All Forum Posts by: Dion DePaoli

John, it is hard to judge your costs not knowing all the details. It does seem like you should get some legal help, an attorney who can help with your interests in the contract and perhaps even help with some level of due diligence.

The previous title company will not be of much value here. They may be willing to order you a title report, but you can get that from any title vendor. Title companies don't make contracts between parties, attorneys do that.

You will have the costs of the due diligence you conduct such as title reports, property evaluations and legal fees and you will have the cost to record the assignment which will be around $30. Your big cost category will be legal and due diligence. Some body who knows what they are looking at and for needs to review the files with you.

In regards to efficiency, that will depend on you and your team I suppose. There are certainly some steps to go through such as negotiate the contract, conduct due diligence, settle the transaction, receive collateral, and servicing transfer.

You should look into putting the loan with a mortgage servicer. They may have an initial boarding cost. They will help with the transfer.

Does the lender or servicer who administers the escrow account charge the borrower a fee for such? NO.

In some states the lender/servicer can place the funds into an interest bearing account and the state forces that interest earned to be paid to the borrower and some states do not mandate the lender/servicer to give that earned interest to the borrower so they can retain it.

Administrative fees are charged from the mortgage servicer to the mortgagee (lender). That fee is usually not directly passed on to the borrower outright. That is, there is not one interest rate for un-escrowed loans and a higher rate for escrowed loans. However, intuitively, some high LTV loan programs do take this additional administrative cost into consideration and it is expressed in rate. Again, the borrower does not see it expressed as a fee directly charged to them.

But the short answer is NO, as a borrower you should not be paying 'on top' of what you owe for taxes and insurance into the impound account.

@Will Barnard

Yield to Maturity will be the IRR provided the investment is held to maturity. However when the investment is dispositioned before maturity, the IRR will not be the same if there is discounted principal.

You did have the Total Return correct. My post points out there is a distinction between Yield, which is interest income and potential Gain from the discount. How and when the gain is realised matters in analysis when a discount is present. If the loan was purchased at par or premium, there is no discount to worry about and all calculations would be centered around yield.

The issue arises, that the Gain may or may not be fully realized and how it is realized will affect the Total Return. Total Return by definition is Yield plus Capital Gain. Yield by definition is interest income.

Trying to dumb down the discount (gain) into yield is not proper when dealing with discounted notes.

Bill, if you don't want to read the post, there is likely no point commenting about it, since you didn't read it. Buying a note for $75k with a UPB of $100k and then refinancing said note into a $100k new note which you paid $75k for does nothing but shuffle paper. Well except for increase your cost basis into that asset by $2k. Also, the 'we' was you, not all readers of the post in regards to evaluating IRR and not just yield.

Michael,

Doug and Bill gave good insight into local bank inquires. It does, however, sound like you may want to sharpen your skills a little before broaching the topic and playing the one or two cards you may get and losing. The bank is not going to be a willing teacher and you will need to understand where you need to purchase the note (level of discount) to accommodate the disposition of the loan. This includes knowing when the bank is priced too high and understanding when you may be priced too low.

A broker can be a good resource, in both finding deals and learning more. However, not all brokers are made the same. I would substitute broker for more of a mentor, someone who is actually investing themselves not just trying to broker. Maybe you arrange a co-investment with them or you do some of the work they need done, although disposition of loans is not a short term project so this method would have it's barriers to expose concepts to you which are unknown to you.

The public interest in notes has grown over the last couple years, although the industry has been around for ages. As such, there maybe credence to attending some local REI club meetings and seeing who there is a note investor or has experience as one.

As Doug and Bill point out subtlely, with limited capital an investor does have to put on an "opportunistic" hat on. Even with large amounts of capital, and perhaps contrary to popular myth, even large capital investors are subject to the same idea. Buying loans is not a Burger King drive up window, you can't always have it your way or get what you exactly want. While everything has a price which can consummate a sale not all make sense. As such, the Seller is likely only willing to sell what they are willing to sell at reasonable prices. So having a mentor will help you understand this approach in many cases as well. I don't know if you really need to leave your geographic area and venture into other areas far away from you but you will have to learn to deal with some of the good and bad in your area of interest. That is what will make your phone ring. Anybody can dispostion easy nice assets, the tough stuff is what tends to be up for solutions and potential sale.

You are mixing yield and total return into the same concept. The discounted principal is a capital gain until it is realized through interest in payments made by the borrower at the time the payment is made. The investment principal will be paid down in ratio to the borrower's principal pay-down so both hit zero at the same time. Although an investment manager can accelerate the capital investment pay down depending on the needs of the capital waterfall and the arbitrage between yield and coupon.

So the investor interest in period one is around $180 while the borrower interest is $125. The $55 dollars become paid interest upon the borrower's payment not before. The $55 comes from the $358.32 principal portion of the borrower's payment, which is the pro rata portion of the purchase discount. The borrower has the entire amount applied to reduce principal balance and the investor applies $303.32 to reduce the capital balance.

The loan held to maturity earns $4k in interest. So the potential income from the investment is $8k through maturity. (interest plus discount) Time is needed to aggregate the $4k of interest. This idea creates an optimal time evaluation where an investment can reap the boost to Total Return through the capital gain and also capture a counterbalancing series of interest payments stabilizing the return.

Period Discount (Gain) Interest (Yield) Total Return

P(1) 4,000 0 4,000
P(19) 3,000 3,000 6,000
P(26) 2,000 4,000 6,000
P(47) 1,000 5,000 6,000
P(60) 0 8,000 8,000
It is romantic to look at this investment and simply say "liquidate now". That will create a very high total return percentage in P(1). However, is a now liquidation the best utility of the investment? Should you try and collect all or a portion of the $4k in yield to be paid over future periods? A liquidation now does not allow the investment to realize future interest payments and thus you are looking to leave a portion of total return on the table. ($4k in interest accrual)

As you can see above, periods 19 through 47 have equal Total Returns but the contributors (discounted principal and interest yield) will have varying effects on the total return percent and yield. Thus, giving way to an Optimal Investment Horizon within those periods somewhere.

The analysis commonly conducted by many loan investors actually makes efforts to over simplify the complexity of the loan and the varying impacts of the different contributors to Total Return. Those analyses tend to be more linear which is not the best for loans. Loans, while we want to specify an investment horizon are not so nicely defined. Exits will be irregular as some are influenced by the mortgagee and some by the borrower. Further, the typical deployed analysis, as here, only tries to look at a very limited investment horizon and fails to look to see if an extended investment horizon actually optimizes the investment. If you don't hold the loan, you don't realize the interest. So is it better to get $4k or is it better to get $6k or even $8k?

My statement does not need to be retracted nor do I have gas in my brain. I made the proper statement. The yield in this loan needs to be examined and the rate at which the borrower could prepay the loan as that will affect the return. Since the borrower's prepayment will affect the interest accrual and thus the investment return. That is not the same as saying the investment will not produce a return. The ideas here, which immediately went to the shortest time is the most optimal, is not a correct analysis of these types of investments. It is more likely "Shiny Thing Syndrome". Look for the shiny big number and that must be the most optimal. Analysing and deploying an investment strategy based on that over simplification of the real world will have it's issues in utility. Ignoring the cost of capital, the cost of deploying the capital, the cost of redeploying capital and the possibility of deterioration of future total return percent in new investments would be a few risks that approach does not take into account.

Yield ends up being one of those words which tends to get used much with a variety of underlying meanings. However, yield is defined as interest income. The discount does not become interest income until such time as the payment is made converting the capital gain (potential) into yield. Understanding this and it's influences on the cash flow model you create to analyse a loan will help you be a better loan investor.

I don't know why you would purchase a note and refinance it yourself. If I bought the note, I am the mortgagee. I can modify the note. Refinancing the note will be more costly than a modification. Typically when purchasing a note and talking about refinance, it is referencing the introduction of a third party as the refinancing lender, again because the modification is the more cost effect route. A modification can cure most defects in collateral documents. In addition, a refinance is really shuffling papers not realising return if it is my capital which makes the new loan. So I bought the note, to pay myself for the note so I could own the note I already bought. Yuk. I don't see the value or purpose unless the underlying ownership structure of the asset actually changes where I own the note and refinance it into an entity which I and Tom both own.

*principal Sorry working the phone app with auto spell

Matt Devincenzo Prepayment returns your principle (investment) faster. Interested is earned in arrears. The discounted portion of principal will still be a part of your return but the yield will decline. For the 25k note @6%, interest will be just shy of $4k if held to maturity. Paying the 25k back reduced the $4k. If a borrower held the loan for one month interest would be $125.00. Careful to make sure calculations of the investment are amortized with the loan. Although discounted loans are not equal schedules to the borrower.

I agree with Bill but I would be a little higher actually. I might be closer to a 20% hurdle. My reason is I think you have some prepayment risk. The borrow came and put down 125k. I guessing (key word), the borrower makes some money in terms of income. If so, I don't think your note will go to term. The rounded figures makes it hard to zero in on if that has occurred. Certainly you can look to his payment history or the real balance and see if it has started. I would look to understand what type of income the borrower makes, or where that down payment came from. While the bid at a high level looks aggressive if the borrower starts to prepay and with the payment being low and reasonable, he could cut your yield in half or more. So you likely won't realize these macro numbers and you should consider reality when bidding. Also, take a look at this gap of sale price that got financed. Did it really appraise for the actual sale price? At times these types of seconds don't really have any equity securing them. 21k would not be a number worth talking about at all. The Seller should just keep it, if that is what he needs.

I am curious, is the actual note stating this irregular payment schedule?

If so, what is the actual language (text)?

Does the payment language contradict the Grace Period and Late Fee language? (from the actual note) (provided the note calls for such)

This sounds like it could be DIY gone bad.

Bill pointed out the application of late fee charges and showed how to deal with the irregular schedule but I think it deserves more of a highlight for this one. My concern would be the note language does not properly address the concept and thus the Mortgagee would have conflicting language in the note itself to the allowed payment plan of the borrower.

If the Payment language of the note is setup traditionally with a Fixed Payment over the course of 45 periods ($644.89) and the Mortgagee and Borrower made a side agreement (Forbearance Agreement) to allow for the irregular payment schedule than the 8 payments at $500 technically trigger the late fee penalty. Since $500, is less than what the fixed payment calls for $644.89. Not properly documenting that allowance could have enforcement affects if the borrower defaults. In other words, you may not be able to include those fees being charged to the borrower in a default/delinquency calculation since you didn't properly collect during the life of the loan when the borrower did pay.

Also, the two concepts are not offsetting each other and will cause a balloon at the maturity around $1,051.52. Provided the late fee penalty, if present, is a typical 5% of payment or in this case $32.24. Annual late fees will be $257.92. Essentially the structure, if not properly notated in the note, will cause a portion of what should have been principal to pay for late fees and the prepayment does not fully catch up the amortization payment schedule thereby reducing the amount of principal paying down the balance over the term.

The forbearance of the payment to $500 could, I suppose, also be grounds for a court to step in and cram down the interest altogether. (if not properly notated in the note and administered) Since the borrower is really only being required to pay the $500, thus making the payment of the 4 $1,000 payments to be double payments. If that happened you would end up with a note that really looks more like 5.53% interest.

May not be the best note to cut your teeth on, perhaps.

@Todd Miles

Listen to what Bill is telling you and frankly disregard most of the rest as background noise. Trying to use Dave's podcast as directions to disposition your note neglects important details of your note situation. Dave knows what he is doing and talks about things in the podcast, but don't take the podcast out of context, he wasn't talking specifically to you about your note. The details matter, who is on title, who signed the security instrument, etc, etc.

It is actually pretty simple, borrowers go delinquent on payments all the time. The response from the mortgagee is demand for payment and any applicable fees per the note. That is step 1 for every note. What Bill also referred to is, if you fail to pursue collections, the note may lose it's collectability. Now, I doubt you are close to that event, usually it takes two years in general. (hopefully anyway)

I think you may discover you also have some other issues and I also suggest as well, you find an attorney who will do a little more explaining and is very familiar with mortgage law in Georgia. Georgia requires a license to hold a mortgage as an investor, not having that license can be used in foreclosure defense, not to mention simply getting in trouble from the regulators. You may be exempt if you have been the Mortgagee since 2005, I am not sure for Georgia. Acting as a Mortgage Servicer can also have some consequences if you are trying to collect incorrectly and servicing the debt without a license as well. Did you make the loan or buy the loan, was it properly originated. When a loan goes into default, all the details matter, don't take hipshot advice.

The takeaway from this, notes are becoming less and less DIY and you need to ensure you have your ducks in a row and you are complying with federal and state regulations or the lesson may be very costly. Much of this can be accomplished by speaking with competent attorney's in real estate and putting your loan with a properly licensed mortgage servicing company. Talking with the state department of finance is also not a bad idea if clarity is needed.

The fact that the borrower is incarcerated does not set aside the obligation on the debt. It also does not stay any collection attempts, provided they are carried out properly.

I do not understand what "not in a position to foreclose" actually means. Also, the statement seems to ignore that the first response to borrower delinquency is NOT foreclosure. So, to that regard, you would not be in a position to foreclose since you didn't actually make demand properly and allow suitable time to cure. If it was meant as a financial barrier, sending out a demand notice usually is not that expensive, some paper a stamp and an envelope is usually within everyone's budget. Albeit, the letter itself should be drafted by a properly licensed attorney or mortgage servicer for your state. This could be as simple as the wife doesn't know your debt exists and only knows of the first lien, so notice will cause payment.

The idea that you can simply wait to see what happens is not wise. The idea that you should run off and take a haircut by selling your note right now is not prudent, you will simply lose money. The idea of trying to do anything with the senior lien holder is premature. Alienation or Due on Sale does not seem to matter for your situation and I am not sure you even understand what those clauses do. You really need to go get some legal help and stop doing the DIY here before you get yourself in trouble or lose money. It, unfortunately, is pretty clear you have never done this before, and it seems you are to some extent spinning your wheels on what you think you are looking for and looking to do to create a resolution. Good Luck.