All Forum Posts by: Dion DePaoli

There is an elephant in the room here. First let's assume the purchase price plus the cost of repairs are indeed secured in a mortgage or deed of trust against the subject property. Let's just assume for ease of math the loan is interest only. So no principal is reduced during the holding period of 12 months. Let's also assume the interest rate is 10% which is usually below most state usury laws if they have them.

Now, when seeking to refinance the subject property the OP seemed to question both the insufficient amount of capital to pay of the debt and the excessive amount of capital to pay of the debt. I don't know why we didn't discuss the exact amount to pay off the debt.

If the original private loan is secured than refinancing that loan away is simply a Rate & Term Refinance, not a cash out. R&T refinances carry with them higher LTV's in general. The interest rate on that type of loan will be more favorable too than 12%. Say 6%, fully amortized. So if the property cash flowed at 12%, it will cash flow at 6% even better. In this idea, we didn't tape into unneeded equity from the subject property. All closing costs for the new loan can be rolled in.

The investor who recorded a security instrument received his interest payments during the term of the loan at 12%. Essentially, he received a 12% return on his money already. Not a bad deal for him. Rinse and repeat.

In the OP #2, if the investor is profit sharing with you he is not a true lender. Either agree to the target return and achieve that through an interest rate or assume he is your equitable partner, since that is what he would be in this case.
Further, Option B has some issues in practicality beyond what Matt said. Further, he is correct the FNMA program being cited is the incorrect product for this scenario. They have NOO loans with LTV's around 75% of the FMV after certain seasoning on title has occurred or if increased value can be established through analyzing what was rehabbed.

The old lien will not be allowed to stay around as a condition of the new loan unless the new lender allows it to subordinate. If it does not subordinate, the interest established in original lien is superior to the interest being established with the new lien. So you either pay it in full or it subordinates. If you subordinate, you have taken steps to stabilize the property since now a majority of the old 12% debt is now at 6%. Adding a second lien in the future through the same investor is a way to tap back into the equity for capital. You will still need to alert the first lien holder but they likely will not mind since they are in first position. Refer to the loan docs of the first for these matters.

The next refinance if and when possible would be taking out both of these two liens which would also fall under rate and term. It is not unreasonable that you will still out run interest rate risk since your blended rate on both loans is greater than 6% and less than 12%. So, if you see rates rising to 8% and headed toward 9%, you should think about the refinance. (made those rates up, didn't calculate the blended rate)

Alternatively, if you hold the property in an LLC, when you take out the original loan in full. You can tap back into the equity of the property by allowing an investor to buy into your LLC. This is another good way to raise the capital and the investor is not a mandatory debt payment but is a floating equity payment. So they will ride the ups and downs of rental income and gain on sale with you.

I agree with Bill. Such a large number of fraud mortgage files is a problem from many angles. Those are not sound investments. Some may be able to be resolved and others may be completely worthless. As I mentioned fraud loans can make for fraud real estate transactions. Loans with no collateral because the transaction is void have a very small likeliness to be collected on since these types of folks engaging in these types of practices usually do not hold assets to collect from.

Purposely buying many of those types of files is not a good strategy for preserving capital. Newbies should understand that idea as something not to do. Again back to my post about why something may be so cheap in price and a Seller knowing disaster is just over the hill when a buyer does not.

See what I mean?

"I guess by your standards or [of] clerical errors you call [claim?] it is ok ('call it is ok'... doesn't even go together in any grammatical situation) to use your child's SSN and give false employment info, and that will be ok (redundant) with you. Sense [Since] you are very educated to out my grammar. I think you are out of touch on what mortgage fraud means."

It is safe to assume I am in touch with the meanings of words more than it is safe to assume you read and comprehend what was written before you attempted to make an argument out of the content you seem to have not fully read and fully understood.

Joe, the ideas in the post are not very clear. We got that you own some files and it seems you believe they are all fraud by the process of guilty until proven innocent. It also seems like the charges you have an option to file for fraud, where you would seek some restitution, have already established the harm which the purported fraud has caused.

To presuppose that misinformation on an application is by way of the borrower without due investigation seems to universally not understand the origination process of a loan and is void of possibilities of 'clerical errors' which are not fraud, they are clerical errors.

I can't imagine a judge denying anyone their constitutional rights. I will simply leave that alone.

To imply that the solution to a fraudulent loan application which would include a likeliness of a fraudulent purchase and sale transaction is simply some surrender of the property seems to stand on the other side of reality and ignores all other implications of what you are suggesting in the first place.

There is a question mark at the end of the last set of words but you are going to have to do a better job of crafting your posts, use some grammar and spell checks, they are hard to read, understand and often times they diminish the integrity of what you might have been trying to say if it even had any real world truth or relevance.

Justin,

The question is a little broad to some degree. Is it viable to purchase a loan that is in default and finish the foreclosure? Yes it is. Obviously, you will need the capital to purchase the note and pay for the advances including foreclosure fees and other advances to protect your interests such as paying for property insurance, taxes and other related advances.

Not all foreclosure processes and events are easy and/or simple. Many things will impact the ease or complications that will be involved with completing the process. The list of those concepts is too numerous to list here. It is possible to buy a loan and have defects within the paperwork or origination or servicing process amongst other ideas that provide barriers to completing the process. Those issues can cause an investor to loose some or all of their investment money.

Ownership of real property is not a right or guarantee that comes with an investment in a loan. The Mortgagee has a right to collect the amounts due under the note including principal, interest and advances. A property can go to foreclosure auction and be sold to a third party and the Mortgagee will never take title. The Mortgagee will be paid what is due from the sale proceeds and any overage from that amount will be dispersed to junior lien holders then the borrower.

Further, large equitable gains realized by a Mortgagee can be recaptured by a borrower in some instances such. This idea can be found in cases where a bankruptcy is filed around the same time or shortly after foreclosure runs it course. In addition, large equitable gains can be grounds for considering a Wrongful Foreclosure action against the Mortgagee. These ideas and a couple other ones similar to them are what tends to be overlooked or omitted in some plans by newbies and by some of the guru strategies.

I am not sure I can describe hard or easy in regards to these concepts. They just are what they are. More experience with these matters affords better understanding like seeing the different angles here in the thread of your question.
Foreclosure is a state governed process. You can search on line for the process for each and typically find descriptions of the process on the state website or attorney websites.

Does a foreclosure resulting in a property reverting back to a mortgagee who then resells the home happen a lot? It has happened often in the past but as we reduce the inventory of foreclosures and as property values more and more homes may trade at foreclosure auction. It the property doesn't go at auction it will be title to the Mortgagee or vice versa, so there the odds are somewhat 50/50 in that matter, only two results are possible.

Peter simply search the internet for the Servicers, there are many in Texas. You will want to do some of your own research and come to your own understanding about the differences in the services and costs each one has. I personally do not give out any recommendations for just that reason, this is all a part of being in the business. Understand your vendor services. That Servicer is really important and if you do not fully understand what you are getting and not getting you could be harmed. If the internet search is tough, go to your state finance department website, Mortgage Servicers have to have a license, it's public record. Good Luck.

@Nick B.

There seems to be a slight tone of disbelief as to the capacity for a borrower to bring a legal suit against a Mortgagee post foreclosure. The concept is referred to as 'Wrongful Foreclosure' and there are plenty of them all over the country. The grounds for the complaints are numerous from improper fees, improper notice, undervalued home price, dual tracking, lack of proper mortgage ownership, etc, etc. Anyone one of those concepts can cause the Mortgagee to be at fault and the borrower could seek restitution through the court. In regards to case law, there is plenty and not worth attempting to bring forth some list of cases.

One of the issues in Texas is that foreclosure is non-judicial and thus moves quickly. It is possible for the process to move too quickly. Yes, it is possible. An easy example, you as a Mortgagee put your borrower on default notice per the standard time and give standard time to cure. One day prior to the cure time elapses the borrower calls you and informs you of their hardship and they inform you of a letter they sent 5 days ago. You didn't get the letter. Through your conversation you ask the borrower to send in material to judge their financial position. You ask for it within 5 days. The borrower fails to deliver on day 5 and you trigger the rest of the foreclosure process. Two days later, you get their financial information. You see they have insufficient income and thus decide not to work with them. You set aside the paperwork knowing your foreclosure sale will be done within 90 days and you will be done with the problem loan. Process finishes and property goes to sale and is sold to another bidder.

Three weeks later you get served a lawsuit for Wrongful Foreclosure. The complaint alleges you dual tracked the borrower likely amongst other standard complaints. When you stand before the judge you deliver your servicing log notes and borrower correspondence. But wait, you didn't keep a good log. The Borrowers have a record of the letter they sent that you didn't get along with your call when they requested relief a second time and they have evidence they sent in the material you asked for. You failed to properly engage in the request for relief and to properly and formally respond to the requested material and relief request. In the judge's eyes the case is pretty simple and he only takes seconds to pound the gavel with his decision. Viola, you wrongfully foreclosed on the borrower. Now, restitution becomes a problem since the home sold at auction months ago, so the court can go unwind the auction sale or they can simply force you to pay the borrower for the loss of their home, the cost of attorneys and fees to bring the case to the court for the ruling. You get the idea, you lose a ton of money. Now be honest with yourself, did you see the problem in the story that would give rise to the borrower bringing and winning their case? I am guessing the answer is no and to some degree the hypothetical actions by the Mortgagee likely seemed somewhat normal and proper. That is how simple and quickly you can loose as a mortgagee.

In your post asking about purchasing a loan with some type of defect from origination. Understand that a borrower's income is only 'stated' on a loan where stated income is allowed, otherwise the loan is full documentation for income and assets. Borrower's give misinformation in almost all loan application interviews because the layman answer to "how money do you make", is not the same systematic way an underwriter calculates the income. Additionally, five years ago many people had good jobs with good income, today many do not have the same job or income level. So those types of issues do nothing to enhance the mortgagee's cause.

If the borrower knowingly defrauded the Lender at origination that is a different story. The Mortgagee would have to show such fraud and in most cases, the purpose of showing fraud would be only to serve to advance a foreclosure complaint or seek criminal charges. Most folks who commit fraud would not try and respond to the foreclosure proceeding. In general, there is not anything that really gives the Mortgagee the 'upper hand' per se. The Mortgagee is showing some breach of contract terms like not paying and then based on the contract seeking the remedy provided which is foreclosure. The idea of a mortgagee having an upper hand would not be equitable (fair) in our system of laws.

For team Borrower, there are many things which can be added to the list of affirmative defenses of foreclosure and added to the list of wrongful foreclosure. Since the mortgagee has to follow steps in order to achieve the result, errors happen and are not uncommon. The Mortgagee is the one who brings forth the action and as such there is a little more burden on the mortgagee than the borrower. In many cases when you hear in passing of a vacated foreclosure which then was refiled, that is curing a defect in the proceeding in order for it to proceed correctly. It's not a crazy mortgagee who doesn't know what they are doing. Mortgagee's have to get it right otherwise they don't win and not winning can mean not collect what is due.

In regards to the general risks of purchasing a loan with a balance of $120k and a FMV of $100k for $30k. Well, all the risks that go with investing in distressed loans. As I already pointed out, that price is grossly under market. Therefore any Seller who sells to you for that price would likely have a better understanding of the present defects than you. You thought you were getting a good deal and the Seller knows they are getting out before they hit zero. Lower than normal sale prices are present for a reason. Buying something that can be worthless or have exaggerated risk for a low amount of money, is still buying something that is worthless for more money than it is worth or the risk is worth. Don't confuse that with a 'deal'.

In a state like Texas, which seems to be a target of yours, where we own and manage a couple hundred loans around Houston and Dallas MSA's that is not a reasonable sale price for a 'normal' NPN. Foreclosure in Texas is quick and legal costs are not as high as other states so you are going to pay more in a purchase price as a percent of real property value since the amount of expenses and time value of money sort of dictate that. It's not magic, it is math.

When you negotiate that killer sale price and the parameters of the purchase and sale contract for the loan have very limited representations and warrants and call for an As Is Where Is sale and the Buyer is solely responsible for any and all due diligence, you just got picked off by a Seller. Perhaps the chain of ownership is defective. Perhaps the security instrument is not suitable under Texas law. Perhaps improper servicing of the borrower's account has occurred. This too can be a long list of 'what if'. Bottom line the enforceability and collectability of the note and security instrument may be null or may be extremely difficult to say the least. That is what prompted the price being ridiculously low, it's a lemon.

If you don't think this type of situation happens, where a more knowing Seller liquidates an asset to an unknowing Buyer under proper legal sales techniques you are massively mistaken. I talk to folks that are in this same boat pretty often seeking assistance to cure the problem. The case of they didn't know what they didn't know. Well now they know it wasn't really a deal when they see what can not be collected or the additional costs it will take to cure the defects. To that extent these fall under some of the warnings that are floating around on BP from guru type sales pitches with investing in mortgages. Like any investment, you can loose money. Unlike some investments you can loose more than you initially put in. (guessing you did think that was possible, it is) Take the story above in example.

It seems some of the newbie or want to be loan investors (in this and other threads) don't want to face some of the reality when they are told from someone with tons more experience. That's fine. However, that doesn't change reality in the real world and believing in falsehoods or proceeding with false assumptions is not working within realty it is attempting to create one that will never come to be.

From the CFPB. (I guess I should have posted these all in one thread, sorry wasn't thinking). Overall summary of the rule. This one is long. I posted two other videos as well within this forum.

I posted two videos from CFPB which are summaries of the rules. Relative to this thread.

If you are a layman servicing a loan, this will be good video to watch (amongst the others they have) to get a little head spinning and to realize, you really don't want to be in the business of servcing without a licensed servicer.

Remember that shot game with "Roxanne" by the Police, you can do that here with the word 'required' in some of these videos.

Ability-to-Repay and Qualified Mortgage Rule

New Mortgage Servicing Rules

From the CFPB clarity on the new servicing rules.