All Forum Posts by: Dion DePaoli

Certainly a question to cover with the estate attorney as state and probate laws may influence the final outcome. In general, Garner-St. Germain Depository Institutions Regulation Act of 1982, provides an exemption to the Due on Sale Clause being triggered if the property is transferred to a relative as a function of the death of the borrower. In other words, the mortgagee can not trigger Due on Sale and call the balance due just because the borrower died and the estate passes to a relative. Certainly the relative must continue with the obligations by paying the amount due on time, etc or a foreclosure proceeding could take place for default.

I agree with Wayne. The agent here may not fully be on point. The Mortgagee being dead (if they really mean deceased or out of business) doesn't affect the legality or enforcement of the Security Instrument (Mortgage/DOT) and Note.

A "Note Judgement" which is not a technical term, seems to mean the borrower can only suffer from a Deficiency if one is pursued. That is not proper. A deficiency can only be identified once the Mortgagee can calculate the loss between what was owed and what was recovered from an action that resulted in loss, such as foreclosure or short sale. If the foreclosure doesn't take place, there is no way to have a deficiency because you don't have a number to use.

In most states there are laws which dictate how much time a Mortgagee can take to respond to a payoff request. In addition, there are laws which dictate the time a lien must be satisfied upon receipt of the payoff amount. So if the Mortgage is being serviced by a Mortgage Servicing Company, there is a chance they can satisfy the lien. It will then become their issue of who to remit funds to for the payoff. This will depend on the Mortgage Servicing Contract to a large extent.

Also, not resolving this issue certainly clouds title forever. So in that sense, a Quit Claim Deed is not really a work around. It probably makes this more of a mess.

If the Mortgagee is private and dead, then I agree, there is either an heir or probate which can receive the payoff amount and execute the satisfaction of the mortgage. If the Mortgagee is a out of business lender, then there is an attorney or new Mortgagee which has taken control of the asset and can execute the Satisfaction. I would look into this a bit more, its not a dead end but will take a little bit of work to get it resolved. Resolving troubled liens on title is not new and happens all the time. Perhaps discuss with the Title Agent/Company/Attorney on the matter to get a better idea of the facts as the agent may not be fully versed in the matter.

Well, I will try and give you a bit more of a legitimate answer than scapegoat.

Underwriters are responsible for accessing and signing off on a loan including the borrower and property meet or adhere to the investor's underwriting guidelines. Fannie Mae, Freddie Mac and Ginnie Mae (FHA) are examples of mortgage investors. Fannie Mae and Freddie Mac are the most familiar and largest investors in the mortgage market. In addition to the big boys, a bank can also be an investor by making a loan they intend to keep as a portfolio loan, which means the loan is not going to be sold into one of the GSEs.

The powers that be, at the investor office, have a set of guidelines which deal with the details borrower and property must adhere to and in some instances give guidance on how things are treated in order to create a uniform approach to extending credit (for the borrower) and making an investment (for the investor). The most widely known underwriting guidelines are Fannie Mae and FHA for the most part.

In the example of Fannie Mae, their underwriting guidelines are volumes of pages long. Those guidelines detail practically every aspect of a loan and acceptable proof of loan eligibility. When application is taken items are collected by a loan officer or processor and sent in to an underwriter for approval. The underwriters job is to ensure the items being submitted as proof of information related to the borrower such as income documentation or asset documentation are (1) acceptable to standard and (2) prove the concept.

For instance, in full document loans, a borrower must prove their income. Not everyone's income is simple and straightforward like a salaried W-2 wage earner. If the borrower makes bonuses, how will the bonuses be treated? If the borrower receives expense reimbursement, how will those be treated. What if the borrower is an hourly employee? What if the borrower is the owner of a company with complex tax returns? So the guidelines give us the rules on how to deal with proving the claims made through a Uniform Residential Loan Application (Form 1003).

Often times, a Loan Officer or Mortgage Broker, will take application by interviewing (question and answer) the borrower. So questions such as, "How much money do you make per month" are plugged into the application but not proven. So a borrower can say, I make $5k per month. The loan officer will plug that information into the application and then use that information to search for a loan program and loan product that will meet the needs of the borrower. However, we have not proven yet, the borrower indeed makes $5k.

So the Loan Officer may collect some documents and then use a processor in their office to start submitting the actual proof of information listed on the application to the Underwriter. Sometimes the Processor will take over chasing documents from borrowers instead of the Loan Officer. The key here, neither the Loan Officer or Processor can make a final call on whether a document does or does not prove the concept on application. So, our LO collects the Borrower's W-2 looks and sees it has roughly $60k. Turns it over the processor. The processor makes a nice package of all the documents and submits the package to an underwriter for review.

The Underwriter receives and reviews the documents. The Underwriter will have to defer to the underwriting guidelines to see how to authenticate and apply the proof submitted. Let's say the Underwriter looks at the W-2 and notes that $10k comes from bonuses. Usually 2 years of income and asset documents are collected and when the Underwriter looks at the previous year, there is no Bonus income. The Underwriter then looks at the guidelines, which are like rules, on how to treat the bonus income. The Underwriter sees that the bonus income can not be counted because it is only for one year and may not continue into the future. So treating that income for the borrower like they actually do make $60k a year would be an injustice to the borrower and could create financial hardship in the future if the bonus doesn't come through. So the Underwriter will amend the income of the borrower from $5k per month to $4k per month. The borrower must then qualify for the loan only using that reduced income. The Underwriter will update the Processor and Loan Officer of the impact who will then relay the information to the Borrower. So the Underwriter is sort of the live version of the mortgage rule book for the investor who will in the end will own the loan.

I can understand how some might want to consider the Underwriter a scapegoat but I don't think that is proper. The Underwriter is simply doing their job, making sure the loan and the documents that support the extension of credit to the borrower meet the criteria of the investor who essentially extends the credit. During the course of their career, Loan Officers (and Processors) will become more skilled at knowing from experience what works what doesn't and some interpretations of guidelines. However, there are many many details and the final decision on the matter is the Underwriter who has the Underwriting Guideline book on their desk. Because of the way the information flows to and from the borrower, I suppose it is easy for the Loan Officer to let "blame" fall onto the Underwriter as in most cases, the Borrower will never meet or know the Underwriter. The reality though, is that there are many places for the information to not be precisely correct in the application to loan process.

For instance, as a Borrower is asked, how much do you make per month. If the Borrower is a wage earner, they might say $5k. In the Borrower's mind, they just made $5k for the last two months in a row so that is a true answer. However, the 3 months prior, the borrower didn't get enough hours and only made $4k. It's an honest mistake, the borrower is not deliberately changing the truth but when the standard of how to measure the income is applied, the income changes. Most underwriting decisions do make sense, we just don't like them since often times they mean a negative impact on our borrowing capacity.

More often than not, the application process is where a loan's troubles come from. Similar for reasons above. Mistakes to some degree are inherent in the process because in order to set parameters on the loan such as product type and rate, only a verbal interview is conducted and used as general qualification of the borrower. The Loan Officer relies on that information to be correct and verifiable. When the information is otherwise, the program the borrower was being put into might change or the loan denied.

The underwriters are experts on the rule book, which we call Underwriting Guidelines. Their job is to ensure the components of the loan meet the defined standards of the investor. The investor sits down and makes the rule book and gives it to the Underwriter. The investor then also prices the risk and rate out for variations on the program they wish to fund.

So in fact the Underwriter only has final say because the investor gave the rulebook to the Underwriter. The Underwriter doesn't make up the rules, the investor does. Similar to you going out and telling a Real Estate Agent you want to buy a 4 plex. When the agent shows you a 4 plex with no tenants or on the bad side of town, you respond by saying you don't like that as an investment.

If loans do not meet the investors underwriting guidelines the loan is not eligible to be funded or purchased by the investor. If a Lender plans to make the loan and then sell it to the Fannie Mae or another investor, they must make sure the loan meets the guidelines or they can not sell the loan which might mean they can't make another loan with that capital to another borrower. In addition, the Lender may have liability to re-purchase a loan that does not meet guidelines. Due to this, Lenders create Overlays, which are enhancements to Underwriting Guidelines which act as a buffer to ensure the loan has not issues with qualifying for purchase by and investor. A good example is credit score, Fannie Mae will allow a 620 credit score, but most lenders require a 640. The Lender uses the 640 so that as a function of getting the loan, the borrower may see a small dip in their credit score after the loan is made. If the Borrower was on the line of 620 and they drop one point, the loan can't be sold or has to be purchased back. The 640 overlay takes this into consideration and relieves the Lender from that liability.

Underwriters are not always located in the office of the Loan Officer for typical business reasons. In addition, they can be found outside of the Loan Officer's Office because the Loan Officer might simply be a broker. The Underwriter is responsible for lots of loans so it is practical to put them in one location so they can do their job efficiently.

Hope that helps and is not information overload.

Amit, you may be hearing what you want to hear. I am not sure anything is being contradicted with exception that they do not seem to have a seasoning requirement on the source of borrower funds. However, they did tell you they will source said funds. Sourcing funds means they will look to see where the funds came from to ensure (1) the money was legally obtained and (2) the money is not borrowed.

When the LLC opens in an official sense, which is who has to have the needed funds. Funds are deposited in the LLC bank account as either (a) Member Capital Contributions (equity) or (b) Debt. If someone contributes, they get equity in exchange for the capital they injected. If the capital comes from debt, the lender gets a promissory note from the LLC detailing the loan details. I think if you would have been a little more candid with the banker you could drilled down into this and had a chance to hear the banker's view on the matter.

You're going to have to turn in tax returns for each member of the LLC that owns 10% or more. Due to the personal guarantee, which they stated you will have to have, your going to have to show Personal Financial Statement. So the part of this thread where you mentioned you don't have your own money will surely come to a head with the bank.

When you mentioned reserves, the response is likely directed toward a replacement reserve for the property. The reserves mentioned in this thread are personal reserves which are falling into the guarantee idea. If you don't have any money, what are you guaranteeing with? What is there to go after in the case of loss on the behalf of the mortgagee?

Now certainly the friends and family you mentioned can pick up the slack. They can contribute capital, take on equity and deliver the guarantee that matters to the bank. In addition there are varying levels of details here we are not privy to nor do we want to be other than this is a 10 unit complex. The required amount of capital to fund the transaction is unknown. As that becomes a smaller number, barriers are smaller as that becomes a larger number barriers are larger. Taking a leap to manage a 10 unit complex is not that far if you managed many residential units. Being able to raise and guarantee money to fund a $300k complex is much different than a $3.0M complex and largely different than a $30M complex.

Its good you are exploring your options. I suggest however, you go in and sit down with the banker you spoke to and be very detailed on how this all comes together so he can help you understand how they will underwrite the loan. I then suggest you take the feed back from him along with the terms of the guarantees and delivery of financials and discuss with the folks you plan to have invest in this venture. Sometimes investing is one thing, but when a banker wants to look into the details of the investor that is different and may make some of your candidates uncomfortable.

In addition to all of that you may want to look up Regulation D offerings here on BP and speak to an attorney about the same as that deals with raising money.

Good Luck.

Originally posted by Bill Gulley:

Originally posted by Dion DePaoli:

Prepayments within US mortgages, which have a penalty, are similar to those of Canada. Usually a maximum of 20% annually can be paid down on the principal without fee.

Dion, there isn't a common 20% limit here. They do have penalties within days, 30, 60, 90 from the closing in payoffs, that too is not really common. unless I missed some new requirement.
I've closed Fannie or Freddie loans and refinanced them minutes later, which is why they put such restrictions in place in times of volatile rates it paid to refi. In fact, most of the lenders were refinancing their own mortgages. I even paid costs on the new loan!

Some states will have issues with payoff penalties as any penalty is an interest charge that can then become a usury issue.

Bill perhaps I didn't write that well or you misunderstood the point. Prepayment penalties in residential loans, where allowed and deployed, which excludes all Fannie Mae, Freddie Mac, Ginne Mae and other government involved residential loans, was typically a step down penalty for the term of the penalty (3%, 2%, 1%...) and allowed up to a maximum of a 20% principal paydown without penalty before triggering a penalty. Not all states allow penalty and not all loans have penalty however, the common theme was the penalties allowed for up to a 20% principal paydown with no penalty. That same feature, allowing 20% to be paid down without penalty, is also found in many commercial loans that have prepayment penalty. Most sub prime loans and non-agency ARM's carried prepayment penalty for the first few years. 2/1 ARMs had a 2 year penalty, 3/1 had 3 year penalty, etc. Additionally they were common on NOO loans. I wan't implying it was a lifetime feature nor iimplying all loans have peanlty. I glossed over it because prepayments in the US are less common now than 5 years ago and will become even less common shortly with the 2014 QM rules from Dobb Frank.

Originally posted by Eric Belt:

LINK>>>>>>>>

Eric to be wise to BP, you should take the link and post it in the Market Place forum. That is where things for sale can be posted here on BP. That is where folks look for stuff to buy. You need to sell, sort of makes sense, eh?

One of the first most basic hedge fund structures was an 80% investor and 20% sponsor structure. Generally as investors receive more in preferred rate of return they give up equity. That said, the investor and risk certainly have to sync for the numbers.

Eric, I am not going to lie, I am intrigued by your deal. That said, this may be from the slow reveal of the details, none the less it is making for a nice story of opportunity.

In my own opinion, there might be something to do here subject to diligence on what you can actually do. The key to that is adding value. BTW, its always about that. The value is exploring and finding a way to turn the $2 or $3k back into a whole house which leaves room for profit. Get your pencil out and start figuring it out. You need input on construction, title, legal, insurance and possibly other concepts. Contact the licensed professionals and starting piecing it together and see what you can and can't do here.

It's good to learn, but protect yourself and capital. You don't know what you don't know. That doesn't mean you can't methodically figure it out.

If you can't add value to this deal or any deal for that matter there may not be any margin. Other investors will place a similar value to see if they can on a deal that you did. There is no magic only effort and efficiency.

Good Luck!

Good job and good for you on taking it up with the broker thus getting a new agent. The needed repairs sound negligible and you could appeal to investors seeking rental units and primary buyers seeking new or affordable housing. I don't hear a reason you need a cash buyer repair wise, however the sale price calls for a loan that is less than the conventional minimum of $50k. That limits your buyer pool. It's difficult to increase price now that you dropped it but an idea you should look at and understand. At your general repair and price, perhaps this is well positioned to market as an investment property. Look at rents in your area and chat with your new agent to see if positioning the house as such makes sense. The point is, your in a hurry, get involved and manage the marketing if your property with the agent. Some if actions likely scared investors, such as a large drop in the first month of listing. Investors want a deal not a lemon, quick drops like you have are more like a lemon than a deal. You need to change that view in the market place. Perhaps get a REI open house which is targeted to REI. It sounds like you can pull this out, don't let the fire drill drive the car, that will be problematic.

BTW, unfinished homes are issues for lenders too, so borrowering money against this also just became more complicated.