Is this note worth buying ?

Question

I am trying to get my feet wet on the note business. Here is something that i offered and the seller accepted my offer. (Have one last chance to backout if need be).

UPB: $8226.36

Monthly payment: $596.50

Remaining number of months: 14

BPO: Approx $900K

Note rate 5%

Maturity date: 12/10/2016

30 year Note originated in 1987 !!!

Offering: $5800.00

Servicing fee: $85/month ($1190 for 14 months)

Rate of return : 21% ?

((8226-5800-1190)/5800)*100 = 21%.

Am I calculating it correctly ?

Are there any other costs involved when the buyer pays off the loan?

One more thing i noticed in the due diligence package is that, there is an affidavit of lost note. Should this be a concern ?

Dion DePaoli · Answer

A couple things:1.  The loan vintage tells a story that is being ignored in the posts so far.  In the 1980's interest rates were in the 8% to 10% range.  In 1986 the loan rate for a conventional conforming loans was roughly 9.5%.2.  The current interest rate on this is 5.0%.  That is an interest rate from 2009.  3.  So what the story says here is that a borrower from 1986 held onto this loan for 23 years.  Then experienced financial difficulty and sought out a modification around or about 2009.  That would not be overly common.  - Where is the modification?  What was the original loan amount, rate and payment?4.  Especially uncommon since when that financial hardship would have occurred the borrower would have likely been able to simply sell off the property and walk with north of $700k.  (Assuming the $900k FMV is accurate)  A simple and make sense consideration that most folks likely would have acted on.  5.  The current balance has an LTV of less than 1%.  That alone would warrant zero discount.  When this loan probably fell under distress the market would have gobbled this loan up at par and foreclosed.  Again, having $700k in equity.  So why did it ever trade to begin with?  And why is a discount even be considered?  I think there is a large part of the story that is missing here.  The attractiveness of yield is causing some blindness.  What typically looks like a home run is often not.  While there is a chance that the sun, moon, stars, winds and water all lined up on this loan - that is not all that probabilistic or common.  The last couple of loans I have seen with a 1980 vintage were being improperly serviced.  At some point the borrower fell behind and collection efforts failed, however FCL never took place.  A newbie investor purchased said loan and had attempted to collect the amounts due well after the loan passed statue of limitations.  An activity you do not want to get involved with.  Does any of that mean this loan has some serous defect?  It might and it might not.  That is what due diligence is for.  However, I would be concerned if your offer is considered as taking a haircut on a loan that matures in less than 1.5 years at 0.64% LTV is relatively unheard of.  Caveat Emptor

Rick H. · Answer

I'm old school. I focus on collateral first.

What are the barriers to the security? I always look at title and equity which is why I don't personally work the non-performing 'emotional equity' deals.

As previously framed by others, this is loan is an anomaly. I like them my tolerance for risk is fairly high.

Odds are, you'll learn a great deal for your small investment.

For instance, you'll find out what happens when someone with $890,000 of equity wants to make you go away.

I'm with @Dion DePaoli that a LNA isn't that big of a deal. You can remedy that with a fresh loan modification that includes, among other clauses, language that reaffirms the debt. Once you've doesn't the money for an attorney to draft that, which I suggest that you do, you'll have that document to use as a tool for other note purchases.

As to title, I'd be concerned (as I implied above) that a junior lien holder might find some way to get their title company to beat you up over a period of time. However, if you get a title endorsement from original insurer, ($150) you'd be golden, IMHO.

Spend the money and have fun with it. Better than Vegas or Indian Casino odds, plus you can talk about it!

Jay Hinrichs · Answer

@Pari Thiagasundaram  lost note is no big deal like Dion said. other wise they have no note to sell right.. if they lost it what are they selling  :)  there is probably a LNA which should suffice

crap I lose notes all the time .. at one time I had 400 HML s out... were I was the bene..

bound to lose one  :)  not sure then why anyone would sell this note with such a small balance  unless it was subordinated and its really a very junior lien

Dion DePaoli · Answer

Just for the sake of mention, LNA's are not that big of a deal.  Notes get lost and LNA's stand in for those notes pretty often.  As long as they are properly filled out, make the proper claims and are signed and notarized they are no different than having the original note.In this case, the LNA is more of an instrument of ownership than the governance of the debt.  That is because, as stated above, there seems to be a mod present.  The mod puts forth the new terms of re-payment.  So the note or the LNA serves as a bearer instrument which is something a mod does not do.

Pari Thiagasundaram · Answer

@Jimmy Campbell30 year Note originated in 1987 !!!

@Jay Hinrichs property is in San Jose. The fact that they have a "lost note" is what is concerning me. After all the insight that i got from this forum, i thought it is in my best interest not to pursue this note any further. (atleast not as a first note that i would be purchasing).

Jay Hinrichs · Answer

@Pari Thiagasundaram  are you sure you have all your numbers correct.

for instance were is this property... if it has that kind of value might it be in CA.. or one other high value market.. no reason for the note holder to discount this at all. what are they going to do with a whopping 5800 dollars... LOL... this just does not make sense

Maybe the ARV is really 70k or something like that..

would be interesting but strange things happen.. and of course its throw away money for you as the investor.. so seems like a good one to get an education on..

Jimmy Campbell · Answer

Ditto.  Very good answer Dion.

Did we ever answer if this is a first or second?  Performing/non-performing?

Pari Thiagasundaram · Answer

@Dion DePaoli, there was an affidavit of "lost note" in the due diligence package and that was a RED flag to me as i dont have that information. Thank you for the detailed explanation !

Mike Hartzog · Answer

Assuming this is performing loan, your annualized yield would be ~65% at that purchase price.  This does not factor in monthly  servicing fees (which would reduce your effective P&I payment), or one-time fees related to  for the purchase itself, loan boarding , etc.  (Servicing fees for a performing loan are generally in the $15-$20/month range.)  Assuming performing loan with a good equity position relative to value and nominal purchase costs, its a good deal IMO.

Bill Gulley · Answer

I suggest you enter the purchase price, plus settlement costs as the present value, enter the UBP as the future value, take the payments and subtract the servicing costs from the payment, enter the term and solve for the interest rate.

Is that a first mortgage??????

900K value? That's pretty good if you don't have senior liens.

Sounds like an old bank loan that fell out of the basket, sounds pretty good and, it might get paid off sooner, that's even better! Good luck :)

Is this note worth buying ?

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