All Forum Posts by: Dion DePaoli

Just to recap briefly, a borrower is upside down in their mortgage. The borrower owes more to the bank than the real property is worth in market. The real property has encumbered title by way of the mortgage on the property.

The borrower is always liable to the bank. Unless you become the borrower, by way of a mortgage assumption, you are not the borrower and not liable. A mortgage assumption is a process of approval by the current lender allowing a new borrower (you) to assume the debt owed to the mortgagee by the old borrower (Seller).

This does not preclude you from taking an interest in the real property, which can be granted by the Seller. The Seller can give you interest by selling you the property or selling you an interest in the property. Your interest in the real property would be Subject To the existing mortgage. Your interest is inferior in rights to that of the mortgagee. In this case, the Seller's conveyance of interest to you can be done with a deed with minimal or no warranties such as a Special Warranty Deed or alike. (Quit Claim works too, but that is not what they are intended for)

If you do not assume the mortgage, then there is no liability to the mortgage from you. However, a mortgage is the borrower giving an interest to a lender for money borrower and intended to be paid back. In the event of a default, the mortgage provides the mortgagee the right to seize the collateral offered to secure the loan.

So, your inferior interest can simply wiped out via a foreclosure on the real property by the lender. This is the danger of a Subject To transaction. The buyer does not gain clear and marketable title to the subject property.

In regards to the level of your offer, well this is a bit broad. The real property is only worth what the real property is worth. So if when you say, "low ball offer" you mean an offer less than what is owed on the mortgage because the property value is less than what is owed, yes, that would be how that works. If you mean a low ball offer in relationship to the market value of the real property, there is more to the situation than that.

If you want to clear title up, the loan from the bank will need to be satisfied. Satisfaction comes from the lender themselves when the unpaid balance of the loan is paid in full. When a lender takes less than what is owed on the loan, that is called a short pay. A short pay and a short sale are the same net event to the lender. They took less than what is owed either by way of short pay (refinance or payoff) or short sale (property sold to another buyer).

In this case, the real property value is less than the balance owed on the loan so a short is in order. There is no duty for the bank to accept anything less than the full balance of the loan. In the event, they are willing to accept less, how much less...well that is the answer that will tell you how much profit is in the deal.

The number you offer to the bank to short themselves will need to make sense to the bank. They are not just going to give the real property away without sufficient compensation. Again, no duty to do so. If the real property is decent repair and is close to median home price, steep discounts from the mortgagee are likely going to be difficult.

So you can make "low ball offers" in that sense, it is the same as throwing mud against the wall to see if it will stick. More often than not, it will end up on the floor and you will simply have gotten your hands dirty in the process to just watch if slide down the wall to the floor.

One other concept, these defects do not provide significant discounts in the normal course of business. Loans are kicked out of agency for disclosure issues all the time. They can't sell to a GSE but there is a PE market for those loans and the discount is usually less than 10% for newly originated loans. In some cases a mere 3% to 5% of UPB.

We tend to have an arsenal of actions to take in defective and distressed loans. This is one, that I would simply stay away from. Too much unknown future risk.

William D., my company purchases notes with a varying degree of defects. Some are more of a concern than others, basiclly based on the ability to cure the defect or the defects ability to erode our rights and interests to enforce the security instrument and note.

RESPA, TILA, HOEPA and similar Regulation Z concepts which are borrower protection and disclosure rules are not really broken that often. The rules focus on disclosure to the borrower which most of the convention lenders and their broker conduits disclosed the heck out of the loan. In origination, the borrower would get a loan packet from the broker, the lender when the loan was submitted, a final loan packet when the loan was cleared to close and a loan packet for execution at closing. So there is not as much probability for these more conventional or mainstream loans to have a violations of those rules.

Loans from private lenders or hard money lenders would tend to be more of a candidate for a violation on those rules including Section 32. Many times, the rule is triggered because the interest rate is high, by the nature of the loan (such as a HML), and points are added on top which cause the loan to fail the APR test in TILA or HOEPA which is a high cost loan or a Section 32 loan.

That still isn't that scary as a note investor as it can be cured and the borrower's defense strategy related to that topic can be eliminated. If there was a defect for high cost loan, through a modification you can have the borrower affirm to not be able to look back and use any event prior to the modification as a defense in the future. Obviously, you will likely need to drop the loan rate in conjunction with the modification, which is further illustration of the mortgagee's good faith.

IMO, this situation with DF and SAFE Act it has potential for more of a problem than TILA, RESPA, HOEPA, Sec 32, etc. The nature of those violation is in disclosure to a borrower, the nature of the issue here is the process by which the security instrument came into being Self Served the Seller.

The nature of the problem with Seller Finance and SAFE is the originator per rule is not allowed to originate the loan in the first place. We do not know how courts will rule on the equity interests of a Seller Finance note done incorrectly nor do we fully understand if a Seller financed note done incorrectly will be deemed to have created a bona fide legal interest for that mortgagee. Did the borrower get the money? Yes. Is a legitmate interest in the real property created....sort of grey. The Seller owned the property in the first place, so is the instrument didn't really establish interest, the Seller had interest before the event happened.

I think the courts will look at the incorrect note and rule on rescission. The note when originated is to some degree Self Dealing. The Seller, originates the note in their own biased interest. So I think the courts will view the enforcement of the rule logical in that sense as the person who sought gain in the event is who the rule is being enforced on. This also stems from the nature of why a loan goes into legal contest, usually delinquency or default, borrowers who pay every month don't take their lenders to court. So you have a borrower who is getting foreclosed and their attorney says, look at this evil Seller/Originator who did this act without a license. Heaven forbid there is a compounded defect for lack of disclosure in the file such as failed Reg Z disclosures. Unless the judge simply doesn't like people, the cards are stacked against the mortgagee in that situation.

That's my take on the issue. Where is Bill Gulley, he can provide some additional thoughts around the matter.

Yes. Satisfy the original, non-compliant loan and make a new one with an originator involved. Keep the records of the originator in file.

Will Barnard, if by another investor, you mean a Seller made the note, then sold the note to anther investor. I would look at the date of origination, if the note is before July 31, 2009 (this is the earliest one of two dates, state dependent) many states were not required to have the act setup so its rules may not be enforceable depending on the two dates.

In the event the loan is originated after the federal and specific state rules went into effect and the loan was not originated by a licensed originator...

...or some tangible proof of a licensed originator is not present in the file such as a signed 1003 or mortgage broker contract or similar, and the Seller originated the loan....

I would not purchase the note. It is unclear how each state and court is going to handle such events. The loan may be unenforceable or they may discharge it from the property but remain and unsecured loan, not sure.

I suppose a Seller who originated a seller loan who did not comply with the rule could attempt to cure the defect, but it is a tricky concept. The problem is the protection is at the point of origination for the borrower. If the parties are playing nicely with each other, I suppose you could simply satisfy the non-compliant loan and originate a new one properly. To some extent, the borrower has a vested interest in making sure the loan is legal and enforceable as much as the Seller. That is seemingly the clearest remedy. (that and do it right from the beginning)

I am not really sure if any other remedy could be created, again due to the problem being the event of origination. You can not cure the event, it is missing a party, and you have to have that party to be compliant so my guess is above is the only real remedy.

And that is the real issue. That is not a great way to fix it once it is not done properly and we do not know how the security instrument and note will hold up in any contest in the future. Like I said, for me, that is a non-start and we would not purchase a note with that sort of defect.

There is a plentiful amount of regulation both state and federal around mortgages and borrowers. Dobb-Frank provided borrowers with certain protections against predatory lending characteristics. I don't think it is too much of a burden or something to be fearful of anymore than RESPA.

One of the bi-products of DF, is the SAFE Act, there is both state and federal versions, where federal is the minimum standard that a state had to adopt but could have more in their state SAFE Act. For the most part, Seller carry-backs are addressed by the rule. The rule calls for any originator of a loan to have a license except where that loan may pertain to the primary residence of seller. So, a investment property offered with Seller financing is subject to license requirements.

There will likely be some future related legal events arise out of this and some unknowns are present until such time as concepts are challenged in court. For instance, some investors have ignored or have been slow to adhere the license requirements, so those notes in existence but because there has not been an extensive enforcement of rights and remedies, the body of law around non-compliant Seller origination is not filled out well. For instances, it is not well understood how proof or an originator will be provided in when mortgagee and mortgagor are in contest with each other. Will the security instrument be nullified or deemed unenforceable? Not too sure. We will have to see what the future brings on the issue.

That all said, prudent diligence in the purchase of the note or the origination of the note is necessary to protect your interests as an investor. Simply stated, use a fully licensed mortgage broker to originate any Seller mortgage. Get documentation of the same if you purchase one.

Outside of a couple new twists, like above, DF is not any barrier to entry into the note investing world. You do however, need to be aware of more rules and laws when you are a note investor opposed to real property. The first place to always start, is go read the rule for yourself and do not take interpretations of the rule from folks "off the street", which seems to be like the person who said DF is a problem.

Our Bid deadline expires on Thursday, January 10 at the end of business.

Thanks.

Yes Jon, you read that line correctly, that is the percent of the purchase price into each respective baseline.

Jon Holdman is only partially correct on the definitions.

UPB = Unpaid Principal Balance (current)
BPO = Broker Price Opinion - a real property evaluation created by a real estate broker. Similar in nature to a drive by appraisal but without the comp grids to have adjustments like an appraisal.

The UPB % and BPO% is found in the table of State geography. That is the percent of the total UPB or BPO column found in that state. This is not a bid price indication by any means.

In an abbreviated example, sections from the table are below:

1. State Loan Count UPB ($) UPB (%) BPO ($) BPO (%)

2. TX 8 670,519 67.86% 626,000 78.58%

Line 1 is the field name and Line 2 is the record for that field read from left to right. The table does not and did not copy well in text format and I could not find directions to make it look better.

You would read line 2 in the following manner:

State=Texas
Loan Count = 8
UPB ($) = 670,519
UPB (%) = 67.86%
BPO ($) = 626,000
BPO %) = 78.58%

Where UPB % of 67.86% = (670,519/988,146) {Sum UPB for State / Column Sum)
Where BPO % of 78.58% = 626,000/796,677) {Sum BPO for State / Column Sum}

I think you can copy and paste that table into excel and it will line up correctly and be easier to read. If anyone knows of the HTML codes to use when posting a table, I am happy to review and re-post the table.

Hope that clears it up.

Our firm is currently selling a pool of 14 non performing loans, located mainly in the Dallas-Fort Worth area, but contains other single asset states and cities. We will liquidate all of these loans this month, ideally in one or two trades.

Interested parties can contact me directly and will be required to execute a Non Disclosure Agreement prior to receipt of any pool data.

The BPO values are from December 2012.

The pool has a "Buy It Now" price of $466,056.05
(58.05% of BPO / 47.16% of UPB)

Weighted Averages:

WA UPB $77,477
WA BPO $65,875
WA LTV 156.28%

State Geography:

State Loan Count UPB ($) UPB (%) BPO ($) BPO (%)
IN 1 50,666 5.13% 19,000 2.38%
KY 1 51,573 5.22% 49,000 6.15%
NC 1 52,000 5.26% 22,000 2.76%
OH 1 67,196 6.80% 30,000 3.77%
OK 1 47,560 4.81% 30,000 3.77%
SC 1 48,632 4.92% 20,677 2.60%
TX 8 670,519 67.86% 626,000 78.58%
Grand Total 14 988,146 100.00% 796,677 100.00%

All real property is Single Family Residences, 1 is currently vacant, 13 are Occupied.

11 Primary Residences, 1 Non Owner Occupied and 2 Unknowns.

Our closing will be before the end of the month Jan 2013. This offer is on a first come first serve basis. The bidding pool data includes our BPO reports for review. No fade or contingency bids will be accepted.

If you have any interest, please feel free to contact me and send me your email address so we may forward out the NDA and then pool.

If you have any questions, feel free to ask here or in private.

This will be the first of many pools we liquidate in 2013. We are always interested in competent and capable counter-parties to develop on-going business relationships with.