All Forum Posts by: Dion DePaoli

Recap:

4 Properties:
1 - Vested in your natural name
2 - Vested in you and your wife natural name
1 - Vested in the Irrevocable Trust (that is not "in" your name, you are likely the beneficiary)

You will need to be careful with the one asset that is already vested in the name of the Trust. You will want to consult your attorney so you do not create a tax event on accident.

You mention the desire is to roll the KS LLC up into the Irrevocable Trust. If your final intention is to roll the properties into the trust, I don't understand why you want to put the properties in a stand alone LLC first. I would imagine you can simply vest those properties into the trust and then you are done. Based on the post and limited story, there does not seem to be a need to create another layer of protection here. Nor am I positive it would even make a difference.

The trust and the LLC can to some degree both accomplish the same goals related to asset protection and deal with survivorship issues. In the case of the LLC, your operating agreement would address the situation and how it is handled.

An LLC has Managing Members and Members. The Managing Member is the manager of the entity. The Member is a little more passive usually. A trust has Beneficiaries and a Trustee or Executor who directs the trust.

Because of a little bit of the unorthodox nature of your design, I will try and comment around it. Again, I am not positive you can do what you are implying or if there is any benefit to it opposed to a straight vesting into the trust.

You and your wife can join in the LLC. You would take on one of the two roles above. I think the trust can join you two along side in the LLC. In that case, the Trust would become a LLC Member. In this type of structure or something similar remember the trust now shares equity distribution with you and your wife or any other Member or Managing Member in the LLC. Trusts have some variations from state to state, so take care to get proper advice.

In order for the LLC to own the properties, they will have to be vested in the name of the LLC. Unless, they are vested in a subsidiary that the LLC ultimately owns. If this is the ultimate plan, you likely do not want any other name vested on title. If you put you or your wife's natural name, you may create a situation where the corporate veil can be pierced easily, thus loosing the protection from the LLC.

To re-vest the names on title to the assets, you will either create a sale or use a Quit Claim Deed. Ideally, a QCD is used. Tax events can happen here, so get proper advice.

All the properties would be re-vested into the LLC (or Trust). The title insurance policy currently for the properties will still cover the title up to the QCD. Since you transferred to yourself, your liability is not that high. You can purchase a new title policy if you like, simply go see a title agent and they will prepare everything for you. In that case, you may be able to realize a discount to the policy as the previous policy still is on hand. A title company will not amend or "re-issue" your old title insurance policy without some form of consideration. In other words, you have to pay for it.

Hazard insurance on the other hand, in most cases you can simply amend the name of the insured to the LLC with no additional cost.

I will stop there and let some others chime in and give the OP to ask more question or explain the idea of the structure a little more to comment on.

You can add your friend to your LLC in any manner the two of you deem fit. That could be having her buy interest in the LLC or it can be granting an interest for some other contribution. You might want to consult an attorney to ensure you properly add your friend.

In any LLC you have Managing Members and Members. If your friend desires a bit more of a passive role, you might want to designate her a Member and you retain the designation Managing Member. The duties or rights and responsibilities of each of you can be detailed out in the LLC operating agreement.

You can use her credit, if she goes along with that arrangement. Financing for an LLC opposed to a natural person is a little tougher to achieve and you will need to have a little history in the LLC to even be considered. The alternative is she obtains the financing as a natural person and you vest title in the name of the LLC. Much of this will depend on lots of factors such as your credit and both you income, assets and liabilities.

You will want to take care in this setup as it will affect your last question regarding what type of harm could come. The harm beside damaged credit would be monetary harm. Obviously if she puts capital in and the deal goes bad, you both can loose money. The key to your idea of structure is this will more than likely be more of a personal obligation by her and you, rather than a business obligation. I suspect your business is too young to qualify for a loan and as I said, loans to companies opposed to natural people are a little tough in this market to find.

Incentive, well you can make that however you two agree. If she joins the LLC, she will get some percent of the companies equity. Therefore, she would be due equitable distributions from the LLC. The percentage of which will be determined by the two of you. Is it worth 50% or 75% or 2%, well you folks have to hash that out. Additionally, if you are designated the manager, you can grant both of you equity but agree you can take a management fee to operate, which would come off the top prior to member distributions.

I will be happy to swing at the ball for you on your initial question:

1. Initial application is filled out via some form of interview between loan officer or loan broker and potential borrower. Usually this is an over the phone or distant interview. Only the data needed to fill in a 1003 (Uniform Residential Loan Application) is collected.

2. Loan officer submits the 1003 through to one of the agencies or to a suitable investor. For Fannie Mae the digital engine is called "DU" (Desktop Underwriter) and for Freddie Mac the engine is called "LP" (Loan Prospector) and they both also use "DO" (Desktop Originator). The digital engine is just that a digital underwriting engine which reads the data on a 1003 and then determines weather the loan eligible to be sold into Fannie/Freddie.

Other investors such as HUD or VA or USDA usually have manual approvals where the 1003 is reviewed by a real person for eligibility.

When the data is loaded into the system, the system spits out an eligible level the most commonly know are DU responses which are Approved Eligible (EA), and EA 1 and EA 2, where the 1 and 2 are diminishing levels of qualifying.

It is also important to note, the loan officer, when uploading your 1003 picks the loan program initially or loan product. The system does not pick your program only determines if you qualify for the program.

3. So once the 1003 is loaded in, and the response comes out, that is a "Conditional Commitment" or sometimes refereed to as a "Stip List". Meaning, the loan is approved subject to the following criteria being proven true in formal underwriting. This generates the list of needed documents in order to prove the information that has been put on the 1003 which can include income, asset and liability information for the borrower. This is also subject to the loan product or loan program, for instance, a no income verification loan requires no verification of the income stated on the 1003 so no W-2 or tax forms are needed to be collected for that purpose. The opposite is true as well, the system reads the credit profile and 1003 of the borrower and creates a standard set of stipulations that the loan office must collect and submit into underwriting in order to have the loan formally approved.

4. The next step is usually the initial loan packet signing by the borrower and initial document collection. The packet includes the 1003 as well as other disclosures and a mortgage broker contract for their fee if a broker is present.

5. The loan officer then takes the packet in and sometimes those loan officers use a "Processor", which is a person who processes the paperwork. They arrange the paperwork according to the lender's wish and then send them to underwriting. A processor is not an underwriter and does not approve or deny your loan.

Usually, this is where all the third party services are ordered such as appraisal and title commitments and closing protection letters.

Somewhere around this step the borrower will usually see document packets arrive in the mail that do not need to be executed and returned. This serves two functions. As the origination team "stacks" the file (arranges the paperwork), they also verify the interview information, such as wages. If during the interview the applicant said they make $50k per year, the origination team verifies that number against the collected paystub and tax forms and corrects the number to be mathematically correct to the supporting documents. The new packet serves as new and proper disclosure to the borrower. Depending on the lender or broker there may be more than one packet received from the two different entities. One from the broker and one from the actual lender funding the loan.

6. When the loan information is sent it to underwriting, an underwriter will review the information sent and will update the conditional commitment or stip sheet. As items are cleared, they are removed as a condition to get the loan. This is why you hear loan officers or loan people refer to clearing stips.

This is usually the most involved portion of the loan for the borrower and the origination team. Good loan officers and processors know what documents to collect and what those documents need to say or have an understanding of how to document things out. Some do not. And sometimes, the origination team must simply wait for the underwriter to determine if a document can be used to support the loan. All of that creates multiple requests to the borrower for documentation.

This is also where loans are denied. The denial stems from the gap in the interview information versus what the documents prove. A borrower can say they make $100k a year but if they can not prove it, they may not qualify for the that loan program any longer and are denied from the program they were initially intended to get.

If a denial takes place, usually there is a backup program that the borrower can be put into. This is also why borrower's see rate changes. More so with non-agency loans with manual underwriting since you have to see if the underwriter will accept the loan. So, if the borrower who said they make $100k is submitted as a full document loan but once the documents are collected and submitted the wage documents do not support the loan amount or are rejected for other reasons, the borrower would then have to be put into a no income verification or no income documentation loan. As the borrower's documentation gets further away from full documentation, the risk the investor is higher, which demands higher interest rates and other parameters such as down payment.

7. Once all of the stipulations have been cleared, the loan is designated "Clear to Close". In some lenders this is a separate department which coordinates the funding of the loan with the title company or title attorney. The lender will send a loan package and have the title agent prepare primarily closing statements and any other relevant documents.

8. The the borrower shows up and executes the paperwork and the loan funds. Unless it is a refinance which has a 3 day right of rescission before funding.

Other concepts which are usually misunderstood by many. Fannie Mae and Freddie Mac do not "make" loans. Fannie/Freddie are loan investors. The loan is made by a lender (bank or non-bank) which has approval to sell loans into Fannie/Freddie. This creates some of the layman confusion when it comes to underwriting criteria for the agencies.

Fannie/Freddie have underwriting guidelines which are the minimal standards which a loan must have in order to be purchased by the GSE's. However, the relationship between Lender to Fannie/Freddie has representations and warrants which are made and deal with buyback clauses where a lender may send a loan to Fannie/Freddie but upon their review they can reject the loan and the lender must buy the loan back. This creates a problem for the lender as most lenders use what is referred to as a Warehouse Line of Credit to fund their loans. This is a short term credit facility usually not longer than 6 to 10 months. So when a buyback is issued or a loan is simply rejected from delivery, the loan sits on the warehouse line diminishing the lending capital of the lender and carries penalties from the investor who granted the credit.

As a result of this function, lenders create what are called "Overlays". An overlay is where the lender adopts the Fannie/Freddie standard but increases the standard of the criteria. An easy example is credit scores, Fannie/Freddie loans are eligible with borrower FICO as low as 620 but many lenders will not write a loan with less than a 640 score. This gives the lender some protection from kick-outs from the GSE's. Continuing the credit example, a borrower with a 625 gets a loan and the next day buys a car. When the loan is pooled and sent into Fannie/Freddie they will re-pull the credit for verification, due to the car loan the borrower's credit score drops to 615 and now the loan is ineligible to be sold to the GSE's. Thus they create the overlay which helps buffer the kick out loans. The overlays is why it seems that many banks have their "own" guidelines but still make Fannie/Freddie loans.

Other interesting concepts, the underwriter who underwrites the loan for the GSE's is a certified and designated underwriter for GSE loans. They are usually found in the lender's operation who has a contract to sell into Fannie/Freddie and are not actual Fannie/Freddie employees.

Lenders have to get approved in order to sell into the GSE's. This includes some form of volume commitment. Because of this not all lenders are approved sellers. Many approved sellers function as the gateway, if you will, into Fannie/Freddie. This also is where most of the initial pools of loans are created. Normally, you do not sell into Fannie/Freddie in a one-off status but rather in a pool. So the large banks such as Wells, BOA and Citi are all approved sellers. Those firms also serve as a gateway for smaller banks and lenders to originate loans that eventually make their way into Fannie/Freddie.

Well some of that might be a bit of a ramble but the information is there. Feel free to ask more specific questions as needed and I am happy to try and address.

When a loan reverts back to a lender as REO, more often than not it already has an agent assigned to the asset. This is simply the way the serving companies work.

"Bulk" is a layman term having the same general meaning as "pool" in capital markets. Both terms only mean two or more assets. The usual misunderstanding from street level investors is that "bulk" or "pool" also implies some significant discount, like Sam's Club. Not true.

Additionally, there is no unit count which qualifies "bulk", as stated above. Bulk is two or more. You can purchase a pool of SFR at full retail, that is still a bulk trade, it can be 2 units or 200.

Confusion stems from the function that capital markets plays in the industry. Typically, institutional investors have larger amounts of capital to deploy therefore, the trades are bigger. When given a choice, a sales guy working on a desk at JP Morgan or alike, will choose to work with their capital market counter-party simply because the trade is larger, which also means more money for the sales person. They most often also have similar views and values on the assets due to their lack of involvement with the specific geography and ideas about repairs and improvements. The misunderstanding of motives at the investment banks fuels comments like, banks do not sell to street level folks. Not true. That said, most street level guys are not making their way to the capital markets desk at JP or Citi, etc. However, banks still want and enjoy offers from folks with lesser capital provided the price is right. Just like any seller would.

I suppose there might be some market resentment that floats around, where street level folks think the bigger guys are getting better discounts. Unfortunately, that is actually backwards. More often than not, a street level investor stands a better chance of achieving more desirable discounts one asset at a time than the folks purchasing pools of assets. In many cases, when purchasing large pools, the investor is actually paying up (paying more) for the assets than a street level investor could achieve. Again, this is more of a function of the capital markets than the asset class. Capital managers need to deploy their funds so they can collect their management fees. Idle, un-invested money is not ideal for capital managers. So many capital managers compete with each other on the pools, which also drives the price up of the assets.

Getting a list of "Bulk REO", well you can simply go to the HUD website or alike. There is your bulk list. Discounts on REO, especially step discounts are derived from property condition or title defects. Institutional investors and street level investors usually do not approach the matter of repair and defects from the same angle. That also creates a gap, making it hard for the parties to work together.

Large pools of REO do not trade often in the market since most of the firms who have REO have worked through the system to be able to maximize their value from the assets. So, when the investor finally owns the REO and can achieve a 90% recovery of market value, why would they take a lesser amount? (they wouldn't). Also, the big six, who hold most of the NPN going through foreclosure have a watchful eye on their standing REO inventory and take care not to create an excess in their inventory by slowing dripping the foreclosures into the market place and turning them into REO at their pace, not the desired pace of street level investors. Further eliminating the need to sell off in bulk in a capital positioning event.

As a street level investor, you can see a discount that is favorable in a pool of REO or any asset for that matter simply due to the capacity to allocate the purchase proceeds by the seller. When an offer on one property is $50, but the seller wants $55, the negotiations terminate as the price can be achieved. On the other hand, if two properties get an offer say one at $50 and the other at $60 and the Seller wanted $55 for each, then everyone wins because the Seller can allocate the $110 into each asset at $55. That is the real benefit of trading in large pools. There is more wiggle room to make things work than a single asset.

In all of the banks someone has some sort of P&L responsibility to the inventory. At larger banks, assets may be split among more than one employee. It is easier to make a deal on several assets with one manager than it is to strike two deals, one with each manager on several assets. This is simply due to how their P&L evolves differently and independent from each other. For instance, one manager can be ahead of projects by 20% and one behind on projections by 20%. The manager who is behind will have to seek a higher price, as he is behind whereas the manager that is ahead can make a deal since he is ahead as long as it makes sense.

Hope that helps.

To simply avoid the debate of license and go back to why buyers and sellers have a hard time with note brokers, finders, etc....

When the retail mortgage market began to shrink and then when to hell in a handbag, many out of work mortgage brokers, real estate agents and others in general looked to the brokering of pools of loans and REO as a new business.

The industry was flooded with 1,000's of brokers who had never bought or sold a note before in their life. They didn't know much about legitimate broker practices on pools of loans regardless of performance. Those brokers went into the market to find buyers and sellers of various experience.

New buyers and sellers went on roller coaster ride. Phone call after phone call, NCND and MFA after the next. Then a pool would come in, it would be a 24 hour fire drill to bid, buy, close, and fund. Many times all while using some title company or attorney so the buyer and the seller never got to meet each other.

OR...the other good ones were the "Compiler" source. Who is next to someone who is next to the other person, who is a compiler. That didn't actually work for the asset owner, mind you.

So the real answer to the question, why does the note industry look bad upon brokers? Because they have usually had terrible business practices and didn't know their elbow from their behind.

Whether that stems from incompetence, lack of education or malicious intent, take your pic, all those guys were at the party.

So fast forward to 2013, those broker jokers are still in the market. No idea what they are doing, no idea what it actually takes to trade a loan.

Because many folks can't be trusted, where you send a pool to a broker for one of their clients, next thing you know 500 people have it. I traced one of my pools one time literally around the entire United States in about 5 days. I talked to 43 brokers, of which each time I was about to get on the phone, the other party was suppose to be the "Real Seller", that happened about literally 11 phone calls. Each time attempted to get price information, bid information and other normal important information about the pool, I was either lied to or the party didn't know. I actually made it all the way back to the broker I sent my pool to. I sent my pool to him as he had interest in 2 (two) assets and seemed like a nice upfront guy. During my trace calls, when he came to the phone, he proceed to tell me he was the "mandate" and had discretion over the assets and sale. I asked him if he recognized my voice (I used an alias on the calls) and then revealed who I was and tee'd off on everyone on the phone. Took all their names and emails and made sure never to do any sort of business around or about them.

The other big issue I see with brokers, they don't even know what data to collect. I see so many data tapes or note offers with less then adequate data to perform any sort of analysis. For instance, selling a NPN without last payment date or foreclosure information. Or selling a PN without payment performance. Stuff, a normal person could figure out needs to be included. But the brokers are too busy trying to sell the whole pool for 3.0% and become some fortune 500 company over night. (Good luck with that)

It is difficult to understand who is a good broker and who is not in this industry if you are not experienced. Even large institutional broker/dealers suck at broker loan pools, because they don't do it everyday.

I am not sure changing your title makes you any different. It is not title but competency in this space that will reap the rewards. Good brokers who want to master their craft, like in any profession are hard to come by, folks who just want to throw stuff at the wall and see if it sticks, well there are a ton of those folks. I will and do work with good brokers everyday. That said, it is always by my rules as I tend to be a bit more experienced in the game than them.

That is not what the SEC does nor oversees. Mortgage Servicing License standards are state specific provided they meet the minimal guidelines in the SAFE Act. That act is enforced by HUD. Most of what was called for was MLO licensing for those employees who work within the lost mitigation department.

All that said, the advice is true, use a servicer to stay compliant.

Deal (1) - Collected $27k from 2 of the 11 assets (18% of the pool) on a total investment of $61.5k. So the investor has made 44% of their money back and still has 9 other assets to collect from. On average the investor needs to collect $5,590 from each asset to break even. An offer to the borrower to pay $X for satisfy the 2nd can entice the borrower to make the payment by which the lien can be satisfied. So far, the recovery has averaged $13.75k over double what he needs to break even. Will he collect on the other 9? Not sure. Will he make money or loose money? Not sure.

(2) Dave purchased and sold the asset for a $1,450 (42%) gross gain on sale. The buyer paid 10.65% of UPB. The first lien exceeds the value of the home and the CLTV is 180%. The first lien is current, so it would appear the borrower desires to stick around in the home. So the second line investor would need to strike a deal with the borrower to payoff the loan. The investor will need to collect at least $4,900 to break even from the amount the borrower owes, which is $46k. If you got a call from a mortgagee who you owed $46k and they offered to go away if you paid them $10k, would you pay them? (sure)

It seems your concern is about the investment equity level into the real property. And that is why seconds trade for such large discounts. Clearly in deal 1 there is not much equity insulating the investor from default. When stacked on top of the priority of the first lien, you are in the red. You could certainly end up with zero recovery on that investment.

Can you make money with those types of deal? Yes.

Is that sort of deal for everyone? No.

I see NPN's trade for around 55% to 65% of FMV. That is provided there is negative equity. If there is equity UPB is used as the baseline as that is what you stand to recover. In states with longer and short foreclosure timelines or with assets that have higher capitalization demand for legal or physical defects, that number will go up and down.

The price is relative to the asset and state the asset is in. 50% in Detroit is not so great on lower level assets and 50% in Texas is too low as foreclosure is a little faster there.

There is a communication issue that arises from NPN discussions, the percent baseline is usually a function of the FMV, but technically that is moving target. That is because FMV is subjective to the party looking at it. In the nature of the parties, Seller's think the property is worth more and Buyers think it is worth less.

Since loans have a varying amount of equity and negative equity it is hard to make a broad statement of NPN's trade X%. The same is true for % of UPB. A negative equity loan with an LTV of 200% will have a lower UPB % than a loan with an LTV of 120%.

Second liens just like first on the concept of principal recovery. Due to the nature of second liens, the recover-ability is much less so the discounts are larger. Dave buys more 2nd liens than we do, but last couple trades we did on NPN 2nds we were around 2.5% to 5% of UPB. They trade more like consumer credit debt than 1st liens as if the 2nd is wiped out in foreclosure, you are left with unsecured debt to collect on.

Those numbers are "Guru" talking points because folks think, "How could I loose" on a second purchased at 2.5% and the answer is, you collect zero, which certainly happens often.

Are prices driven up from Institutional Investors? Yes. On any given day, there is more money chasing an investment into this asset class than there are assets available.

That said, as Bill points out, no the little guy will never be pushed out of the market because at the end of the day, the little guy should be niche and local providing for faster disposition times and more effective asset and cost management. As such, when we look at a downstream trade to a street level guy, he/she would pay more than we did for the asset otherwise, I can do what he is going to do and do not need the street level guy.

This is true and you can see evidence of this in your note more than likely. Your payments apply in order (1) Late Fees (2) Advances (3) Interest Arrears (4) Principal.

If you make extra payments, either at the same time as a full payment or within the same period, the extra payment will reduce your principal balance.

In general, a $100 extra payment per month will knock about 7 years off of a 30 year loan. It does not follow that $200 reduces by 14.

You can simply down load any amortization schedule or use a financial calculator and see what the long term affects of the additional payments.

Bill Gulley, what are you saying, that first note you purchased was written on animal hide parchment and collateralize by a cave just east a tyrannosaurus rex playground?