All Forum Posts by: Dion DePaoli

They are telling you the truth. HELOC's in Texas are restricted to homestead properties only. You can pursue a cash out refinance of the NOO property, but not a HELOC in either first or second postion.

@Phil Z. not to be disrespectful but I am curious, you are real estate broker, you have not learned or been taught what these items are yet?

You also mention you have a HML, did you just sign the paperwork without looking at what it is?

Also, this comment, "Obviously all of that protected the lender, not the real estate investor." doesn't really sit well.

What protection are you looking to achieve for the Borrower/REI?

Ellis, I think you are misinterpreting/misreading Joel's question. Debt forgiveness for the borrower and your or your investor's investment gain or loss are not the same nor related. As an investment, you would report gains or loss to your investor. If the investment was a loss, there is no sending a borrower a 1099. The borrower had nothing to do with that.

If you forgive principal on the borrower's loan, that is an income event for the borrower and it would need to be reported to the IRS.

A little off kilter, but we are into many loans secured by Houston real property. From my perspective, many of the homes outside of deed restricted areas can be a little slippery in evaluation. We obtained BPO's for all of them but had to go a couple rounds with many of the agents and their evaluation. From a high level look, the homes inside the deed restricted areas held value much better and tended to be more stabilized homogenous locations.

The rental market seems to be be pretty decent but there can be issues with renters with kids and the school zones they fall into. Again, the deed restricted developments seem to do a little better on average.

We don't get to pick and choose like REI so much, so we have to take an opportunistic approach and take what is provided in the pools we bid. Just like any other market the vendors are both good and bad and we have had to find decent folks to work with when needed. To some extent, the market didn't wash out all of the lesser experienced/less qualified agents and low level contractors like other markets that tanked, so I would say simply be prudent.

All in all, I think it is a good market but I also think over the last couple years there has been a little hype in excess. There are places that have seen some decent decline in values. The deprecated zones are spotty it seems and cater to the hourly wage earner opposed to the salaried worker. Those same assets tend to have more of a fall behind and catch up cash flow, clearly depicting the hourly wage grind and the flux of hours worked.

You will need a security instrument suitable for the state that the subject property is located. Essentially a Deed of Trust or Mortgage. You will also need an accompanying Promissory Note.

It is not clear if the property is residential or commercial in nature, which can affect the content to some extent.

A good idea for you to become familiar with the documents is perhaps look at some Fannie Mae template agreements, if the property is residential. You can even use those so you don't have to reinvent the wheel. That is also if there are no exotic terms that you are trying to create.

If the property is commercial, you should really speak to a real estate lawyer as those are not all one size fits all.

Even with a residential loan, you should bounce the paperwork off a RE attorney to ensure details are accommodated properly. Using the template will reduce his time to create one from scratch.

You can visit Fannie Mae Document Website

In general, loans which exceed 80% LTV (20% down) have a higher chance of loss due to default. So the Mortgagee (Lender) will require Mortgage Insurance.

If there is two loans, like a 80/10, this will avoid MI. They key number there is the Loan to Value of the first lien. If it exceeds 80%, chances are you will see mortgage insurance.

In addition, some loans mandate MI such as FHA loans.

The occupancy of the property is not what drives the MI. Investment properties tend to not have MI because in their nature, they require more of a down payment to get the loan. Investment property purchase mortgages top out around 85%, which would require MI in most cases. You could do an 80/5/15 which would be two loans and avoid the MI. In your example, $25k is 20% down on a $125k purchase.

There is a relationship between closing costs as a percent of purchase price. It is a bit geographically driven as well due to tax, insurance and recording fees and rates, etc. The best way is ask a title agent to give you a draft HUD1 with some mock numbers. (this also lets you see the title company fees) If it is high level inquiry to get you in the church, I tend to use 5% for easy math. There is also a difference when you have a mortgage and when you pay with cash. The mortgage transaction is more expensive.

@Joel Owens ,

Any principal forgiveness above $600 is an income event for the borrower. This is money the borrower received that they did not payback. So the IRS says it is income.

The Mortgage Forgiveness Debt Relief Act of 2007 set the amount of relief for Borrower's who take principal writedowns on their primary residence which is up to $2.0 Million if joint filing and $1.0 Million if separate filing.

Currently, the act will last until January 2014.

There are some caveats to the rule which most CPA's can help with.

@Ellis San Jose ,

For clarity, I did not say return is limited to performance per se. I drew contrast to the two sides of the spectrum where on the left side is a non-performing loan. The recovery of capital from those assets is through REO sale or Auction. On the right side is a performing current loan. The recovery of capital is through the payment stream. And thus, to finish the picture is a little mix of both in the middle. As a loan moves to the left, the discount gets deeper. As the loan moves to the right, the discount becomes smaller. Where performing current loans can trade for par and premium pricing.

I do not understand what point you were trying to make about banks recovery of capital through payments. When a loan is funded, it is funded to 100%. That is some bank's (investor) capital. The point of the loan is to be paid back with interest. The interest is their gain. The only way to have a portion of the borrower's principal be a part of the gain, is through a discount. What is the 'other way' they can look at this or treat this?

Loans with equity are not giant losses for banks all the time. Which was sort of the question the OP asked that I said there is a definite difference between loans with and without equity. The more equity in the property the less the risk of loss. A loan with a 200% LTV generically stands to be a 110% plus loss. A loan with a 20% LTV stands to be closer to a 0% loss. This is the function of a down payment, amongst some other concepts, but it limits the risk of loss in the case of default.

If you purchase a loan that is underwater. The loan is underwater. If you modify said note, you changed it. The definition of underwater didn't change. The note is no longer underwater. However, my point which you are referring to pointed out that the invested capital basis and the note are not on equal footing all the time. In fact, they are only on equal footing when par is paid for the UPB. In any discount or premium price, the investor and the borrower have two different principal numbers. In any of those ideas, there are still two different components which is the borrower's principal balance and the invested capital. The idea that the loan becomes 'not' underwater due to your discount is not true. The loan is its own balance. Just because you purchased the loan for 20% of FMV, doesn't change the loan is 200% LTV. That is, until you change the 200% to 99%.

None of this was speaking to the potential disposition of forbearance or modification. Or any other disposition, which I don't know what 'out of the box' ideas are not widely known and practiced. There is nothing new in the industry and there is no magic in any of this. Folks have new ideas of how to work dispositions, but that is just new to them, not the industry.

Perhaps this stems from a misunderstand of idea of principal recovery. This traces back to the loan is funded to 100%. That is somebody's capital. Anytime less than 100% is paid back, somebody takes a loss. When a bank sells the loan at a discount, there is a loss. Technically, when the bank forecloses on the loan, there is a loss as the asset turns to real property. The real property sale is a gain. Whether that gain is a full or partial recovery of the capital will depend on the equity in the real property.

The OP's comment was, "So the fact the mortgage is underwater is not a underlining factor, got it, and it is more about the collateral." which is not correct. Loans with equity are different than with loans with no equity. Loans that are underwater have a higher chance of less than 100% principal recovery and loans with equity stand a higher chance of 100% principal recovery.

The OP is not the first and likely not the last to improperly jump to that conclusion. In other threads, you can see where the poster had misunderstandings of having a large gain on the 20% LTV loan, due to selling off the real property. The chances of getting the title to the collateral in that LTV is not high, so you only stand to gain from the aggregate of the principal balance, advances and fees.

Ellis, the loan is underwater when the principal balance of the loan exceeds the value of the real property used to secure it. That definition does not change.

Discounting your capital basis into the asset is your investment not the loan. They are not the same thing and are even less of the same thing when the investor and the borrower's principal balance relationship is distorted by the discount.

From a performance perspective, it is about the performance. That is all you as a Mortgagee are entitled to. The principal repayment and interest gain. A borrower who performs is living up to the obligations in the note. If the borrower handles their obligation, there is no act for the Mortgagee to seek remedy to. A mortgagee can't just decide to foreclose on a current performing note.

It is important to put the word current into the sentence as current, delinquency and default matter. Default triggers the Mortgagee's capabilities to act on the remedies provided in the note and security instrument. Current and delinquent do not. If a borrower is 30 days late for the entire life of the loan, there is not much beside send demand notice to the borrower that a mortgagee can do.

When an underwater mortgage has performance it can be interrupted that the borrower has some level of intent to stay in the property. Or they simply would stop paying. That is not to say that a non-performing mortgage means the borrower does not have intent to stay. Borrower motives for their actions are not an exact science. How long a borrower will maintain a negative equity loan is a different discussion.

From a financial analysis perspective having equity or not and having performance or not changes the financials of the loan for the investor. When a loan is an NPN that needs to go through a foreclosure disposition, the recovery of the invested capital comes by way of foreclosure auction or through REO sale. There is a whole lot of zeros and costs in between the start and finish there. Thus the discount is deeper. When the loan has performance, return will come through the payment stream.

If there was no difference, a NPN would be worth the same about of money that a Performing Note is and a Sub or Re Performing note would also be worth the same. They are not all worth the same.