Evaluating Tapes of Non-Performing Notes

[Sandy Uhlmann]

As a note newbie, the entire process of going through non-performing tapes seems a bit overwhelming.  I was wondering if anyone has advice on how they do their preliminary process in order to rule out some of the notes before the real in-depth due diligence starts?  I realize that this may vary depending on if you invest in NP firsts vs NP seconds.   Is there a priority system/ranking system that you like to use?  Which factors do you find most important? What is your favorite notes to buy and why?  

Some of the factors that I can identify off the top of my head include:

-Price of the Note

-Judicial vs Nonjudicial state

-Redemption Period

-Price of loan vs UPB

-Time to foreclosure

-Typical cost of foreclosure in that state

-Hardest Hit funds available?

-BK vs no BK

-Status of first (if you are purchasing NP seconds)

-Equity vs No Equity

-Credit score of borrower

Are there any of the above that you would not consider at all?

Thanks again for any input!

[Joshua Andrews]

Hi Sandy,

You have asked some great questions. You have also opened a can of worms with regards to the "correct" answers to these questions. I will start off by saying some of the answers to the questions you've posed have to do with an individual investors model and their own risk tolerance. That being said here are my thoughts and what I look for.

-Price of the Note

This is important but not the determining factor for me. If the loan will make me money, with plenty of cushion price is not a huge concern. Some folks get really hung up on what percentage of UPB they are buying at, and trip over dollars to pick up pennies. Of course we never want to over pay, but this is not the first thing that I am looking at when buying. Price is always negotiable. I do tend to stay away from overly large notes, such as something with a purchase price of $20k+, unless it has substantial equity. Most that I buy are in the $4 - $15k range with regards to my out of pocket purchase price per loan.

-Judicial vs Nonjudicial state

If given the chance, I will choose non judicial every time. Judicial goes throough the corts and is more costly and time consuming. This makes the expense to foreclose and help nudge the borrower into a "wake-up call" more costly. It also takes longer. However, I have recently picked up a couple notes in judicial states because the price was right and the deal still makes sense. So don't count out loans in judicial states. Just be prepared to sit on them for awhile before an exit. But rest assured exit you will, and typically profitably!

-Redemption Period

A factor I consider, but low on my list. This is not a huge deal for me, as I rarely follow through with a foreclosure. I initiate them on 90% of deals, but it is only used as a tool to get the borrower to communicate with us. I just want the loan mod.

-Price of loan vs UPB

This can vary. Pricing is important, but I weigh in all factors. After running a few exit scenarios, if the deal still makes sense I will buy it. Remember in addition to UPB, there are typically considerable arrears on these delinquent loans. That is found money.

-Time to foreclosure

Goes hand in hand with judicial foreclosure states. Time to foreclose certainly makes a difference, as it's a tool used to get the borrower to communicate with us and perform a loan mod. If it takes me a year to follow through with a judicial foreclosure, I just need to be prepared for that mentally, along with the added expense. The loan also needs to be priced right. Meaning, it needs to be priced lower than others in order to make it worthwhile for me to wait an entire year or more to consummate a loan mod with the borrower. There are a handful of states I will not buy in, such as PA and NY.

-Typical cost of foreclosure in that state

This is not an issue for me. I set aside 2-4k in legal expenses for all loans I buy. I am prepared for this in advance.

-Hardest Hit funds available?

No experience in this area. At least with 2nds.

-BK vs no BK

I love borrowers who have been through chapter 7 BK. It means they wiped much of their debt clean, items that were killing them financially like credit cards, consumer cards and other misc debt. It puts them in a better position to pay their mortgages.

-Status of first (if you are purchasing NP seconds)

1st mortgage must be current. No two ways about it. I will not buy otherwise. Emotional equity plays into this as well.

-Equity vs No Equity

As crazy as it sounds, I buy both. However, I weight my portfolio with around 70% which have at least some or full equity coverage. Then I make plays on smaller loans with smaller out of pockets for me. Like a loan I just purchased for $4,000 recently. It is underwater a little but excellent loan. Borrower has family in the home and the place is immaculate. I would live there myself. 1st is current and they have lived in home for 15 years. Other factors play into this of course, but when I can buy something for $4,000 that will produce a $200 month cash flow for me, basically for the next 20-30 years, I will buy that every time. Owning one is not life changing, but a few start to add up. It's a comfort level with the assets that I am developing as I learn more.

-Credit score of borrower

This is not a big factor for me. However if the score is substantially under 600, I will be careful with the loan. Unless they just finished a BK, it could mean the borrower is a habitual credit criminal. Just someone who does not care about paying bills on time, if ever. Usually I buy loans in the 550 - 750 FICO range. Other factors play into this of course.

Hope that helps. Post more if myself or others on BP can elaborate. Glad to see you are getting involved. This is a great business.

Josh