All Forum Posts by: Dion DePaoli

You are inferring things that may not be related.

Relief of Stay, is the relief from the Automatic Stay issued as a result of an approved BK plan. The Stay causes all debt collections attempts by creditors to completely stop while the debtor is under the BK protection.

A Relief of Stay is filed by the creditor asking the court to lift the stay of debt collection. The cause can vary but reasons for seeking relief are found in the BK code. In general, if the debtor was obligated to make payments to the Trustee or say a Mortgagee during the plan and failed, then one would file for relief so collection attempts can continue.

During a BK, the debtor is not relieved of debt, or, the debt is not discharged until the BK plan is completed. So during the BK plan process, the debtor still owes the debt, which is why the creditors have to be stayed. This is also why if the debtor fails on the plan, the debt is not discharged. What happens is the BK plan is dismissed, like it didn't occur.

Failing in a BK plan is not good. It doesn't have direct credit impacts that affect a credit score. The derogatory debt is what affects the score. That credit line stays on the credit report until removed. In some cases, a person might have to take steps to have the creditor remove their line, if they are not compliant with the final outcome of the BK.

So the property is a four-plex that was converted into condos. The Seller owns all 4 units.

Was an HOA agreement put in place, where the deeds properly restricted and split?

I would explore how these units were converted and make sure everything is in order with proper HOA paperwork, etc. I would also go back and make sure the units in the BPO's are indeed similar to this project. Living in a 4 unit condo building is not the same as a 100 unit complex down the street. It is also not safe to simply use square feet as the only filter in comp selection. Lots of these smaller complex conversions have been adjunct failures and I have seen many get converted back. It might even be, after scrutiny of the comps, the best use for this building is actually a four-plex under one deed.

It is really hard for me, based on this being a 4-plex converted to think this Seller has done a proper job of converting these. Just the legal paperwork alone would increase his cost basis past $10k per unit. Let alone any construction costs needed to comply as well. Generically speaking at $10k a door, you are paying for rental units like in a 2-4 unit or multi family project. That is general price for rentals, but cost basis on condo conversion generally are closer to $30k to $40k per door.

If the Seller has screwed the conversion up, you can cure it or you can unwind it. I think you really have to dig into this conversation, be careful to make sure things are as they seem.

If the project is good to go, in most likelihood, the condo will not be eligible for conventional financing. So, if the plan is to sell, you may want to make sure you go after some cash buyers.

My ten cents on the disposition of the asset. If it were my note, regardless of anything else, you want the guy to pay the loan back and it sounds like the guy wants to pay the loan back. If you have not done so, you need to drill into what is causing the financial hardship.

Make no bones about it, this is a distressed loan. Distressed loans are high touch, administratively intense loans. So take the idea of simply collecting payments and a conversation here and there and multiply those tasks by 10. Plan to be involved and plan to stay involved for likely close to over a year. Heavy in the beginning and lighter in the end.

To some extent, you as a Mortgagee, have to be the mature thinker rooted in reality. Usually financial problems with borrowers are not solved within one or two periods (months) and a plan to help the borrower involves a little more time and effort. Depending on what other influences play a role into his delinquencies, you might look at a forbearance for several periods. Perhaps where you temporarily reduce the interest rate to allow the borrower to get caught up.

I don't agree with the foreclosure reactions here. Or at least with the limited knowledge of the situation, I don't agree with pursuing NOD right now. I think that might be perceived as hostile and you want to exhaust alternatives to foreclosure if possible. Not that a borrower thinking I, as a Mortgagee, am being hostile by pursuing my remedies but in a negotiation sense, we all see he can sell the property and be done with this. So I think foreclosure sooner or later to him becomes a threat, conversations with threats are generally not productive. I wouldn't want him to clam up and stop working with me. I think you have to warn him first by providing a plausible solution, which is beneficial to both of you, where you do take some hit, about what you are willing to do and what you will be forced to do if that plan doesn't work.

When we look at those types of plans, our approach is to ensure items which we would advance on are covered first. This way as a mortgagee we are not adding additional capital to the asset, exacerbating the problem. Sometimes it involves a plan for each separate item. So, create a plan to catch back up on taxes and pay the tax advance back. Separate from his P&I obligation. Then create a plan to allow him to catch up and pay his P&I obligation, perhaps this calls for a forbearance for a period of time to allow him to get caught up.

An arrangement like this can be something like reducing the interest rate temporarily to say 2.0% for several periods, like 6 months. Setting up a 'catch up' plan to fully fund his current escrow demands. You will have to look at when the taxes are due for the current year. Then back calculate how many periods he has to pay into an account to reach the total amount needed. If you sum both the insurance and taxes and divide by 12, you will get an escrow without a buffer. If you take that payment and add three of the payments you just calculated to your previous sum and re-divide by 12, you will create an escrow with a buffer which should help cover some increases in taxes and insurance. When you plan this out, make sure the balance needed is reached prior to the period payment is due. Also, as a mortgagee, if you collect escrows, you must distribute those funds in line with any discount offered for early payment by the county. (you will definitely want to have this loan boarded with a Mortgage Servicer to lessen your admin)

So once you have those two ideas setup, you can then look at repayment of the advance. You can simply create an extend term for this repayment plan, depending on the balance and finances of the borrower. If this obligation does not fit within his income parameters within the next 24 months, I would consider deferring into the principal of the loan and move forward with life. Keep it simple for the borrower and you, first and foremost.

It is tough, without knowing what the actual numbers are to come up with a plan on this side of the computer screen so I am trying to express the ideas, not the specific time, rates or payments. In that sense, the guiding idea would be sometimes strategically it makes more sense to take close to 0% interest for a short period of time to allow for the borrower to reposition. Make no bones about it though, this requires some baby-sitting on your part. Call or give notice before payment is due during any forbearance period, nag him anytime he alludes to not being prepared to pay, dig into why. Call the day of payment due and certainly call the day after, if he is late. In that sense, you do sort of treat the borrower a little child like, you are not scolding them, but helping them live up to their obligation. It seems this is viable for you since you already have a decent relationship with the guy.

Putting this plan formally on the table also allows you to gently broach the topic of 'what if'. What if he misses one payment or is late? Somewhere in here you have to draw the line and say, if you do this or if this happens, I will be forced to initiate foreclosure or he should consider selling the property. You can even follow it up with, I don't want to do that but I will be forced to in order to protect my interests. Or something that nature. This is your 'Jerry Maguire' moment, it's not you, it's me.

It is not easy to dig into another person's financial situation. This particular case could be easy or hard due to your relationship. You have to know. He has to share with you, in detail and if needed with proof. Mind you, if you were a institutional Mortgagee, he would have several hoops to jump through before he got any type of deal/plan. As you look at his actual household income, if 40%+ of his income has to go to housing obligations, the real answer maybe sell the house and find something more affordable.

Agree with everything J Scott said.

My concern is your ARV number is based on units down the street and not within the Subject Property complex. Those could be viable comps, but they also could be skewing your number. How many other units are in this complex? Does your ARV take into consideration 'mainly' comps from similiar units within the comunity?

I found that funny.

Peter,

Defective means the instrument and note may be deemed unenforceable. It could also mean fines. Some defects can be cured, some can not. It is an industry term.

Texas Usury Statute:

Sec. 302.001. CONTRACTING FOR, CHARGING, OR RECEIVING INTEREST OR TIME PRICE DIFFERENTIAL; USURIOUS INTEREST. (a) A creditor may contract for, charge, and receive from an obligor interest or time price differential.(b) The maximum rate or amount of interest is 10 percent a year except as otherwise provided by law. A greater rate of interest than 10 percent a year is usurious unless otherwise provided by law. All contracts for usurious interest are contrary to public policy and subject to the appropriate penalty prescribed by Chapter 305.

A commercial loan has a different statute which provides for a higher than 10% rate but this is not a commercial loan. The loan is to a natural person, secured by their primary residence, for domestic purposes not business. I certainly can not speak to what the attorney thought or researched prior to helping put this together. I also will not claim to be an attorney who specializes in Texas law. But in the research we did, including speaking with our counsel and local attorneys, a licensed lender and MLO have options which can allow the rate of a residential loan to exceed 10% to 12% but that is with the presence of a license. You, do not have a license.

Fundamentally, in the origination process of this loan, it sounds like your attorney, you and the borrower are the only three parties. So there is no licensed MLO taking application and negotiating between you the lender and the borrower for rate, term and other loan features.

The idea that you provided a loan which was less interest than the previous loan does not substantiate whether you attempted to ensure the debt could be paid back. The borrower is 18 payments into the loan and is already approaching default and has been seriously delinquent for a large portion of the total term of the loan. This not only applies to loan payments but to other obligations under the loan like paying property taxes. "Can he afford the payment?" is not the same as "He should be able to afford this because it is less.". A borrower making a statement of "Yes, I can afford that" is not prudent research on your part to determine repayment capacity. Typically loans collect income statements like W-2's to prove the borrower's true income. That true income is then calculated into a Debt To Income Ratio (DTI) which has affinity on loan approval.

Regarding #3, the idea of being predatory is clear as day when you talk about the borrower not being able to afford the loan and how you look to see the UPB and Fees accumulate to your advantage. You are allowing the borrower to harm themselves for your gain. Lending money that can not be paid back is predatory. Allowing fees to run up on a borrower to benefit you is stripping equity, that is predatory. Sure, you intentions are good, I don't think you are a bad guy, your actions are flawed from an observation point which does present some predatory characteristics.

In regards to #4, the idea that the borrower cannot currently afford a 5% loan which has an approaching maturity, and you are aware the borrower could not obtain a conventional loan is the issue. You don't have to use the word "force" for something to be forced. Frankly with what you know now, or at least what is in this post, the borrower should not get any new loan, he can't pay it back. If he can't pay back 5%, then extending credit to him at 7% is setting him up for failure.

Texas has statutes on charges on unpaid items and late fees. There are several depending on the computation cycle and type of debt. A standard residential loan usually provides for a grace period around 10 to 15 days, which is a no penalty late charge. And the penalty is charged on the payment, like 5% of the payment is the fee. It does not compound monthly. I believe there is also a specific provision which calls for this to max out at 5%.

As a Mortgagee, typical to most notes and security instruments, you have a right to protect your interests. That includes advancing on behalf of the borrower for items such as property taxes and insurance. In the event the Mortgagee makes the advance, the amount is due to be paid back from the borrower. No issues there. However, automatically taking that amount and adding it onto the loan balance is not normal and probably is not defined in your note. In it's simplest form, an amendment to the balance of a loan that does not benefit the borrower, requires the borrower's agreement. I have no idea what your point is with the link provided, that doesn't deal with Mortgages or Deeds of Trust thus it has zero bearing on this matter.

At the end of the day, this could be one of those situations where you are believing you have correctly setup and are handling things but due to lack of knowledge in lending you are falling pretty short on some fronts. From the post, you seem like a nice guy who was trying to help out a friend and it sounds like the friend is thankful. When we help friends and things go as planned, everything is perfect. When they start to fall off the track, that is when issues start to get flushed out with documents and practices.

More important to the topic is attempting to remedy the situation. And to be clear, the situation is, the borrower can't afford the home and you may have paperwork that if challenged, you may not be able enforce. I suppose the good news is you at least have an idea of some of the defects you could encounter and you don't have a judge in court voiding your loan altogether, so there is a chance to cure the defects.

There are many Mortgage Servicers in the state of Texas. A couple of quick searches will produce you several. They are not all the same in terms of service and fees so you will want to shop and compare. I think as well, make sure you fully understand what their obligations are and your obligations are.

For your own review here is the Texas statute Texas Finance Code

The only two items that you 'could' negotiate are numbers 1 and 2. Those fees are going to the Lender. The other fees are a part of the transaction and are fairly standard when buying property and getting a loan.

Number 4 and 5 are the same thing, I think you might have mislabeled one of those. One might be Lender's Title Policy and one is Owner's Title Policy?

Regardless, there is not much negotiation on those either. Charges will vary from title company to title company but only slightly, the cost of insurance is about the same amongst providers.

I think some of this is going to be a little painful, you might want to sit down. Texas SAFE Act allows for a private lender to issue their own funds for a loan, provided the Lender (You) did not take application and negotiate terms of the loan. It is not clear if you obtained the assistance of a licensed MLO to negotiate but if you did not, you have a defective note and security instrument. As far as I understand it, your attorney is not exempt from licensure either, so if he negotiated the loan is still defective.

There are some serious issues that I see in your post both in the structure of the loan, the provisions of the loan and might even have impacts on the servicing of your loan.

1. The loan you made is/was favorable for the market at the time. The issues seems to be that the borrower can not afford the loan. This could be a large defect, if you did not take steps to ensure the borrower could afford the loan, enforcement will suffer.

2. The 10% Interest "Compounded Monthly" is a serious concern. Usury in Texas is 10%. Monthly Compounding Interest plus fees can easily put over that number. Another defect.

3. The manner in which you mentally address the idea of the borrower missing payments, which are then compounding and essentially stripping away the borrower's equity is predatory in nature.

4. 'Forcing' the borrower to accept a higher interest rate in lieu of foreclosure, as you stated bump his interest rate up to 7.5%, where there is no material benefit to the borrower is predatory in practice. Note as well, the only way you can do this is through a modification. Modifications that do not afford a borrower any benefit such as rate reduction, principal reduction, payment reduction but benefit the Mortgagee can be found defective and unenforceable.

5. Unless there is a specific provision in the Note, which states that advances made on behalf of the borrower will defer to the end of the loan or be added to the balance, you can't do this at all. Advances are their own accounting segment and a Mortgagee can simply increase the balance at their leisure. (let alone do that and charge interest on it)

These are just the elephants in the room I see from reading your post. There might be more deeper issues dealing with the manner in which you are currently servicing the note. Did you properly deal with the borrower seeking relief of his hardship? That could be a violation of Dobb-Frank. These are also just some of the laws I am familiar with after buying several mortgages in Houston area earlier this year.

I suppose I will play the role of doom and gloom. It sounds like you have a pretty large problem with this loan and it's enforceability. I am not sure there would be any value in your loan in the secondary market, so selling it likely is not even an option. The ideas you have of foreclosure at this point seem like distant dreams. The borrower has some serious defense in his corner and I am not sure you could enforce the remedies provided in the note and security instrument. Texas is one of those states which protects its borrowers and primary residences specifically pretty tightly, it is ingrained in the constitution of Texas dating back to Stephen F. Austin and the Legislature of Coahuila, the Mexican state that included Texas, prior to Texas being Texas.

Now how can you remedy this? I think you need some serious help from a real estate attorney who is 'extremely' versed in real estate law in Texas to consult you on this loan. From some of the provisions in the note, I don't think your attorney who helped you put this together would be who I solely rely on to help cure, if possible, these defects, but that is just my opinion.

I do not understand why there is a tendency to exclude a small capital investor or single investment into a world that has no complexity. We were just doing that with NPV and now we are doing it with risk assessment. It is injustice.

To say Eddy's risk assessment is simply a qualitative investment decision omits that the particular idea may be qualitative in nature but it matters because it has a quantifiable root. It also implies that all risks are quantifiable, which they are not.

Risk is devation from an expected outcome or dispersion from a tendency. The human mind processes risk and even performs it by standard deviation in your everyday activity. Walk across the road, riding a bike, tasting hot soup, all have this similar practice. Whereas, we don't know the exact outcome but statistically we believe it to end up like X. 80% of the time X should happen. Etc.

When Eddy says I want a SFR instead of a Condo it is not random, and frankly especially IF Eddy makes that criteria, he has conducted and concluded a form of risk assessment. Perhaps he feels renting a condo is hard than an SFR or perhaps he is concerned the value of a condo can decline faster or he might have exit issues with a condo in the future. The list goes on, some of those are easily translated into numbers others are not. If that is still too abstract to realize it's true, surely we can see something like rental rates and sale price fall into this example pretty easy. Does he know the exact number, no, but he conducts a risk assessment and decides to pursue or no. If Eddy thinks there is a higher percent chance Condo values fall faster than SFR values, he would logically choose to pursue SFR. The decision had to come from somewhere, didn't it? In high level appearance, it may seem to lack quantitative backing but under examination it is present. That is also what is learned as Eddy becomes more experienced. How to quantify his risks, which make him a better prudent investor.

In it's most simple and elegant form, the idea of return is an assessment of risk. They are forever entangled and inseparable. Investor new and old, large and small have equal capacity to determine risk. It is not unique to one category of investor and not the other. It can't be, there is no right or wrong answer. When we do exclude these concepts such as equations or formulas or concepts to the 'institutional guys' that, sounds like something that is said to a child, "...you are not old enough for that yet..", etc. I prefer to look at it with the notion that, it's about time you learned this and it is valuable, that is why 'they' use it.

I agree with @J Scott . Which he stated in much less detail than I but it is the center of my argument. They are the same. To throw one out is throw both out. Not doing something properly, like the correct treatment of net cash flow is a problem for both. So we can't say NPV fails because of that because IRR would fail too.

NPV answers the question, is this cash flow above or below my [Stated] hurdle.
IRR answers the question, what is the hurdle.

The equations are not used to answer the same question.