OK.....now what???

[Bill B.]

I've partnered with my mentor to purchase my first NPN. The purchase is now complete. It is a first position note. I'm very satisfied that the purchase price of the note is around 40% of the current fair market value of the property. That FMV price is for a well maintained, but NOT improved/NOT flipped, home. (we got lucky.....when we close out (which will verify or disprove the thoughts outlined above)....I'll flesh out how we ended up with sixty percent equity.

We have a qualified servicer lined up to stay in compliance with our beneficent government.   

The collateral is on the way, but I do not have it yet.

I can provide info like maturity date, interest rate, last paid date, but I don't know that such information is pertinent to the question.

I plan on reading every line of every document...just to learn about the collateral.  (My wife and I have purchased real property before....so I have some familiarity with the documentation.)  But, I understand that I am trying to make sure this is a full and complete package.  I also realize that the servicer is going to review it for completeness and propriety.  However, I trust slowly and also want to understand the process in detail. 

So, with all that as background, what am I looking for in the collateral? 

[Dion DePaoli]

Bill congrats on continuing your voyage.

There is an undertone that makes it sound like all due diligence is sort of post settlement.  That is not the ideal way to buy a loan.  Due diligence will guide you in items that you need to expect.  

The collateral file typically consists of a Mortgage/Deed of Trust, Note, and Lender's Title Policy.  The only "original" you actually need is the Note and all endorsements to the note.  Mortgages/Deed of Trust and the assignments should all be of record.  Any unrecorded assignment would need to be original and that is about it.  If the instrument is of record there is no requirement to have an original to enforce.  (recording perfects the instrument)  Title policy copies are not required to make a claim but you do need to be able to reference the correct underwriter and policy number.  Certified copies of recorded items can be obtained through every county recorder office in the union.  Since most states require Modification Agreements to be perfected, those too can be found in record and if not of record then you would need the original to record.  

Outside or above and beyond what we have listed here and to some degree even this list itself is subject to change and the file content really depends on the Seller and Buyer and is agreed in some fashion in the purchase contract.  A Promissory Note can be lost and thus you would expect a Lost Note Affidavit.  A loan can be in forbearance, so you would need that agreement.  The Seller may only require themselves to deliver each Note along with assignments and endorsements.  The collateral could be in custody of an attorney for legal matters like foreclosure.  The preparation and recording of the assignment to you can be accomplished by you or the Seller.  

The key concept here is you do not ensure a file is "good" post settlement, you do that pre-settlement, during due diligence.  Due diligence helps mold the list of items you should expect.  Generally speaking you should not wire money while or until all items have been reconciled with the Seller.  Once you settle it is tougher to obtain missing or trailing items.  

Loan sales are not like real property, there is no "normal".  There is what is agreed in the contract.  

Servicers while they will reconcile your file upon boarding, I would not define that as "due diligence".  Also we have the age old notion of garbage in turns to garbage out.  

Reading of any of the documents should have been afforded during due diligence.  The Seller should have provided you with copies of the file content.  You could have read all the documents then.  More often, there is more content to be found digitally in file than the hard file that is shipped.  It is not uncommon to settle and then receive the file.

Generally speaking at the one off level of purchasing loans and assuming most of these types of sales are down stream trades for some more institutional type investors.  It can be pretty dangerous to expect to obtain any items not presented during due diligence.  More often than not, the Seller sells the file in an As Is condition further removing any recourse to obtain items which may be missing.  

The notion of a "full and complete package" is a subjective idea. Full and complete in some sense is dependent on what is happening on the loan account and to some degree the parties that have been involved with the account. There are disclosure requirements that institutional loans typically carry the weight in their origination file but in a Seller Financed file you should be inclined to obtain. Items like HUD, TIL Disclosure and other origination required documents tend to be overlooked and their importance is file specific. Is the loan a high cost loan? Well then you need a disclosure for Section 32. Not having said disclosure may invalidate your loan if a defense is raised that a right of rescission was not granted or not disclosed.

Buyers in the market are up against a minimalist idea in the market.  I would presume this is where the notion of "complete" file comes from.  Many folks know the stack of papers they signed at a closing of a loan for themselves was extensive.  These distressed loan files that trade are much skinnier than that most of the time.  The is no normal and there is no consistent file content when it comes to distressed loans unless the buyer themselves creates and stays with their own standard.