All Forum Posts by: Patrick Roberts

Be interesting to see how this plays out with a recorded transfer via warranty deed. Sounds like the seller tried to DIY it and botched it. Why is the lender trying to sell the paper rather than filing a title policy claim - did they not get a lenders title policy? 

 Madison, Provident, FCI are some of the more notable and reputable vendors. There are a few others as well; these are the ones I have dealt with recently. 

Attorney and lender fees would add another $10k-$15k in costs to this. Repo agreements such as this structure are fairly common in the capital markets world, but theyre typically done at much large scaler because of the transactional costs. Also, theyre typically executed with a margin as a buffer to absorb losses from market moves as Chris described. I would expect something like this to be executed at 70% LTV, and then the repo would be at the imputed yield plus costs (with yield on the costs as well).

Another factor here is counterparty risk. Ken mentioned this - what happens if youre unable to execute on the repo when the agreement terms out, or if the market drops and the house cant appraise for the repo amount. 

Honestly, overall, I feel like this is reinventing the wheel unnecessarily. A old-fashioned loan would probably accomplish the same thing with a fraction of the complexity. I dont think there is a world where you're going to convert 100% of your equity to liquidity without selling the property, and even then, you'll likely only walk away with 93-97% of the sale price. 

There's an adage in the investment world: "you cant eat IRR." I remind my clients of something similar in situations like this - you cant eat equity. It looks good on paper, but youre rarely able to realize on 100% of your equity.

A servicing company will handle all of the borrower payments, accounting, recordkeeping, statements and communication, etc. If the borrower makes additional principal payments, the servicer will handle this as well. If this is for an owner-occupied property where the borrower is living in the property, whoever services the loan will likely need to be licensed to do so. Servicing for a straightforward note like this should be around $35/month.

For the documents, an attorney or an RMLO service should draft the note and the mortgage/deed of trust, as well as the rest of the compliance related disclosures, reviewing title, etc. As far as the conditions and agreements, most of these are pretty standard across the board. There are some big no-no's and some must-haves. Contract for deed is another option, but I personally prefer and note and mortgage/DOT.

I do not recommend DIY with this stuff. If you get something wrong, it could cost you severely.

Not enough capital. You'll spend all of that on closing costs alone, leaving you 0 liquidity for the rehab.

Another thing - dont get anchored to the list price. Determine the appropriate price based on ARVs, rehab and carry costs, the value of your time and effort, and the risk youre going to take. What the seller listed it for is irrelevant. 

Just at a glance, I would also challenge the idea that a property listed for $140k and only needing a light rehab has an ARV of $340k and has been sitting for 3 months. Doesnt pass the smell test.

 Just buy the rate down. Probably cheaper than paying for two closings. 

Quote from @Linda Weygant:

Quote from @Patrick Roberts:

Quote from @Linda Weygant:

Quote from @Chris Seveney:

Quote from @Linda Weygant:

I'm a CPA, serving real estate investors.

This time of year, clients who are on extension will request proof that they are on extension for their mortgage broker.  Because I live in the 21st century, I EFile the extension for my clients and my software receives a confirmation back from the IRS and/or state that there is now a valid extension on file.  The proof exists in bits and bytes in my software, but my software can generate a letter that looks like this:

All of the smart people I know would look at that and say "Yep, that's proof of an extension being filed all right.  Even gives me the confirmation number.  Cool!"  HOWEVER, the bright folks in the lending industry say "No - I want the form!".  I do get it.  Back in the dawn of time, about 15 years ago before EFiling was so prevalent, it used to be that you'd print out a form 4868 and mail it to the IRS to request your extension.  The IRS would stamp it as "approved" and mail it back to you and that was your proof that you had a valid extension.

Somehow... SOMEHOW... in this day and age, this is what you guys still want???  Why??  I mean, my software can still generate that form and print it out.  But if I do so, it doesn't mean that it was sent to the IRS and it certainly doesn't mean that it was accepted/acknowledged.  The IRS no longer stamps the paper copy and sends it back.

In fact, the client could just go online and complete the form using Adobe and give it to you and it would be proof of exactly nothing.

So tell me..  Please, because I'm dying to know.  Why are you like this?

I believe its a CYA thing for the institutional lenders who are buying these loans and its there requirement. 

 OK.  But WHY is it their requirement?

Because you are dealing with the federal government. The vast majority of loans are Conventional (Fannie/Freddie), FHA, VA, or USDA, and are directly or indirectly subsidized by the federal government. All of the guidelines for these entities are publicly available and are written by the staff of appointees of the agencies that administer them - the FHFA, HUD, VA, etc. All federal bureaucracies.

Most lenders sell their paper to one of these entities, and the guidelines are either A) very specific about the forms that are required and the substitutes that are allowed and not allowed, or B) nearly deliberately vague to the point where the seller (i.e. lender) has to guess at what's required. Sound familiar?

If lender's dont check all the boxes and provide the correct forms when required, they get hit with buybacks, meaning they have to buy the loan back from the aggregator/entity/agency. This is insanely expensive for lenders and, if buybacks get out of control, can literally wipe out the equity capital of a lender, causing insolvency. 

If you think a lender is going to risk a $40k or $50k loss because you want provide a different form than what the govt bureaucracy is known to accept, youve got another thing coming. From a solvency standpoint, it's much better to tell the borrower to kick rocks than to roll dice on an untested and/or unproven document. Im not saying this makes sense - Im saying that in the lenders are not incentivized to use common sense - theyre incentivized to use the forms that are proven not to cause losses. In other words, the CRO or UW manager/leader is saying "this other form is probably good enough, but I know for sure that 4868 works and I'm not willing to gamble tens of thousands to test this other document."

Some lenders go over the top with zealous adherence to guidelines and not straying from the known path because they recently got hit with a string of buybacks. For example, an underwriter or risk officer goes out on a limb doing something that seems to be common sense (like accepting a different form from a CPA than one that has always worked), only for the loan to come back to the lender 60-90 days later as a defective asset. Then a memo comes down from management saying the next person who does something like this will be shot on sight because the lender just lost $50k to make someone's life easier by allowing a different form. 

For instance, in 2023, FNMA released selling guide announcements that alternative documentation for a 4868 could be accepted. In cases like this, what they will accept as a  sufficient alternative is anyone's guess until you've tried something and either it worked or you got burned. No one wants to play the "test and find out" game, they want to play the "I know this form works and I dont get paid any extra to bear the risk of trying this other form" game so they dont take losses. 

 At last, an answer that makes sense to me.  It's still stupid, but makes sense.  Thanks for taking the time to write out a well thought out and highly explanatory answer.  Going forward, when the client asks for proof of extension, I'll just do what we've always done (and we'll keep getting what we've always got).

They aren't looking for proof of filing.  They're looking to check a box.  Something I always suspected but thought it was the underwriters being dumb.  But now I understand it's the government being dumb, which is always imminently more believable.

 A lot of this is lender specific, too. That's what @Brandon Croucier intrinsically meant when he said that it varies by lender and guidelines. This is especially prevalent in small local banks and credit unions. Large, specialized lenders, like non-depository, independent mortgage banks (IMBs) or wholesale lenders typically have the economy of scale, margins, and skilled staff to work through stuff like this - to competently think outside the box. Smaller credit unions and local banks, or some highly bureaucratic lenders, however, are typically the opposite. 

Where an IMB or boutique lender has a risk management team who are heavily credentialed and experienced and are very involved in the leadership/boards of the industry associations (like the MBA), small credit unions/banks typically have "Donna" leading the mortgage department, which consists of two underwriters, an assistant, and a bunch of tellers-turned-loan officers. Donna has worked at the credit union for all of her career and has never seen the outside mortgage world to know any different than what she was taught in 1996. They do things the way theyve always done them, including using paper URLAs/application forms and printed rate sheets where they check a rate on a rate sheet and stick it in a folder to lock a rate. But hey, theyve got "great rates", because they dont spend money on the infrastructure - people and technology - to be good at what they do.

So when Donna gets asked to accept a substitute for a 4868, all she knows is that in 1996 she was told to always get the 4868. This is because if the bank or CU needs to unload some of its risk to stay compliant with capital/reserves/risk requirements as market conditions change, they can sell the paper quickly to rebalance. 

This is why I always shake my head when people say stuff like "get 15 loan estimates from every lender within 50 miles and pick the lowest cost/best rate/etc". The skill and expertise of the lender matters - a lot. Competent, skilled people and firms will never be the cheapest. This applies to lenders, CPAs, contractors, whatever. You typically dont want the lowest bidder working on things that are important. You want someone who knows what theyre doing and will do it for a fair price. 

To tie this back to your original post, this is why you see this problem semi-consistently with variation across time and geography. Its consistent enough to be a problem because probably 20-30% of lenders fall into this category, but not universal to the point where every lender does it, because another segment of lenders is skilled enough to work around these kinds of issues. My guess is that if you drill down enough, you'll find a selection bias that results from a correlated variable, likely the clients themselves. The variable may even be markets like the one we're in now - where everyone is shopping everything to save every dime, pulling more clients to the "cheapest" lenders, causing these kinds of problems to surface at higher than normal frequencies.

Quote from @Linda Weygant:

Quote from @Chris Seveney:

Quote from @Linda Weygant:

I'm a CPA, serving real estate investors.

This time of year, clients who are on extension will request proof that they are on extension for their mortgage broker.  Because I live in the 21st century, I EFile the extension for my clients and my software receives a confirmation back from the IRS and/or state that there is now a valid extension on file.  The proof exists in bits and bytes in my software, but my software can generate a letter that looks like this:

All of the smart people I know would look at that and say "Yep, that's proof of an extension being filed all right.  Even gives me the confirmation number.  Cool!"  HOWEVER, the bright folks in the lending industry say "No - I want the form!".  I do get it.  Back in the dawn of time, about 15 years ago before EFiling was so prevalent, it used to be that you'd print out a form 4868 and mail it to the IRS to request your extension.  The IRS would stamp it as "approved" and mail it back to you and that was your proof that you had a valid extension.

Somehow... SOMEHOW... in this day and age, this is what you guys still want???  Why??  I mean, my software can still generate that form and print it out.  But if I do so, it doesn't mean that it was sent to the IRS and it certainly doesn't mean that it was accepted/acknowledged.  The IRS no longer stamps the paper copy and sends it back.

In fact, the client could just go online and complete the form using Adobe and give it to you and it would be proof of exactly nothing.

So tell me..  Please, because I'm dying to know.  Why are you like this?

I believe its a CYA thing for the institutional lenders who are buying these loans and its there requirement. 

 OK.  But WHY is it their requirement?

Because you are dealing with the federal government. The vast majority of loans are Conventional (Fannie/Freddie), FHA, VA, or USDA, and are directly or indirectly subsidized by the federal government. All of the guidelines for these entities are publicly available and are written by the staff of appointees of the agencies that administer them - the FHFA, HUD, VA, etc. All federal bureaucracies.

Most lenders sell their paper to one of these entities, and the guidelines are either A) very specific about the forms that are required and the substitutes that are allowed and not allowed, or B) nearly deliberately vague to the point where the seller (i.e. lender) has to guess at what's required. Sound familiar?

If lender's dont check all the boxes and provide the correct forms when required, they get hit with buybacks, meaning they have to buy the loan back from the aggregator/entity/agency. This is insanely expensive for lenders and, if buybacks get out of control, can literally wipe out the equity capital of a lender, causing insolvency. 

If you think a lender is going to risk a $40k or $50k loss because you want provide a different form than what the govt bureaucracy is known to accept, youve got another thing coming. From a solvency standpoint, it's much better to tell the borrower to kick rocks than to roll dice on an untested and/or unproven document. Im not saying this makes sense - Im saying that in the lenders are not incentivized to use common sense - theyre incentivized to use the forms that are proven not to cause losses. In other words, the CRO or UW manager/leader is saying "this other form is probably good enough, but I know for sure that 4868 works and I'm not willing to gamble tens of thousands to test this other document."

Some lenders go over the top with zealous adherence to guidelines and not straying from the known path because they recently got hit with a string of buybacks. For example, an underwriter or risk officer goes out on a limb doing something that seems to be common sense (like accepting a different form from a CPA than one that has always worked), only for the loan to come back to the lender 60-90 days later as a defective asset. Then a memo comes down from management saying the next person who does something like this will be shot on sight because the lender just lost $50k to make someone's life easier by allowing a different form. 

For instance, in 2023, FNMA released selling guide announcements that alternative documentation for a 4868 could be accepted. In cases like this, what they will accept as a  sufficient alternative is anyone's guess until you've tried something and either it worked or you got burned. No one wants to play the "test and find out" game, they want to play the "I know this form works and I dont get paid any extra to bear the risk of trying this other form" game so they dont take losses. 

Very few lenders - Conventional, DSCR, or otherwise - allow for your downpayment to be borrowed funds. Half of the reason for a downpayment is to make the borrower put skin in the game.

Meh, I wouldnt call 8.5% high for a DSCR at 650 FICO - probably normal. At $120k, 7% vs 8.5% isn't really moving the need a whole lot on the monthly payment (maybe $100/month) - it's mostly psychological. If want to keep the property and this amount will get you where you need to be, then bite the bullet, tackle your credit, and refi down the road when your FICO has recovered. Just dont sign a 5yr PPP if you can avoid it.

This is probably your best bet - this is a fairly standard offer for a DSCR given your credit. There is no shot of a 650 FICO cashout refi on an investment getting approved without piles and piles of reserves and a low DTI.