All Forum Posts by: Dion DePaoli

An example of a reason of restricting a second lien in the future would be like in construction financing. When the loan is made the balance of the loan trails the value of the property since the property is not built yet. The property has a future value Subject To construction completion which usually means completely finished. So during the construction period a lender would not want the borrower to errode the future equity by taking on additional debt, say for poor construction budgeting. A reason for this might be the loan program is one where the lender will also provide a permanent loan after completion of construction and a second lien would mean the amount of new loan would have then include paying off the construction first lien and the unauthorized second lien. Since in such a program the loan documents create obligations by the first lien mortgagee to deliver a permanent financing, they have to restrict the borrower from increase their already approved risk in the project. Otherwise the borrower could point to the terms in the agreement which said lender agreed to provide permanent financing which if the lender want's a first lien would including paying off the unauthorized second lien.

Inferior positions in title are not without rights. That is why there is redemption rights and depending on the state certain notice requirements for any lien holder attached to a subject property.

Is it "unfair", not really since if you are making a second lien you should really understand the risks you have. That like I mentioned before is the case for any lienholder or any loan frankly, secured or unsecured. The risk is always you may not get paid back and the opitions to recoupe afford by law may not make you whole when it is all said and done.

@Taylor Green and @Linda Lin

The nature of a second lien is in and of itself more risky than a first lien. That is why second liens carry higher interest rates. They are in second position relative to the first. The risk of the first lien doesn't really increase per se just because a second lien is attached since the first lien has priority over the second lien.

Can the loan documents carve out terms which prevent the borrower from placing a second lien on the property? Yes, there are some loans that do infact do this but they tend to be relative to construction loans and commercial loans. Not really conventional residential loans.

"So if the borrower gets the 1st loan from other lenders, say 80%, then seek seller financing as 2nd, say 15%, isn't it very risky for the seller? Why would people want to do it? to help with the sale of property?"

This is not an uncommon combined loan structure actually. Sometimes referred to as an 80/15/5. 80% first, 15% second with a 5% down payment. The creation of the second line allows the borrower to avoid MI on the first lien by keeping it at or below 80% LTV. Some sellers have done the second lien and institutional lenders as well.

Is there risk? Yes, there is risk in every loan no matter what postion. Loans are not risk-less investments. The mortgagee, in any position, can lose money. The higher you get in position, the less superiority the higher the risk so a 2nd is riskier than a first and a third is riskier than a second, etc. The 5% of equity the borrower paid could quickly disappear if the property value drops or even if the first line advances and has unpaid interest accrual which would mean that a second might not recover all of what is owed. That said, the structure can be created in many different combinations which affect the risk. The more the borrower contributes, the more equity there is that can be used/consumed by enforcing the remedies provided in the note and security instrument. So if the borrower puts down 15% and the second is only 5%, that has less risk for the second opposed to the second at 15%. Both examples of seconds carry more risk than the first still. The more equity in the property the higher the chances are of recovering the principal. So a loan with a CLTV of 10% has a pretty high chance that the mortgagee will recover their capital opposed to a 100%.

Yes, a seller carrying back a note like this could help with the sale. It also will provide more return than a straightforward sale since the principal of the loan will now have an interest charge to it. But again, there is risk of default which might also turn into loss of principal.

The function of recording something is putting it in public record. So if you record it (properly) it will show up in public record and when title search is conducted, that search includes searching public record, so yes it will show up.

@Bill Gulley would know more about the relevance of recording it in public record and what postives that might have for the holder of said instrument.

A seller of a note will always have their own intentions, reasons and justification for dealing with whom they deal with. Like anything with RE investing, you have to find a ready willing and able seller. That seller could be private, institutional, big or small. The only way to know is to ask. There is some merit to knowing the "lingo" which is really code for understanding the asset class. The same can be said in dealing with an uneducated real property buyer. The uneducated party creates more work since they don't know what they don't know.

The inexperienced party can be a liability for the selling institution which is one of the more concerning barriers for large institutions. If you buy a note from one of the big banks and do something wrong with collections or treatment of the borrower, etc the borrower and their attorneys will want to go after the institutions behind you, that was your seller, since in most cases they have bigger pockets than you. Essentially who could a borrower get more from you or Citi Bank?

All that said, it is good to get yourself familiar with the asset class, which will teach you the "lingo". In terms of finding a ready willing and able seller, the worst thing you will hear when you make your inquiries is simply a "No".

In addition, like with anything, if you can add value you will catch the ear of folks. Perhaps that is being able to work in an area of town that others shy away from or dealing with certain defects when it comes to loans that the Seller doesn't want to deal with, etc.

There a many threads here on BP dealing with topics around notes. Explore those and ask some questions as they come up.

@Ron King The 104.1 title endorsement is an endorsement that can be purchased from a title insurance company which endorses the chain of assignment of a mortgage or deed of trust. It is the chain of ownership of the mortgage which is endorsed essentially speaking to the entity endorsed has unseparated interest in the mortgage/dot and no previous partials or other parties have an interfering interest before the endorsed party.

The PV might be confusing you because he is talking about the loan in a couple of different manners. One is from a borrower perspective or origination:

#1 N I PV PMT FV

180 9% $56,200 $570 $0

PV = Loan Balance
So this is a loan for $56,200 with an amortization of 180 periods (15 years) at 9% interest and a payment of $570. This is the loan that the buyer of the home received, through seller financing, which is being sold in the example.

#2 N I PV PMT FV

120 9% $45,000 $570 $0

PV = Current Loan Balance
This is the same loan as above which can only be deduced by reading the body of the passage. The author points out the loan is now 5 years old (60 periods), which is why the "120" Nper. The author is using PV here as the Current loan balance, so essentially the loan balance has paid down from $56k (post #1) to this balance $45k (post #2) over 5 years.

For the record, it appears he rounded a tad bit upward. The balance of the loan in period 60 should be $44,998.17.

#3 Full purchase:

N I PV PMT FV

120 18% $31,636 $570 $0

#4 Partial purchase:

N I PV PMT FV

60 21% $21,069 $570 $0

PV = Purchase Price

I = Target Yield from investment

These are the same idea, the author's offer to purchase the note. Structured differently which is why there is two. So #3 is a full purchase, where he offers to purchase the entire note and #4 is an offer for only part of the note's payments remaining. This is why #3 has "N" (Nper) of 120, the remaining payments of the loan which we learned in post #2.

In post #4, the offer is for only 60 of the remaining 120 payments.

What becomes confusing I guess for you is the "I" (Interest) numbers being randomly chosen. They are being randomly choosen to some degree. In #3 the 18% and in #4 the 21% represent the desired Yield the author is suggesting make his offer based on. How he came to 18% and 21% opposed to any number around those seems to just be his preference. He could have decided he wanted to try and receive 15% and 17% if he wanted to. The yield is what the investor would receive by collect on the borrower payments of the current loan as it is noted in post #2.

So then, what #3 and #4 tell us the investment numbers that helped create his offer. The offer in each of these two posts is his PV number. That is present value (PV) of the future cash flow ($570 [borrower payment] over N periods). So essentially if the Seller of the not wants to sell the entire note the offer to purchase the note is $31,636, which would deliver back a 18% yield to the investor (#3) and the offer to sell the partial note is $21,069 at 21% yield to the investor (#4).

The loan itself still has the balance remaining identified in post #2, so the difference between PV in #2 and either #3 or #4 is the amount of principal discount being applied to purchase the note. So offer #3 is 70.30% of Unpaid Principal Balance and #4 is 46.82% of Unpaid Principal Balance. By discounting the principal the investment has a yield which is higher than the interest on the loan as for the investor the portion of the discounted principal becomes yield for the investor.

So then the last paragraph describes what they did to sell the note. They made an offer to purchase the note from the current note owner which is post #3 and #4 and then they turned around and found another investor to purchase the note from the author using a 13% yield.

#5 N I PV PMT FV

120 13% $38,178 $570 $0

PV = Sale price to exit investor

I = Target yield for the exit investor.

The author mentions they restructured the amortization of the note ("We knew that if we rescheduled the note....") and then in the #5 post we see the "N" which is number of periods is now increased from the note as it was purchased or stood at the first sale (either #3 or #4). The note periods increased from the remaining 120 periods to 178 periods. This could only have been done by modifying the existing note with the borrower since when the note was purchased it only had 120 payments left.

The post he has written (#5) is flawed in the manner in which it is posted. As stated above, if you modify the existing amount of payments by adding more periods and keeping the same current balance of the loan ($45k) and the current interest rate (9%) the borrower's payment would have dropped to $458.85. In the above post (#5) notice how the post suggests the payment stated is the same at $570. That couldn't happen. If you increase the amount of time in periods the payment will drop. They would have had to also increase the interest rate on the loan to the borrower from 9% to 13.75% in order for the payment to remain the same.

It seems like the author points out that the entire note was sold, so that is post #3. So then post number #5 is the exit figures. Generically, he suggests that the loan was first purchased for $31,634.12 (post #3) and then resold for $38,178 (post #5) so the author suggests they profited $6,543.88 from the sale of the loan.

So the current loan, post #2, was sold first in post #3 and then resold in post #5.

What might be confusing is the manner in which the author is using the term "PV" through the different posts. There really is not much to calculate from the data in each post, the author is providing the point of conversation in the post it self. It is being supplied to sort of check his math. So if you use post #3, you could solve for PV by using the desired yield (18%) over the investment term (120 periods) which is the offer price/sale price $31,636 (I come up with $31,634.12). In post #1 & #2 PV is the loan balance. In post #3, #4 and #5 the PV is the Sale Price of the note. So the are claiming they did this:

UPB = $45k
Buy = $31.6k
Re Sale = $38.1k

They bought the $45k owed for $31.6k and then sold the $45k to someone else for $38.1k.

How true the story is in my eyes becomes a little suspect based on my point around the restructure of the note. A Mortgagee can't expect a rational borrower to simply accept an increase in interest rate for no apparent benefit. Remember in order for the borrower payment to remain the same at $570, in line with the original terms of the note, the author said they increased time so they would have also had to have increased the rate on the note (that is through my extraction not the author's direct statement). Otherwise the borrower simply pays the loan off in according to post #2 within 120 payments of $570.

@Account Closed , that is simply not true.

Most banks, especially small community banks and credit unions would not even have a pool of 300 loans to sell, that would be upward of $54 Million in balance depending on geography. The commercial banks are certainly a different story however even their pools are certainly put together with less than 300 loans. There is also no blanket rule on cherry picking, again more common in smaller tier banks and less common in larger commercial banks.

David, to some degree I don't follow what you are suggesting is the issue. I reviewed the link you posted and the law may have some effects on the consumer but it seems to be geared toward the investors which may participate in a transaction. Requiring a Notice of Transaction to be filed or face a fine and suggesting limitations of total indebtedness. It further moves for the promoting broker to take steps to ensure the investor and investment are suitable for each other. To some degree it sets out to protect the unsophisticated investor, which seems to be the party you point out concern for.

@Daniel Miller my email address is at the bottom of the signature in my post. You can just use that. I don't know how to attached something to a BP message. I can take a look at the excel file and comment back perhaps provide some summary to keep J Scott in the loop too.

@Account Closed I hear you. I don't know of any note seller that allows for contact with the borrower prior to ownership of the asset. Allowing or participating in such an event could have legal consequences of dealing with the borrower negotiating terms of the loan without a license or ownership interest in the note.

There are certainly a couple different manners to clear a trade. I have never done any escrow and would never agree to such a thing. I have done Bailee Agreements and PvD arrangements with buy back clauses for non-performance.

Understanding how best to clear the trade is something that is a skill needing to be learned with this asset class as we all know there is some counter-party risk out there. Why I mentioned, digging into contracts and documents starts to become a lesson plan in and of itself and why the OP should seek counsel, we can not cover every detail here, there is for sure.

@Account Closed you must have add this while I was typing.

In this example, the second lien would essentially have to agree to make a lien with insufficient equity to cover their position. A second lien has rights of redemption and also is next in line at foreclosure sale for their lien amount. So the only way to essentially get off "scott-free" is to make a loan in negative equity, which would mean there is no equity in the collateral by which to seek what is owed. If a second lien lender did such a thing, they are not that smart and should probably look at a different business to operate in. Mind you as well, collusion like you suggest is fraud and that doesn't usually end well for the particpants.