All Forum Posts by: Dion DePaoli

We are an active principal and broker/adviser with a national foot print with some exclusions, more institutional than private. We are mainly cash flowing or cash flow potential folks but trade all performance as a function of the business.

I agree with Bill, getting your feet wet in your backyard is the best start. It seems that is what your question is targeted at.

From a Seller perspective, targeting regional specific counter-parties is optimal. Because the Buyer is localized, price execution should be a little better than that of a firm with a bigger footprint. California in a general comparison trades ahead of most other states due to the larger property values and the backdrop of shorter non-judicial foreclosure timelines.

To some degree, California has many folks seeking assets within its boarders. To some extent, IMO, that drives prices up and in some cases I question whether folks can make any money.

Depending on what the ultimate disposition strategy is, California can have barriers of execution as many loans quickly exceed conventional standard loan amounts becoming jumbo in nature. This makes rehabilitation of loans with a refinance takeout a little difficult. Because of this, some loans have been modified into low coupons. This further creates a gap between the bid and ask since lower tier market participants have a hard time making a business out of low yields with minimal or zero leverage capability.

There is an education process out there for lower level market participants that also has its issues. Many folks are looking at these assets now-a-days for the obvious opportunities but do not have that much experience in evaluation or workout. To a certain extent, I have noticed a little bit of a return to the 2007/2008 group of folks who migrated from origination to distressed loan investments which clouded the water with all sorts of misconceptions and intentions.

As Bill stated, many folks looking at the space are under some presumption they can flip loans with ease and make tons of money. Many folks are trying to break in with no capital and no value add intentions. IMO, they are just wasting their time and energy. The base concept of these folks relies on Sellers leaving some easily obtained yield and/or return on the table to be tapped into. Additionally, for some reason they tend to think they are slicker than the Seller. They also tend think these assets trade like real estate. In both cases, they don't know what they don't know, a dangerous place to make such noble assumptions. This is also the opposite of what I said above of why a Seller wants a localized investor. Further it ignores none of this is easy or simple.

The market makers in this business have billions of dollars. Middle markets have hundreds of millions. With that kind of capital comes resources, relationships and operations that are hard to replicate for lower level folks. In general, there is no magic formula to disposition even though some folks tend to believe last night they came up with a cutting edge idea such as modify loans or knock on doors to get DILs. None of it is really new.

All of that said, there is a gap at the lower levels that is being filled. Securitization is not close to coming back yet so the distribution of the risk of these loans will continue in private markets. The market is huge, so a crumb here can be very lucrative. The best firms will be slim and efficient in order to compete. They will have capital/investor expectations managed in line with reasonable returns and yields. Sure, in one off scenarios you can hit a home-run but that is difficult to scale up into a real business. Risk free rate of return is 1.5% +/-, always keep that in perspective.

I suppose one last concept to this thesis, is the counter-parties you will actual be able to do business with. Really, not as many banks are selling off residential loans as I think some think. The big investment banks are certainly actively trading but the littler regional or local banks do not have that much volume if any to really talk about. Most of their stuff is worked out in the bank not all the time but seemingly the majority. There is humorously a lot of folks who claim to do business with the big investment banks but that tends to be far from true, the trades are too large and less than 15% of companies pass initial compliance to trade with them. You will find more private equity type folks being active counter-parties more than banks and more open in minimal trade levels and compliance than the large investment banks. This is also a function of the pseudo step down from the large institutional investors to what I refer to as the street level guy. The key is to find some good counter-parties and work the relationship. If you are a buyer who will actually work the asset you will be valued as a trading partner. Break into the market with controlled bursts of acquisitions so you can update your workflows, expectations and ultimately your execution.

David C., the 7.5% comment as a desired interest rate is a function of most conventional mortgage being subject to some sort of servicing fee. That fee on average is 0.25% to 0.30%. This then gives you the net 7.2 to the investor.

I agree, the accuracy of the rule I believe is at 7.85% is true. That said, the margin of error is negligible up to 50% (arguably up to 20%) as the function is to brings back years as a whole number. For instance at 10% interest it takes 7.2 years which the point is 7 years, the real actual answer is 7.2725 years. As an example of this rule breaking on large number look at 72% interest which the rule would say doubles your money in one year, which we know to be false or 100% interest would double in 0.72 years. Again, it is not the proper calculation but it is a good mental shortcut calculating a non-linear equation.

The part about "mort" is fine, some of the other comments are not correct. A typical amortization schedule, say 30 years, will have 359 equal payments and 1 different at the end. In the beginning of any amortization schedule the majority of the payment goes to Interest not principal. It is true, the purpose or function of an amortization schedule is to show the allocation of principal and interest from the payment over the life of the loan. This at times includes cumulative balances.

People confuse amortization with term often. Happens in conversation and happens in calculations from time to time as well. Your loan term, the number of periods between first payment date and maturity date plus one is not to be confused with the amortization term which is the number of payment periods of constant payments at an interest rate to get a principal balance to X, where most of the time, X is zero. Your mortgage note does not spell either out and because of this, it can confuse people to thinking the loan term is the loan amortization. I will not go into the longhand math but in excel and financial calculators you can use the nPer functions to find the amortization.

While Bill dropped the hammer on other concepts here. One other good concept to think about is the Rule of 72. The rule of 72 is quick, un-precise math, that will find the time or rate needed to double an investment. The math is simple mental math and useful. Financial calculators can now find the precise number. Simply applied, $100k at 10% interest will double in 7.2 years. (7.2=72/10%). The same loan at 6% will double in 12 years. This also gives you a base of understanding why a desired rate on mortgages is 7.5%. Essentially doubling every 10 years. The rule breaks down and becomes less accurate after 50%. The rule can be used for any concept with a growth rate.

Ah, well, that is better. So you purchased the NPN and have worked to reinstate the loan. The amount of principal reduced from the loan is what was supposed to be per the schedule. In other words, the loan, according to what you posted, for the terms and point in it's life cycle has the proper balance, the borrower is current. It is unclear what the level of delinquency and default truly was through the post. So figuring out the potential default risk is a little difficult in the posts.

That said, generally speaking a relatively unseasoned payment history from a defaulted loan will trade around 3% to 5% higher than the value of the defaulted loan. So generically, this asset as a NPN trades around 35% of BPO or $10,465 which is around 41% of UPB. As a re-performing loan with 3 months seasoning you are looking at 38% to 40% of BPO $11,960 or about 47% of UPB. I would not automatically think you will float to the high side of that bid range. You reinstated the loan, but it doesn't appear you treated the loan to lower the default risk. So whatever happened to cause or lead to delinquency and default can happen again. Due to this you will need more payment seasoning to raise the value of the bid. The more you season those payments, provided the borrower makes the payments on time and does not fall back into delinquency or default the more the value of the loan go up.

Generically speaking, you can expect 10% ahead of NPN bid at 6 months. And about 15% to 20% ahead of NPN at 12 months of seasoned re-performance.

A couple other thoughts. CBR, is something you made up or learned from someone who made it up. That is not an actual data point. There are three credit repositories, typically sellers will get a FICO and share it. If a tri-merge report is received, then you use the lower of the three, which is the base of origination. That credit score is only relative to the date in which the credit report was pulled which is unknown. The 580 score is not getting you any price lift.

The split payment deal, IMO, you are being a little to generous to this concept. Additionally, the cash flow is around $3,600 I don't know if you are really improving your on hand cash by selling a portion of that off opposed to all of it.

As the short term re-performer, the loan has a gross yield around 30.5% and an IRR of 29.05%. Not a bad deal by any means provided you can get some performance out of the loan. If the loan goes back into default, you will likely shell out an additional $9k to foreclose and it will take you over a year and a half.

As a general exercise, how do these numbers mess with yours?

What are the names of the Mortgagee?

Do you have a title run down which shows these two mortgages as active still?

Are there any assignments in the title report for the two mortgages?

Who deeded the property to you? The borrower? Why doesn't the person who deeded the property to you know the story?

Matt I think you are thinking of notes like real property and they are not the same. The market is not the same. The transaction does not flow the same. I buy and sell loans for a living, it is what my company does. You are never getting a contract from me or anyone else that I know of in this industry with an ability to flip the contract. If I caught you attempting to even shop my assets, I would kill the deal and we would never talk again. And there is nothing you could do about it at all. When I said, flips are frowned on, they are and they are non-existent. Flipping note contacts is a dream not reality anyone telling you otherwise is lying.

Once you purchase the assets you can certainly sell them. If you go back and read my first post, which you thought was a rant, I addressed all of this already.

Caveat emptor.

Good luck.

Your PV is not correct. Ask yourself why the PV is not equal to the loan balance if you are solving with the mortgage payment, rate and remaining term. It should be the loan balance of $25,415.07.

In your OP, I am not sure what "CBR" stands for.

Your BPO is a little dated but according to that number you have a little equity, which should be the case since the note is only 3 years old.

You do not explain why your payment history is only 3 months. The loan looks like it has been making its payments. The loan balance is reduced by $2,849.26 which follows the loan terms you list. Perhaps this is just the detail level of your post. Generally 12 month pay history is shown to prospective buyers of the note, especially with 36 months already lapse and likely being only one owner. The loan from a balance standpoint is current and on time, that said, some of those payments could have been delinquent.

When you say "split payment deal". Not sure what you really mean there. Are you implying you are purchasing a portion of the payments? Do you mean this is a shared investment where you and someone else have a equitable interest in the assets?

Your question about ACH making a difference. A difference of what? Is it more attractive to have a ACH payment as an investor? Yes, sure it is. Is not having ACH something that you can get a discount for, no not likely.

So, now to the meat and potato of your post. What is your exit strategy? You should really be telling us not vice versa. Your current options based on your post will include two main paths:

1. Hold to maturity,
2. Hold for a period of time and re-trade the asset.

The low balance and value of the real property will be a barrier for the borrower to conventionally refinance. Certainly the two disposition strategies above are based upon the borrower not becoming delinquent and not going into default, which would change the path to foreclosure or similar.

So, what is YOUR plan for the asset. And when I say asset, I don't mean BORROWER. You can not force the borrower to do anything they are not obligated to do per the mortgage contract. So what is your investment plan? How long did you want to hold this asset?

The current yield of the asset, which is gross and you should look at getting a mortgage servicer, is around $14.34%. Your IRR holding the loan to maturity will be around 9.53%. That is provided you pay PAR for the note.

It is clear in your post that you are seeking a discount but it is not clear why this note Seller will allow a discount. Is the pay history slow or spotty? Is the collateral defective in some manner? The loan currently has equity (15%) so your bid on UPB will likely need to be high. On a par bid you are out running the market, so I am not clear where the discount mentality is coming from. A presumption of a note buyer newbie that all notes trade with a discount is simply flawed thinking.

If this were my note I was selling, based on what I can see there would be no discount here at all. The loan affords a nice yield and you as the buyer have to work the asset to bring your IRR in line with your yield.

Your last post with the payment and PV number says:
"is that based on the buyer & the yield they expect? "

This has me concerned that you are trying to flip this loan. I hate to be the pessimist, but you are out of your skill box and should not be playing that game. You just came to BP and did a poor job of highlighting the asset, you have no idea what drives the price of the asset and you clearly do not have an understanding of what the market is for this type of asset. It would seem there also the things that you don't know that you don't know yet too. That my friend is a recipe for disaster.

Again, based on what I see, there is no reason to discount this note. So then your bid to buy will need to be par. Your income for this asset would then come from the payments made by the borrower. Just because you would want/need a discount in order to sell the loan (with zero value add) to another investor does not mean a discount will be given.

Matt Yates, sorry you could not pull any valuable information out of my post. I did answer your question, there is no broker contract which gives you an interest in the asset. To gain said interest, you will need to be a principal party (buyer/seller) and that is a purchase and sale agreement.

Since your first role would be buyer, you will get a purchase and sale contract from your seller. When you are a seller you will supply the contract. There is no industry standard purchase and sale agreement really, they vary widely depending on transaction and parties. There is not a real standard to the reps and warrants inside said contract either, each seller and trade is a bit unique in that sense.

If you are looking for some agreement to function as a broker, there is no standard document for that either. That can be as simple as a success based fee agreement or as complex as you wish.

The shrug off of conducting due diligence and passing that through to your buyer is not a good plan. Trying to get into the middle of a trade as a pass through entity will be difficult at best. There are logistical barriers such as servicing transfer requirement time frames alone with time frames to receive collateral, all of which is agreed to in the purchase and sale agreement. As a function of being a legitimate party to the transaction you will have to record the assignments of mortgage, which is also a time barrier. Not having a complete chain of ownership from lender to current Seller creates issues with the enforcement of note and security agreement.

Generally speaking purchase and sale contracts prevent any type of arm's length assignment of contract. Generally speaking the concept of flipping is frowned upon in the industry and most sellers take every step they can to prevent such situations from occurring. Selling to a flipper implies that there is a better bid in the market place as flipping implies little to no value add to the asset.

You are not the first or last person to have relations with potential sellers of loans. That does not create any easier of a path to accomplish what think you are going to be able to do.

Hope that is less of a rant and specifically answers your questions.

2) Should the GWD be notorized? If so then when do you turn all the paperwork into the title company?
All deeds are notarized. The closing agent/title company will do this at closing.

1)Is earnest money the same as saying option money when using Pur-Contracts
Earnest money, Escrow money and Option money do mean the same thing when using in the context of talking about earnest money. That said, Option money, which is money given for some option to do something can be used in other situations where an option to do something is present. Option money is not commonly used to talk about Earnest or Escrow money and I wouldn't personally use so there is no confusion.

2)Do you give the seller the option money/earnest money for signing the contract or so you give it to the title company to start the paperwork and get the deal in motion?
All funds for a real estate transaction should pass through a title company or escrow company or real estate attorney. Look up RESPA which is Real Estate Settlement Procedures Act.

3)Which is the best amount $5.00 or $10.00?
There is no "correct" amount to give as Escrow money. That said, you will likely get laughed at if you offer such small figures. Escrow money is a showing of good faith and commitment to do the transaction. From a Seller's perspective, you the buyer are offering $X to have an exclusive right to complete a purchase of the Seller's property. Failure to complete the transaction after the grace period can result in you forfeiting your escrow deposit. A Seller looks at the escrow money judging the amount of time the property will be off the market while letting you try to purchase it. Failing to close on your behalf is considered damaging and thus the escrow funds are forfeited. Seller's have a right to counter all terms of your offer including escrow deposit.

Generally speaking, Gurus do not get much fan fair on BP. I do not know what he is teaching but you seem to be asking about how you can be some type of "protected broker". The only real way you will have an interest in a deal is have an interest in a deal as a principal. There is no magic there. That paperwork is simply a contract.

Additionally, "flipping" notes can be pretty dangerous if you have no idea what you are doing. As with most of these training gurus, they paint a rose colored picture with nothing but gains and profits. Far from true. These guys do not not teach you how to do any financial analysis or valuation on the asset. They teach you little to nothing about the regulations involved in the mortgage industry or debt collections.

This is not a very broker friendly industry as most of the brokers have no clue what they are doing and only serve to prevent real deals from happening. Additionally most tend to highly inflate their value and role in terms of monetary gain. They have never really purchased an asset, owned an asset or dispostioned an asset so how could they possibly know about any of it? (they can't and don't) Because of this they spend a bunch of time talk among themselves instead of anyone who actually is in the business.

Flipping notes/loans is a very misleading concept in this industry as it assumes that you will always have someone who will pay you more than what you paid for an asset. But if you do not have any experience with the costs and time it takes to work through the assets, how is it you plan to be able to put a price on them? How will you ensure you pay less than your buyer to you? It further assumes, not only do you know how to price these assets out but relies on the Seller not knowing what the asset is worth either. Completely backwards and opposite to reality. A knowledgeable seller will pick you off faster than a sniper in a watch tower on a clear sunny day. Aside from that, most Seller's are not going to hand you a return on a silver platter, the bid and ask is already separated in the market. Being the highest bidder really means just that, you just paid too much.

What will you do if you purchase defective collateral? What is defective collateral? How do you cure broken endorsements and assignments? What is the value of a NPN in California and New York? What is the value of a second lien versus a first lien? How will you evaluate your default risk? How will you determine the loans prepayment risk? What do you do if a borrower files for bankruptcy? What is a high cost loan? What is section 32 disclosures? What paperwork do you need for due diligence? What reps and warrants do you need from a seller? What reps and warrants will you need to offer a buyer?

I can likely keep that going for a good page or two before I even slow down to think of one question. You simply do not even know what you do not know right now and will not gain that from a Guru course.

Bottom line, you want to learn the business, go find a legitimate party in the industry that is willing to teach you. Plan on it taking a while to learn. Plan on it being a good share of work. Whole loan mortgages are more complicated than real property in their nature as real property is only one of several pieces of the industry. Gurus, are usually not in the industry they teach, they are in the Guru industry which sells CD's and books where they like to hear themselves talk.

Good luck.