All Forum Posts by: Dion DePaoli

@Account Closed that is a pretty decent question.

Fundamentally, the Borrower breached the contract in the example you describe. If the loan documents detail the prevention of any subordinate debt and the borrower allows subordinate debt to attach to the property, the borrower breached the contract. The Mortgagee where the breach occurred has the same remedies provided by law and the documents, which in most cases is pursuing acceleration, calling the note due. The borrower would have to deal with that event or face foreclosure.

The second lien is not invalidated by a breach of contract between the borrower and the first position. The second will have to deal with protecting its interests which were granted in the property through the second lien instrument. To a certain degree, just like any first lien foreclosure situation, if it comes to that. There are other options which could be worked out, like the second lien payoff the first and modify the note to include the increased principal.

The issue really arises for the borrower. Typically an action of foreclosure by the first could trigger a foreclosure response by the second, so now the borrower has to deal with both. The borrower may lose some of their affirmative defenses if the lien was allowed under fraudulent circumstances. Either way, it all still has to the same process, which provides for the same remedies.

This is also why as a second lien, it is prudent to conduct due diligence on the first lien to see if there would be a violation. It just creates a mess when your sloppy and miss details.

A lesson in and of itself really. As with learning the in's and out's with any contract.

Purchase and Sale Agreements for notes is not a uniform contract although there are some forms which are more commonly used in transactions. Much of the difference will be the representations and warranties that are made by both parties to the transaction inside the contract.

The transaction cycle can be a little different and defined by the what the seller and buyer agree to, essentially providing where due diligence takes place and whether pricing is subject to the due diligence or pricing is final, amongst other concepts. That will also vary depending the number of loans you purchase and the type of seller, institutional or private.

There can be many moving pieces in the contract and some are governed by law, such as timing for Servicing Transfer. Other concepts work to protect the interests of the parties such as how and when money is delivered and the files to each party. There is typically no escrow like you find in real property so again it can be a little different.

As with all of this, if you are the point where you need contract information that is synonymous with getting a qualified and experienced attorney dealing with notes in your rolodex. You can likely Google some stuff for some examples but I would caution using those at face value as they may be incomplete in terms of concept coverage and details to protect your interests. None the less reading a couple might start to help you understand some of the topics the contract deals with.

In many cases, if the seller is institutional in nature, they will provide a contract to you which they desire to use and some times that is open for red line. If the seller is private, this may be the first loan they ever sold and would need the same help you need. So either way, like I said, it's probably time to seek legal counsel for those matters.

@Daniel Miller just sending you a nudge not sure the mention functions let you know about the mention. (reported already)

@Lubasha White

I am just curious who is conducting the seminar and how much does it cost?

Interestingly enough, I was talking with an industry associate about this two days ago and the amount of money people were paying to get sub-par information was astonishing to me. She so happen to actually be a speaker for a portion of some of the seminars as she is well versed in title resolutions and heads up some loss mitigation servicing. She also mentioned, the attendees pay $20k, get not even a hand out, which some fall asleep during portions and then go home no smarter then they came. Ready to invest in notes! (she no longer does this and made attempts to bring value to the ordeal, it didn't work and she no longer does it, not a swing at her)

If you don't want to share that information, no harm no foul, just thought I would inquire.

The beauty of BP is you have a guy like Bill who has loads of experience and guys like Ellis and myself who have some decent experiences of our own. The forums are free and I can honestly say BP seem to be the largest single source of note investing that I personally know of anywhere. To that degree, the combined collective of minds by leaps and bounds has forgotten more than most of the guru seminars folks ever knew. All for free or the pro membership.

Food for thought. Good luck in your learning and ventures.

@Linda L.

This loan structure is not ideal, IMO. A first lien ballooning in two years and a second ballooning in three years. That is an awkward set up to say the least.

When the borrower deals with the first lien balloon, they will also end up dealing with the second lien in most realistic cases. So, the second lien should only have a life cycle that is in timing with the first's maturity date. The awkwardness of the two balloons being one year after each other in reverse priority is a red flag for me. It puts the competence of the originator in question to a certain degree.

The information the broker gave you is not completely accurate. A first lien can foreclose without paying off the second lien. The second lien would have rights to redeem the first to protect it's position. Certainly, the first could payoff the second and not have to deal with it however I toss some caution out on that matter as most security instruments and notes will allow the Mortgagee to advance on behalf of the borrower and the borrower then owes the advance made, but if the Mortgagee runs out and just pays off a lien and the borrower contests the amount advanced, especially if any interest is attempting to be added onto the advance, may have issues if the lien didn't truly infringe or encumber the first liens ability to enforce and collect.

No lien can initiate a foreclosure action without a default, like missing payments or a maturity event or some other contract violation that allows for acceleration fo the balance. For that matter, the Mortgagee needs to send Notice of Default and allow time for the borrower to bring the account current or cure as well. Again, the state where the property is located will have the foreclosure laws that need to be followed and some provisions can be found in the note.

The DIL question, I agree with what is said, bad idea. Taking into consideration the balloon structures on the two liens and the DIL pre-sign idea. I am getting a general feel these are private loans being made. I note, you mentioned the presence of a broker and I also note he didn't give you completely accurate advice. Based on all of that, I suggest you practice some caution here. Getting a mortgage broker license and being familiar with all of the states mortgage laws are not even remotely the same thing. To that degree, the broker may be dealing with concepts that he/she is not truly familiar with. That is the age old antage of "the blind leading the blind".

I am not trying to be mean or talk about someone that I don't know and who can't defend themselves, I am just making an observation. It is good to ask questions to make sure you double check what "facts" you have been told or understand. Certainly you should think about getting a RE attorney involved to protect your interests.

Not sure if that appraised value is current or old. If that is current, the property has equity. The LTV of the first position is 49.8%. The CLTV is 76.2%.

You will want to understand the laws of the state where the mortgage is located in terms of notice of foreclosure so you understand what your rights are as a first lien if the second lien initiates a foreclosure process. Clearly it will help you also understand your obligations as a first lien holder to do the same.

The two year balloon may really reduce the return on this deal. Provided you meant that is a balloon for the position you are evaluating. If the maturity event is in the very short term, you will only stand to collect payments for that amount of time. So for instance, if it matures in 4 months, you may not be invested too much longer than the 4 months as the borrower goes out and refinances you out.
If the second is already in default, you may be stepping into a ticking clock, so be sure to understand what is happening with it. Some states have time limits on redemption rights for lien holders so if that time is almost up, you may have too much of a 'fire drill' to really do anything.

I thought the quote function use to send an alert to the party who was quoted or mentioned. It does not seem to be working in that manner any longer. So if you quote someone, if you don't @NAME them, they don't get alerted unless they are following the thread.

There are many threads here on BP around the topic of investing in notes. There is a specific forum which is called "Tax Liens, Notes, Paper & Cash Flows Discussion" which contains many of the posts.

Aside from that. Are notes a legitimate investment vehicle? Yes.

How long will it take you is hard to answer as that will certainly be dictated by many factors including your capital, your risk and comfort thresholds with a new asset class and some others.

If you want to post some more specific questions, happy to provide more specific answers and I am sure some of the others will also join in.

I am struggling to follow this to some degree in terms of realistic impact.

In order to set up an NPV calculation, you need the net cash flow during the holding period of the investment. How can you have a large or small NPV in terms of purchase price? The price, is the price, it isn't an NPV, there is nothing to calculate NPV from with just the price you have no periodical net income.

So then, if you purchase an asset with a smaller initial capital injection opposed to a larger injection, of course that will show better numbers. A small number is easier to catch up to and exceed in shorter time. Which takes longer to break even on, $10 or $1,000,000?

Additionally, NPV is not the same as equity. I don't understand how you are correlating these. Simply add debt to any investment to illustrate the idea flaw. Your equity will be earned as a function of principal reduction and appreciation/depreciation. So, you can have an asset that depreciates or simply deteriorates and still have good cash flow with a suitable NPV. Take every dollar from rental income and put zero back into the asset for repairs, you lose equity but you still generate return in that sense.

Do you want to detail your two examples, I am interetered and perhaps am simply misunderstanding the posts.

You may want to have one of the moderators move this to a more suitable forum. This is for BP site questions. Your question is around loans and cash flow.

How much to buy a note for really depends on many things not simply the yield or total return for that matter. A note with a very high yield which is not enforceable would negate the effect of the high yield. A defaulted note, which typically carries one of the larger discounts can have some of the highest potential yield, if you can collect payments. Contemplating your yield without concern for default risk or adversely prepayment risk would be an injustice.

Yield in a basic sense is the interest income you earn from an investment. At par, the yield will be close to the actual note rate. As the note balance is discounted, the investor's yield will include all of the interest portion of the borrower's payment along with the discounted portion of the principal payment.

In terms of saying, "What will my yield be?" nobody can answer that since there are no numbers to calculate.

In regards to plugging numbers into a calculator and not coming up with the same number, without reference to what those numbers are and how you tried to calculate them, nobody can speak to the accuracy of your number crunching or the post which are referring to.

Perhaps make up and example and some folks can comment to help you understand.