All Forum Posts by: Dion DePaoli

Who has the upper hand in the market? Well there is more capital chasing loans than there are loans, so I would say that goes to the Seller.

Loans are sold via auction style sales where a pool is issued to multiple parties and they bid and one bidder wins. Pools can also be sold in a negotiated basis or more of a one on one, seller to buyer situation. Those types of trades can be originated from a reverse inquiry, where a Buyer tells a Seller what he is looking for and then a pool is cut to match or by a Seller simply just cutting a pool of their liking and showing it around.

Auction style bids are not same day events. No pool sale is, for that matter. The laymen have an incorrect impression that a loan pool is received, bid and purchased in a short amount of time. That is not true. Pools are issued with a bid deadline depending on the pool size and data points to allow bidders to respond. Somewhere in the 3 to 14 day timeline. Due diligence on any given pool also depends on size and character and can range from 15 days to 30 days.

If you're crossing state lines the mortgage broker you want to work with will need to be licensed in that state. Same with the lender.

Yea, not really on point to reality. That said, this is a common misconception that folks have. Let's address.

The performance of the loan will depend on the level of passive involvement from the investor. When a loan is performing, there is nothing to do but simply collect the payments. Not all that labor intensive. As loans erode into delinquency and default the level of action related to the asset increases. That workload can be allocated to a Mortgage Servicer or can be taken on by the Investor. Sub preforming loans and non-preforming loans will require the most work.

The disposition strategies are the same and have been the same for many moons. The concept of payment or performance is really simply. "A" they pay or "B" they do not pay. In the event a borrower pays, not much to do. In the event a borrower doesn't pay, much to do. Disposition the loan can be initiated by either the borrower or the investor. A borrower can sell the property or refinance the loan. No involvement needed if these events satisfy the debt. In the event the debt is not covered the option to take the payoff is up to the Investor.

I think the idea is pretty simple to understand, in regards to potential modifications and reinstatement. However the underwriting and restructure of the loan may not be as straight forward. It is possible to have borrowers who simply can't afford their house payment any longer. How will you determine that? New origination have a guideline for this in their asset and DTI ratios but modifications do not. Just because you shaved off $300 from the P&I payment doesn't mean the borrower will once again be a successful borrower. In addition, why only $300 and not $400?

To that degree, how do you get the loan to that new structure? Through principal forgiveness or through rate reduction or through amortization extension? A simply understanding of amortization math can lead that answer but what impact will each of these concepts versus the other on the current and future value of the loan?

Loan are put into "pools" not 'lots'. "Lots" is not the right word. A pool of loans simply means more than one loan. That is all. Whether the pool is $100k or $100M depends on who put the pool together. Additionally, loans trade as 'One Off's' all the time, so purchasing a pool is not a requirement to invest in a loan. The key to finding smaller pools and one off loans is finding a seller willing to deal at those levels. If you have a Billion in inventory you likely do not make too much progress trying to sell $100k at a time.

The newbie investor issue seems to be a lack of knowledge of navigating the mortgage secondary market and finding the correct counter-party.
The presumption that all loans trade at 50% or pennies on the dollar is highly incorrect and flawed. The price of a loan is dependent upon many things, which are not magic but quantifiable. The yield, the total return, collateral, credit and property defects can all also influence the value of said loan. Loans trade for premium 100%+ or par 100% or discount <100%. Loans trade in different lien positions.

A $20k investment for loans has it's limitations. To the extent of the example, a first lien $20k investment at 50% (into a $40k house) if the loan is non-preforming could be a large loss. The value of the real property and subsequent recovery from the collateral will struggle to catch up and costs associated with dealing with the default through foreclosure. A $20k investment into some second liens could yield a couple loans, first liens likely only one.

In the market there is downstream trading. Where larger investors sell down to smaller investors and the asset pool shrinks in size to match the investor level. A footnote to this, do not assume that the larger investors do not purchase and work the assets themselves. Downstream trading has its limitations. Sooner or later the price of the asset is highest best price for the asset and there is little to nothing to do to impact the dispostion expense or time of the asset so essentially everyone puts the same price on it. If I bought it for $10 and my bids are all $10, then I might as well work the asset and get the $5 profit from disposition.

Do folks here on BP have experience with some loan pool sales? Yes, a couple of us here do.

Has the seller of those pools been banks? Yes, sellers are banks, investment funds and private investors. Banks are not the exclusive owner/seller of whole loans. In fact there is a bit more market activity by non-banking institutions lately that banks.

Face value of a pool? Face value is not a industry term. I presume what you are asking is what is the UPB (Unpaid Principal Balance) of the pools. This can range from a small two loan pool for $100k up to a large loan pool exceeding $1.0 Billion. There are not too many loan pools that trade in one trade in the very high numbers. Typical market pools are geared toward the investors who bid on them. While undefined formally there is a little structure in the following manner $50M to $100M, $25M to $50M, $10M to $25M, $5M to $10M, $1M to $5M and less than $1M. The UPB size of the pool is one concept and the amount of deploy-able capital used to purchase the pool is another.

The purchase price of any given loan or pool depends on the loan or pool which is being bid on. Believe it or not, this is not really a guessed at number and actually is quantifiable, contrary to popular belief that everything trades for 30% or 50%, etc. I always like to point out that concept because those who say it don't understand the next part which is 30% of which number? (UPB or RE Value)

A loan pool can contain 2 loans or thousands of loans.

The loans geographic concentrations or exclusions will depend on the Seller of the loans. The seller can only sell loans they own. If a bank in Iowa sells loans, it is a safe bet they have Iowa loans and not New York loans. Different firms have different business footprints from local to national and all in-between.

A $200M pool sold at 2% for $4M is not a typical trade level. That sort of discount would be for some very bad first lien loans or some second liens that likely are not too pretty either. To answer bid levels is another long answer as it depends on many factors. Generically the price levels are based on credit grade, performance, collectable/enforcement and some other factors. For a NPN secured by a median home in the US in a judicial foreclosure state you could pay anywhere from 58% to 65% of RE Value. Pricing is fluid not stagnate so market influences those prices as well as asset characteristics.

There is also a difference amongst sellers in basic terms of being private, such as a seller financed note or institutional such as a institutional origination, say by Countrywide.

Can an investor, investor with $100k in loans? YES. That is sufficient money to buy some first or junior lien potions across all performance categories.

I think that doesn't make much sense.

The issue to this concept, IMO, is that you are saying the business plan, which includes knowing the market and having a realistic plan, is better than knowing the numbers for the deal. It seems to me, this presuppose the numbers are garbage. Problem is they are both interconnected.

If you know the market, your numbers are accurate. If you understand the economy, your numbers are accurate. The saying, garbage in, garbage out applies here. To simply slap numbers down for the sake of computing something is certainly not the best idea out there. But you can not have a plan if you don't have the 'accurate' numbers. Adversely, you can't have numbers if you don't have a accurate plan and knowledge.

In my days of retail origination and capital projects I have read and wrote many project business plans. The numbers are the core. The expression of the other concepts supports the numbers. I don't think other concepts lead the numbers. Upon review, you look at the numbers and then research the document for support these are viable numbers.

I would even go so far as to say most newbie business plans lack number content. Plans that paid too little attention to the numbers or had very generalized numbers were tossed out. This illustrated a lack of understanding of how to really execute the plan. In real life things happen and plans need to be changed. In those events the numbers are what dictate what changes are made, how they are made and when.

I think the idea is important, do not fail to gain market competency but the numbers are what walk the dog still. Sound numbers are backed by good plans. Good plans are only good plans because they have sound numbers.

John a couple things here.

In Florida, you have 5 years post maturity to foreclose. (assuming a standard instrument that has a defined maturity date and is of record) The loan can be modified and the maturity date can be advanced into the future, which as long as it get's recorded will be five years from the new date.

Just to recap, you have a UPB of $74k and a RE Value of $80k or an LTV of 92.5%. The Seller ask is 94.5% of UPB or/and 87.50% of RE Value.

We don't understand if the borrower has been paying and the mortgagee has been accepting payments since maturity. We do know maturity has passed. We do know the borrower has had difficulty getting a new mortgage. We do not know what the balloon term or amortization is.

Does that mean the only disposition of the loan is foreclosure? No it certainly does not. The loan at 7.0% interest is at the least a decent coupon, although might be a little low based on the borrower's credit from insight in the post.

If the borrower is making payments and the current mortgagee is accepting those payments you have a matured but performing loan. That could be a cash flow play for some investors who understand how to restructure the loan through a modification. It sounds like this borrower would best be setup to pay to zero based on the credit problems opposed to finding a new lender.

Talk to your client and chat with him about modifying the loan. (this is predicated on the borrower paying, if the borrower is not paying, then there is no choice but to pursue FCL) Having this maturity come and gone is not some huge problem at all but it does illustrate without too much diligence the borrower's credit is not good and the borrower can not create an exit from the loan. This then leaves two choices, which have been pointed out: 1)Modification or 2)Foreclosure.

The value of this loan as a forclosure is not as high as the value of this loan as a performing loan. With the property in Florida not having filed Notice of Default or started FCL and being under $120k you will be in the 45% to 50% price ballpark of real property value. So your seller get's a bid for around $40k. Pretty short of where he wants to sell.

Selling the loan as a modified loan with some good seasoned performance your Seller might be able to garner bids closer to asking price, but they still will be discounted. That said, we don't understand what the instrument or origination event looks like, which could have some defects which warrant a steeper discount, but we will stay optimistic. For similar notes in the marketplace trade values will range between 65% to 75% of RE Value which puts UPB value around 80% to 70%. That is going to be around a 8.6% to 9.9% yield on the table and a little higher Total Return based on the discount, into double digits, but will based on the new maturity in regards to impact.

In regards to pricing for a short sale or DIL, I and my firm usually do not do that. There is no real way until you are the note holder to understand if the borrower will really do a DIL or SS. Even as the note holder, you don't know until the borrower signs. So a more conservative approach is to simply price it as a FCL and if you can turn the deed over faster then that is more return for you.

This discussion might help the Seller determine if liquidating the note is worth it just yet. In an NPN bid, he is shy about $30k of his target and in a PN bid he is shy about $10k of his target.

Other quick areas of concern. Seller financing can be a concern if not originated compliant with SAFE Act state and federal level guides. If the loan is being Self-Serviced, this may add additional discounts to the cash flowing bid as third party accounting via a licensed mortgage servicer is seen as objective and a Seller/Servicer is not. The loan didn't seem to have too much earned equity by the borrower, which would leave me to guess it might be interest only or a long amortization with a short balloon. This can also drag the price down. If there is an I/O feature to this loan as a function of any modification the Seller probably wants to remove it.

Construction loans are tough in today's market. The criteria that you are being told is fairly standard stuff in regards to your reserves and LTV.

The income from rent will likely not be considered until you have rented the home for several months at the least. Since construction loans are mostly portfolio loans, each lender may have a different view on this concept of when rental income can be used in loan approval.

Not sure who you are talking to as a lender but I know Wells Fargo has a loan product for construction and you can roll costs of lot and permits into the loan. In your situation that may not work since you already own the lot, you would have to go ask. They also have a construction to permanent loan feature so it means getting one loan for the whole project opposed to two, one for construction and one for permanent financing.

I would try and talk to them and perhaps a local bank and see what type of guidelines they have and see if you can get past the barriers.

Yea, Bill is right, I retract my idea of running the property management through the LLC without a license. Not the right solution. Sorry, bad idea. I missed it.

Foremost is a subsidiary in some fashion to Farmer's Insurance Group. For due diligence whoever is providing the insurance obtain a copy of the policy. Insurance is pretty regulated, you can look up any insurance company at your state website to ensure they are properly licensed and formed. Certainly subs of large national insurance companies are usually set up properly.

Never heard of the other company, they sound like an agent. In that case I would ask who is their underwriter and insurer. That is not an unusual question and also could be found on the policy.

A concern for the mortgagee in this matter is allowing the property to vest in the LLC and the LLC have bankruptcy options. Corporate BK options are a bit harder to work with as a lender opposed to personal BK situations.

As Wayne mentioned, and I am not tax guy either, but you should still be able to take very similar benefits running through your personal taxes. Not all that big of a deal. In that sense, the LLC only really provides liability protection and is not likely offering you some fantastic tax shelter or tax implications that can not be realized in your personal return.

If you are hell bent on playing with your new toy, the LLC, you can turn the LLC into the property manager and run all the income and expenses through the company and distribute back to you personally. This is likely what you're going to do in practice anyway. I believe in that type of situation you're really only moving the depreciation over to your personal return, which many folks do anyway. Anyway, point is, the vesting of the title doesn't mean you don't have opportunity to use the LLC and benefit from any tax advantages, simply run the rent and property care through the company. Your accountant can help you with this as well.

Not having the title vested in the LLC is not the end of the world.

Jinean Florom, you're caught up in fighting for the sake of fighting it seems. The borrower's account has to be greater than 90 days delinquent or they could not have initiated Notice of Default and foreclosure proceedings. Additionally, the payments will show delinquent from the date of the borrower's last payment all the way up to the FCL Sale.

In order for the property to proceed through Trustee Sale, the property would have had to complete the foreclosure process. This includes Notice of Default after being defaulted for over 120 days. Note that there is a Trustee and it is their duty to perform the FCL procedure properly. If the property is approved for TS there is no duty for the bank to approve a short sale or the Trustee to stay the sale for the short sale. A borrower has to conduct the short sale and payoff the balance due prior to the redemption period expiration.

A bank can not choose who the house sells to, the bank is not the owner of the real property. So this idea that the bank somehow sold the property out from under the borrower doesn't make much sense. The bank has nothing to do or say if the borrower finds a buyer which will provide a sale price which pays off the balance due to the bank. The borrower doesn't need permission to sell his house in any manner really. If the borrower sells the house for less than the amount due to clear all liens, as a function of providing clear and marketable title the borrower would have to simply pay the difference to satisfy the lien. Again, a bank can not say "No" to any of that. The bank can not say "No" to a potential buyer and the borrower entering into a contract, they are not party to any of that. The only time a bank's is involved is if the bank is being asked to take less than the amount due in satisfaction of the lien. The bank then is shorted, paid less than what is due, which is the bank's option to allow or not.

A property being listed really means nothing in matters of foreclosure. Listing the property will not stay foreclosure. Again, the owner of the property would be who hired the Listing Agent, not the bank, so why the agent need to involve the bank for offers over the payoff makes no sense either. The bank only has power to decide who to allow a contract with if they are forced to take less than what is due. In those cases a bank can deny any offer for their own reasons, so even if the offer is above payoff, if the bank deems the buyer inadequate they do not have to allow the sale to that buyer.

A TS by nature is a foreclosure, so whatever is being said about it not being a foreclosure doesn't make much sense. In regards to not receiving notice of sale, this is claimed all the time. In most cases, the claim is unfounded and notice was delivered but ignored. Perhaps this is an exception but the odds are against it.

The borrower not being allocated the overage from the sale is not grounds to classify the sale as not a foreclosure. It is a separate matter.

I don't understand what you mean by the bank and the title company are reporting..."Title company said it's a T.S. sold will show foreclosure. Bank says not. Both are reporting."

Title companies have nothing to do with consumer credit or reporting consumer credit, so I am not sure what they are reporting. The title company does seem to have the right comment though, it is a TS, therefore it is a foreclosure. Nothing in this story is going to change that. All the energy being directed to try and get the state to make the bank report differently on credit seems like an utter waste of time.

The borrower can call this whatever they want but the fact is, this is a foreclosure and belongs on this credit. The nature of the late payments that will show on the credit will also show it is a foreclosure.

It really sounds like you and the borrower are hearing the answer, you simply don't want to hear it.

I guess the puzzling thing for me here is, your firm sounds like it is some consumer protection group or foreclosure counselor of sorts. Why don't you folks know the in's and out's of foreclosure and credit if you are counseling the public on these matters?

Moral of the story in my opinion, you are wasting the borrower and your firm's energy in a battle that seems pointless. Unfortunately, the borrower may not want to hear the reality but that doesn't change the reality. To what end do you pursue this concept, hiring some attorney, if they even take the case, to persuade a bank to amend a derogatory credit line? That attorney will cost a couple thousand, money likely better spent for the client setting up his new living arrangements and life.