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. 

[Dion DePaoli]

Hey @Tiger M.  thanks for the call out.  I guess this must be a response to a thread dealing with these matters I created over in the Notes forum.  That link is here: Loan Investing...do you even workout, bro?  I am pretty sure it would have made a little sense to drop this directly into that thread, yet here we are over here.  It's all good, I and my crazy beliefs are portable.  

I suppose it is important to extend the invitation to Mr Prominent to join BP.  That would allow him some manner of defending his thoughts.  I suppose that could also backfire on him as what I have read above is the biggest utterance of jacked up stupid nonsense that I have heard since the last time I heard somebody suggest to purchase multiple crappy second liens as a strategy that make sense.  Feel free to relate my commentary if Mr. Prominent so wishes to hear it.  The good news though, it makes for one hell of a fairy-tale.

First, the NPN opportunity is nothing like Baskin Robins 31 Flavors. I don't even know what that means. There is some attempt to imply an array of utility to loan investing, specifically here, in non-performing second liens. The array does not exist. Never has never will. A defaulted loan has not other utility than being a defaulted loan. They don't make good door stops and they do not innately make you money. I suppose you can use a defaulted loan to carry ice cream, though I do not recommend it. That seems like way waste good ice cream.

As to Mr Prominent's opening ideas, to mention "risk mitigation" and then follow with stating loan risk can not be identified or quantified leaves us with a bit of a dichotomy.  Or what I like to refer to as a "steaming pile of horse poo".  Then to continue the eruption of stupid as a legal professional and essentially imply that exposure to un-quantifiable risks, meaning we do not know how small or large that risk may be, is a good idea.  Well, let me just give a simple example:

Tiger:  "Hey Dion, how deep is that hole?"
Dion:  "I don't know Tiger, just jump - twice"  

What's interesting is his justification does not seem to be able to exist on its own.  So after telling us, risk here can not be quantified or identified, he tells the un-quantifiable and un-identifiable risk needs to be spread amongst other assets whose risk can not be quantified or identified.  It seems stupid had a child and the result is that statement.  How can something unknown be spread?  I mean, who wants to eat that sandwich?  Unless it is ice cream, people like ice cream.

Moving right along, we have some story points we should discuss:  "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."

What is really interesting here is the bridge that is being jumped over.  If we don't know, because as Mr. Prominent says, we can't possibly identify or quantify the risk here, then how could we come to benefit from his magically implied notion of accidentally including loans which are not losers?  

To illustrate in a different manner here is an example:

Tiger:  "Hey Dion, I didn't know you knew how to make cookies."
Dion:  "Yes, a new hobby of mine away from typing mini novels on BP.  However, this batch is messed up.  I accidentally put poison in some of the cookies."
Tiger:  "Well, which ones are poisoned?"
Dion:  "I am not sure, you should just eat many because odds are, one may not be."

So then as Mr. Prominent moves along in his universe of things we can't know, he shares some well understood known concepts.  I would have hoped for an illustration of a better understanding of the contrast between title theory and lien theory states.  However, I can understand he only has so much time while looking out for our risks which can not be identified or quantified.  I mean, it takes a lot of time to see something that can't be seen.

The good news, I too have often found myself desiring a trip to the land of the one month foreclosure.  I hear the roads are painted in gold and the citizens have no houses.  If only such customs were present in the US or any nation for that matter.  Then and only then would we know the name of fairness.  

In the magical world of things that can not be quantified nor identified, apparently we need not be perplexed as the time continuum is also altered in to an infinite loop of prosperity.

"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."

This is both a blessing and curse for us all.  We will be both, early and late for dinner at the same time.  Which I am inclined to believe, we don't actually get to eat.  It's a shame really, I spent a lot of time on those cookies.  

 I will point out that it is nice we don't have to pause and argue about investing in loans under the guise of getting the property.  I heard that misconception never made it out of last week.  It was a troublesome little guy.  He will be sorely missed.

It would seem somewhere in the story, presumably by magic, our ship goes off course from the land of un-identifiable and un-quantifiable loans to the continent of all things know.

"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."

This indeed is a happy event for us all.  Since we have subscribed to the idea of "Plan A" - it seems as though we will have no need to find Plan B, C, D, etc.  That is, since "Plan A" above was we can not know, measure or guess what the outcome may be there would seem to be no need for any other plan or letter.  I am guessing this leaves more room for cookies and ice cream.

Oh, wait...scratch that, darn, he is talking about maximizing return.  Though, that makes all the dribble in front of that sort incomprehensible.  He probably should pick one, which is it?  

What does it matter if I know or don't know available remedies, when the outcome of those remedies can not be identified, quantified, guessed at or alike?  

Tiger:  "Hey Dion, what are you doing?"
Dion:  "Hey Tiger, just messing with these baskets and lids.  Some of them have cobras in them."
Tiger:  "Well which ones?"
Dion: "I don't know, you should stick your hand in all of them.  Don't worry, if you get bit, I will give you some cookies.  I am all out of ice cream though."

The closing paragraph of Mr. Prominent, almost makes me want to believe his middle name is "talk about other things that have no relevance to what you originally started talking about".   However, I can understand how the length of such a middle name is a little cumbersome.  

In this fairy-tale, it is good we have super powers the kind that would rival the DC and Marvel universes.  We can measure the un-measurable, while not needing to measure it.  We can know the known that need not be understood.  Other honorable mentions for our abilities seem to also include erasing history.  (I could have used this in school)  I am happy that Mr. Prominent decided to send out invitations to the first annual Private Loan Investor World Meeting.  (Perhaps I can bake some cookies?)

It really seems like a timely event.  I mean, the Mortgage Crisis was only just 84 months ago.  What is seven years besides a war that took place back in the 1700's?  

I am sure the passing of that time has afford some fantastic wine vintage for us to share at the party.   I mean, let's be honest, the Grand Canyon didn't really exist until Mr. Prominent saw a picture, right?

The one thing I think we can all be excited for, is that rumor has it, the infamous Dodd-Frank will be at this party.  I don't know about you, but I have personally wanted to get that guy's autograph for at least a week.  Normally, dropping Dodd's name around town gets you into all the hot clubs.  Well, all the clubs that don't know the guy, so technically you could even say you are him.  Ultimately he is not that bad of a guy.  Yea, a little strict and perhaps a bit misunderstood.  More people should really take the time to get to know him directly.  I mean, you can pretty much read the guy like a book when he is not hiding in plain sight.  Which is a town over by Google.

What has me concerned is this mention of the curve coming by Mr. Prominent.  It sounds like no other curve we have seen before, if I understand Mr. Prominent's angle properly. I suppose that begs the next logical question, when should we call Clint Eastwood?  You know, just in case we have trouble with it.

The last time this curve followed Dodd around town, back in 2010, there was about 243 rules that came along with it.  Let's be honest, who has time for just Title XIV let alone the rest?  

I too find reading bothersome and would much rather be told by someone else, who didn't read any of it, what is inside of it.  That just makes it all the better of a campfire story.  
After running the gauntlet of manure that is the above post it seems clear that we clearly have no idea what Mr. Prominent is talking about.  I am sure this is probably just our fault.  We don't get it.  I mean, to not know what you should know and have no need to know being what you should know is all an exercise in mental gymnastics.  Let's be honest, who really has time for these trivial concepts like prudent investing.  As long as we say we are mitigating risk, then by not mitigating risk we are surely mitigating said risk.  Mr. Prominent should probably be formally recognized for the amount time in minuets that he is saving all of the investors who subscribe to his plan which seems to say increasing exposure to un-identifiable and un-quantifiable risk will eventually work out in the investor's favor.  I am sure he just overlooked including any sort of time or volume for the event to turn into a positive.  I guess that makes sense, let's just mindlessly buy until we do win.  Good news for those who play the lottery, apparently eventually we all win.

For me, I can say, this has been eye opening.  I mean, I always wanted to jump out of an airplane multiple times with no parachute.  I figure, if I eat enough of my cookies, there is chance which I won't know, that I might bounce off a basket with a lid which may or may not have a cobra in it.  Therefore increasing my level of success not knowing whether or not said cobra would bite me.  I can only hope there is still ice cream left.

Yes, Yes.  In this world of Mr. Prominent's things we can't know, it seems there is truly one beacon of something known.  

Mr. Prominent will be not attorney of mine.  

The other good news, if legal advice in these matters doesn't work out for him.  I know some farmers who might be interested in spreading his commentary all over their fields.  

[Tiger M.]

@dion 

Glad to see I caught you on a rare good day! Baking cookies, reading comincs and all whatever else. Sorry, I don't understand much of your post, I'm just a simple guy I guess. I can tell you, Mr. Prominent as you called him, runs 8 figure NPN investment funds so I will stick with the attorney with a track record on this one, but thanks for the input.

As far as the comment, "A defaulted loan has not other utility than being a defaulted loan", in my experience, I have found them to be profitable. seems Dave Vanhorn and several others have figured it out too. I totally understand the idea of buying several notes in a pool and have been happy to have been exposed to the concept by a "Guru".  Peace.