members, from your servicer to the agents to the construction folks to whomever, understand what you are getting. Go talk to more than one Servicer (or service provider). Find out in detail what makes Servicer A different from Servicer B. Just because you go talk to the most popular guy in the room, please do not think they are ALL like that, they are not, far far from the truth. Sometimes, the most popular guy in the room is not the best choice. Other times, maybe he is.

As far as other tips and tricks and alike, that all comes with experience. When you are receiving said tips and tricks, you do need to vet the information a bit before you simply run with the idea. There is a pretty substantial difference between an investor who has purchased 3 loans versus 300 and 3,000.

There is no controversy or argument for NOT using a Mortgage Servicing company. ALWAYS use a Servicer. Honestly, @Account Closed that statement makes it seem like you have no idea what you are talking about but your trying to give advice.

- This is subject to a lot of debate but many argue that you shouldn't put 1sts with a servicer while it's delinquent, since you're going to send it all to an attorney to start the foreclosure process / do all the work. The servicer will collect while doing nothing. On the other hand if you do get a loan mod then definitively put it with a servicer.

A delinquent loan and a defaulted loan are not the same. Foreclosure is a response to a defaulted loan not a delinquent loan, so the above is not even talking about the right idea frankly. There is no debate from anyone with real experience as to the value and utility of a Mortgage Servicer. That is simply hogwash. Always use a servicer, period.

Default servicing across the board is $75 to $100 per loan per month. The cost of servicing increases based on the increased amount of handling the file should have. If you do not understand what your servicer is doing in the case of a default situation, then you should probably ask but the answer is not debaord or never board your loan. If you are not happy with your Servicer, find a new. In advance, you are not the best or most suitable replacement, you have no experience or background, so that would do more harm than good. I have seen and purchased my fair share of self-serviced loans. The servicing is usually a cross between a train wreck and car crash. That will translate into dollars at some point.

Suggesting that 'all' that happens when a loan is in default is simply waiting, is not accurate. Many states have mandated mediation. Continuity of collection still needs to take place. The debts need be collected per regulation standards which means regulations over the spectrum of communication including phone calls and letters. Any borrower in a default situation can easily turn into a request for relief which has mandated responses and times per DF. A lackadaisical approach here can be costly in many ways.

The regulations that govern this idea and those around the servicing of the debt are not 'new'. The portion of Dobb Frank that deals with servicing rolled out a couple years ago. The Fair Debt Collections Act has been around for years. The mandate to have a Servicing license on the state level has been around for years. The state level servicing requirements have been around for years. New to you, is not new to the industry.

"There is no magic in mortgages." That is my favorite saying. Mortgage as an investment have this mystique to them which in some ways is funny. The concept of a mortgage has been around for literally thousands of years. It is by design a simple construct to deal with a fairly complex idea. Even under that idea/example we still involve courts of law, so clearly we do not think that it is all simple and straight forward.

Compliance with our rules and laws is a full time job. Servicing a loan is a full time job. Implying otherwise does not change the workload that needs to be done, it simply changes that actual amount of proper work that was completed.

A couple additions to add on top of Jon's information. Interest accrues it is not innate. Meaning, the money must be being used by the borrower in order for interest to accrue in the arrears.

Now that we have established that, some corrections to your thinking.

If I receive the majority of the interest over the 1st year of payments holding the loan, will it be much less valuable given that when I sell it, much of the interest has already been received by me?

Interest is only collected when it is due. Interest is only due after it accrues. So, it is impossible to collect "the majority of the interest". In period 1, the note calls for a payment of $21k. Any amounts paid above that would be applied to principal. That is called prepayment. The principal is being pre-paid in comparison to how the loan is amortized, which is the schedule of principal and interest payments and allocations of the same. Now, there are some caveats to interest paid in advance, but for the sake of this thread, we will set those aside.

If I would like to sell this stream of payments to a bank, what discount fee do you think they would charge at 60 months? At 48 months? At 36 months?

I agree with Jon, this loan does not sound too bank-able. There is a fair amount of detail missing to really judge the value of this loan. I, like Jon, came to about 10.47% as a note rate but also realize we do not understand if the $21k payment is Interest Only or if the loan is amortized. While it seems like the loan has a maturity 5 years out, we do not understand if that has a balloon in it either.

So a balloon at the end will devalue the note to some degree as it means the borrower has to come up with the capital at maturity to pay off the loan. If the loan is interest only, that too will likely have some downward pressure on price for the loan in a trade. To some extent under the same guise, the borrower is not reducing what will be all due at maturity.

So, understanding that, the answer to the question above about a bid on the loan at 60 months would not be a great one in most cases since the term is over.

As far as the other two time periods. Generally speaking, there really is not much difference in a loan at 36 months and at 48, depending on the maturity. So, apply the concepts two paragraphs above again as needed. We would expect, however, a Buyer would offer on both remaining terms a price where they realize (or have the chance to) their desired return target. If we use a longer term loan, say 30 years, it might be a little more obvious. If my target return is 15%, then a bid is produced based off of that number no matter where the loan is in the term. The cash equivalent of the price however will be different in the case of a loan which amortizes since a bid earlier in term means more principal is left and vice versa. The loan is accruing interest at a constant rate, which is the note rate no matter what year it is in or how many periods are left, etc. I think this confusion stems from the first point I addressed with interest accruing.

So then, to jump to what seems to be your ultimate desire, which is know when the most ideal time to sell the loan is, the answer there simply is - When you want the money now and not the payments over time. There is no mathematical superior place to sell the loan in regards to seasoning of term.

In regards to this loan and the collateral, it is somewhat problematic. The equipment you have as collateral (I assume), is very specific. This creates liquidation issues. Relatively speaking, we would assume that only another dentist can use said equipment. Medical equipment as a collateral is not uncommon but the institutions who do much of that finance, like the SBA (Small Business Administration) has a matrix on how to value the underlying collateral. Often times the equipment is really only worth pennies on the dollar when it is all said and done.

I would be curious to know why the dentist choose your loan at 10% when it would, at face value, seem like he could have walked into any bank and received a nice SBA loan with better terms than yours. (much better)

I would also point out, he should have spoke to a CPA before taking this loan too. Chances are pretty high, he would have done much better economically if he were to have done more of a structured lease of the equipment. Those can be win/win's for both borrower and financier. A matter for another time, though.

Putting a real price on this loan or the idea of this loan, as I mentioned, is difficult because details are missing. Is there a UCC over the equipment? If the answer there is no, the loan is unsecured. That is less valuable than a secured loan.

Did you get a personal guarantee? No does't devalue but yes may add value.

I think one other point to make, there might be confusion using the idea of selling the payments. There is more of a desire to own the entire asset than there is to own partials. That said, based on the general terms here and your questions, it seems more like you are simply interested selling the loan whole and not some payments.

Steve, have you ever purchased any type of loan before?

I assume the loans are in California. You mention they are defaulted. What percent of RE Value did you expect to offer for these assets?

What type of properties are these?

Yes. I know them. They will demand higher level execution.

@Bryce Y. I knew your kidding and I just messing with you.

I think you are missing important point(s). We adjust for risk by tweaking the interest rate and down payment (in general). Rates can increase up to usury. You just do not get a free pass to put any rate on the loan. So nobody said you do not get to be compensated for added risk.

I think that it seems much of the push back on the matters that perhaps Bill and I seem to advocate against are being challenged under the core concept of looking for a way to justify taking advantage of the lesser credit borrower. There are none.

If a borrower can afford the loan, you will be a saint. If the borrower can not, you will not be. It is an oxymoron to say that someone can get into a house that they can't afford. If they can't afford it, they should not be put into the house. Stop thinking you MADE it affordable. You did not. Free is affordable, do you plan do give it away? (Likely not)

I think often we try and convince ourselves of our 'charitable work'. In that same line of thought we gloss over the core point of it all, to make a profit. So why would you lend to a borrower who may struggle? Why don't you want a borrower who can afford to make the payments and be successful in the obligation? If you choose a lesser borrower, it really only means one thing. You set out to take advantage of them. No amount of lipstick changes that. No matter how many times you pat yourself on the back.

Borrowers are not tenants. Let's just not go there.

RE Disclosures: This topic is also misguided. I think your line of thoughts are like many other folks. That doesn't make it right and you are missing the point.

Great, the borrower signed a disclosure that says what? You verified their income and in your opinion they qualify. We do not even need a disclosure since your actions would clearly imply the same. You gave them a loan.

When a judge asks to see proof you reviewed and verified income to the standard, what is your plan, to hand him your signed disclosure? How does that prove anything? Wouldn't it just be a declarative statement? How does the conversation go, well your honor, the borrower signed the disclosure that we reviewed their income. How or when did the borrower become the qualified person to cast judgement on your adherence to the rule? Does the borrower even know what the rule is? (Come on!?!)

In addition, this presumes that your disclosure will cover every angle that can be charged on the topic. What if you did bad math. DTI is at 55% because you treated some income wrong or you did not properly account for a liability. You check the right stuff, you just have the wrong answer. How would the disclosure protect against that? (It wouldn't)

Fact of the matter, what is really implied is the "Disclosure" is an agreement. Well, if the borrower agrees to something, it is not a disclosure now is it?

Borrower agrees we checked their income and it meets guidelines in our opinion and blah, blah, Borrower has no standing against us on this topic. Wait, what?!?

Frankly, this line of belief is closer to stupid and naive than much else. Sorry to say. That is what the defenders of this idea are hoping for. It is hope in vein, trust me, go look at any new mortgage file, over half of it is disclosures. You know how many get used in court as defense? Less than one.

There is no and never will be protection from doing the wrong thing. It's wrong. Do not do it. That would be my short disclosure for all who don't want to hear or see the truth in these matters. I suppose at the bottom I can put, you do not have to believe me, you can wait until a judge tells you the same thing.

FCI is what it is. The other listing sites follow suite too. I have sold some notes never bought any through those types of platforms. I don't have the patience to search their database in the manner they expect. I would personally rather review a pool and within 2 mins have an idea of what I like/want opposed to still trying to figure out how to filter to a characteristic of the loan.

In my opinion, those sites do not because they can not, do justice for the assets that are listed. There is not one simple reason and it is not necessarily something they do wrong but more along the lines of the accumulation of a couple of different aspects colliding.

Much of that is User caused problems. Folks list their loans for sale for the sake of listing their loan for sale. There does not seem to be file content standards beyond the very basics. The pricing expectations on both sides are a bit off. It seems to capture more of the "why not, sure I will list" type idea than a comprehensive plan to liquidate the assets.

We have worked with Sellers liquidating their portfolio and every so often, the loans we are working on are listed and remain listed even once we are engaged. (I do not recognize it is an obstacle.) Mind you, I am talking about a legitimate engagement not a pool lost in broker circles. The sites just can not bring to the table the full spectrum of knowledge that comes with working with a good firm or broker, IMO.

I am not sure there is much they can do about it, it sort of is the nature of using a web page as a sales vehicle. Information can be posted regardless of correctness or completeness and no guidance is given toward price expectations and the transaction is not really managed. On the other side of the fence, there is no matching of file attributes to potential investors. So its more like a free for all than much else. I remember we had a file once which was listed on a site similar to FCI and I swear somebody out there was getting drunk every night and going on the site and bidding on our loans. Wacky bids at 3 am would come in nightly on the same few. Many were humorous. So, something so make sense, like don't let drunks at 3 am bid on my loans, can not actually be stopped. So we get a lot and I mean a ton of background noise which diminishes the effectiveness of those sites.

I think our expectation of the Note or Loan market is a little inflated in that regards. There are A LOT of new comers. A lot of folks who buy NPN's and think value increases with time. A lot of folks who do not understand needed and required file content. A lot of folks who, while they are entitled to bid what ever they want, are not remotely close to where the market is. These sites end up catering to them just out of existence. Honestly, those folks need assistance and the sites can do it.

A current example we have. We are working on a portfolio to be liquidated by an investor we know. The loans are listed. Same idea as above, more of the well let's see kind of attitude. One loan, has a couple of serous issues with it that a lesser experienced person may not even understand. A real person can drive that loan into the hands of someone who does understand it and can work with it while managing price expectations and paperwork. Reviewing this loan on a site will never do it justice and could be dangerous for a newbie buyer. I think the way it looks with the information scares everyone off. The book is judged by its cover, if you will. We had the loan for less than 24 hours before getting it in front of better more suited counter-parties. Within a day it went into trade.

I think the real recipe is two parts knowledge and one part hustle. A website just can't do that. And it is really that simple.

I think newbies are often looking for something that also does not exist. The Ideal Seller. Good luck. I think the best advice I can give a newbie looking for loans. Is look everywhere. Where you find the loan is of no consequence. How you buy the loan is what matters. If you do not know what you are doing, go team up with someone who does. Then it doesn't matter where the loan is from. The experienced Note buyer can buy from anywhere since they understand the asset. They will help keep things in line and they should know when to walk away. Perhaps to much of the same reason folk seek out agents to help them find houses.