What The Gurus Do Not Teach You In Note Investing - Part 3

[Chris Seveney]

This week's educational lesson is understanding a loan sale agreement - especially one-sided agreements. There are many parts to understand as part of the loan sale agreement (including closing date). The closing date is the date means when you close and when payments from the borrower would transfer hands. One key component is making sure there is language that outlines how the purchase price is reduced if a payment is received BEFORE the closing. (Note its typically reduced by the percentage, so as an example if you pay 90% - $90k for a $100k loan, and the UPB was reduced by $1,000 - you get a $900 deduction not the full $1,000).

But let's take a deeper dive into a LSA and some of the key areas - Specifically the section called "Representations, Warranties & Convenants" For both the buyer and seller. 

Here are some Buyer representations:

Enforcement/Legal Actions. Buyer warrants and covenants not to take any enforcement action against any Obligor that would be commercially unreasonable or create any liability for Seller. Buyer shall not misrepresent, mislead, deceive, or otherwise fail to adequately disclose to any particular Obligor or guarantor the identity of Buyer as the owner of the Mortgage Loans. Seller shall have the right to seek the entry of an order by a court of competent jurisdiction enjoining any violation hereof.

What is commercially unreasonable or create any liability for seller? Whole point of suing someone is because of an issue that could create a liability. The next section also stated "All future buyers are also subject to these provisions..." The only reason you should not enforce action is if its contrary to an applicable law or regulation...

Here is another section from Seller Covenants:
Seller agrees to honor requests for execution of endorsements of Mortgage Note from Seller to Buyer if made within thirty (30) days following the Transfer Date, after which Seller shall not be obligated to honor such requests.

So if there was an issue with a prior document, after 30 days they can tell you to go pound sand - and based on court documents, this has happened. 

There are more, my question to you is: Would you have discovered these issues based on your experience? The answer to most is NO. This is why you have an attorney review your contracts - so they keep you out of issues that could arise because of one-sided agreements.

[Chris Seveney]

Quote from @Chad U.:

My favorite is when the reps and warrants state that the loans are being sold as is and the seller will not take any responsibility or guarantee that the loans are enforceable or not, even if they were the sole cause of such  unenforceability.

 Yep seen them as well. I wanted to post this as I see many people do all the DD in the world and sometimes too much DD (I love it when the BPO comes back at $140k not $180k but loan balance is $50k and they want to fade/walk away) - but they miss the most important component which is this loan sale agreement.