2nd NPN risk mitigation attorney response

[Tiger M.]

I thought the comments from a prominent note attorney may be helpful to folks watching the NPN niche. I see BP comments coming in from all sorts of folks with their varied opinions, influences and comments on these forums. Some that come from outer space where they were previously looking for new life and new civilizations in another galaxy. Others that are entrenched in this niche on a day to day basis (@Dion DePaoli  for one) .This NPN opportunity is like Baskin Robbins with 31 flavors (1st, 2nd, performing, OWC, partials, etc.). That is part of what makes notes work. Each investor can select what fits their investment model and roll with it. I hope this is helpful as the attorney below works for a major investment and servicing firm. I feel product type is one of the most important disclosures in any note forum discussion to avoid blended responses. This topic is on the junk(cheap) underwater second position lien with intention to help the borrower stay in the home. The question posed was, "What are the most important items in NPN risk mitigation". Reply as follows:

A typical client of mine is seeking counsel for one of two things: (1) how to protect themselves from lawsuits for things that have happened in the past; or (2) how to best minimize risk for future business endeavors. Of course, forward-looking risk-mitigation is always preferred. The following is intended to offer a bit of perspective on necessary aspects of the non-performing note business with an eye towards mitigating risk:

First, acquiring the right asset is naturally important, but, when it comes to non-performing loans, evaluating one asset over the other is often impossible due to the one thing that no two loans will have in common: the borrower. As a result, the only real method to accounting for this risk is acquiring several similar assets. We know that certain mortgages will end up resulting in little or no income (be it through something like a bankruptcy or foreclosure). Purchasing a single loan, therefore, is akin to entering a casino. However, by spreading the risk across a number of loans, an investor is far more likely to weather a handful of “bad” loans in stride while covering losses and making a substantial profit on the loans that are successes.

Second, each state treats mortgage loans (or loans secured by trust deeds) differently. Some states require a lawsuit to be filed to foreclose; some states merely require some recorded documents and a public sale. In either case, the process could take just over a month to several years. But, a typical note investor is rarely interested in the property itself, so the timeline, however long or short, can be used to his or her advantage. Additionally, some states have different laws regarding deficiencies or even how the asset or debt is to be treated in bankruptcy or insolvency proceedings. Understanding the state-specific remedies available in the event the asset does not perform in accordance with “Plan A” become crucial in valuing an asset for purchase or otherwise maximizing return.

The third thing to be mindful of is regulation. This industry, at least at the private level, is in its infancy. As I see it, the industry is on a path towards more regulation. With the passage of Dodd-Frank, and the extension of fair debt collection statutes (both state and federal) to, not-only third-party debt collectors, but to owners of that debt as well, the regulatory bodies have exhibited their intention to continue protecting the consumer. Now, at present, much of what is done in working out non-performing notes, may be done without a license, the truth remains that at some point in the future, that may not be the case. Therefore, working with entities that carry the appropriate licenses (e.g., debt collector’s licenses, servicer licenses, and mortgage broker licenses) across the nation and are “ahead of the curve” so to speak when it comes to compliance further minimizes the investors potential risk.

In short, the opportunity to make money in notes certainly exists. With an understanding of the foregoing, however, I feel that that opportunity can be realized.