Working out a Distressed Note - to start some discussion

[Steve Hodgdon]

There's a lot of buzz these days about Hardest Hit Funds as the exit strategy when you own a delinquent note on the way to REO. Sounds simply amazing. Seems there's always an "angle" to work.

Having spent nearly my entire adult life in the debt collection world (36 years and counting), I’ve learned you do better when you have multiple options for your borrower. Sometimes THEY will have an option you haven’t even considered. Don’t go charging in with “the” solution. Give the borrower some time to tell you how they’re going to solve their problem.

Maybe they don’t think there is a problem. After all, sometimes the borrower has been living rent free for years.

Below are some thoughts from a conversation with @DionDePaoli of SDXS.US on a note we are trying to work out.

Set up: Cleveland borrower. 2 loan mods in past 8 years. History is she pays a few months when pushed, then goes dark.

Generally, borrower assistance programs are an add-on bonus not something we would consider for bidding purposes. Qualification and availability are many times difficult to obtain. To that extent, lots of folks talk about them but the actual pull through ratio for these programs is relatively low compared to the amount of total defaults.

Remedies and contact:

1.Contact has to be made.

a. Call campaign from Servicer – typical outbound call is for reinstatement/back payments. If possible have a little better plan in place with Servicer to entice response. Borrower suffer from what I refer to as “ostrich syndrome” – when life problems mount up they stick their head in the ground. Got to give them a reason to look up.

b. Calls to inform Borrower they may meet a “loan special relief” program. Usually if I have a predetermined idea of MOD. A couple times I have referred to the program as “the deal of a lifetime”. The key though is have an incentive plan.

c .NOD/Breach Letter and Service of Process – this is when reality sets in and can prompt return calls.

d. Door knock – last resort and only if I think it is worth it. Door knocks often take several attempts and I haven’t had any better success since the door knocker can’t live negotiate the loan. A state issued mortgage broker license is required for any person negotiating between the mortgagee and borrower.

2.Is there a treatment (“deal”) to be made?

a.In my opinion the best two things to ‘create’ for a borrower are equity and affordability. Borrowers want to see equity earned faster, when they begin to understand how they can do that, like through a modification which actually shortens the term of the loan they tend to buy into wanting to work to keep the property.

b.These types of treatments are best suited for negative equity accounts where payment relief can be delivered through principal reduction and note rate can be adjusted to maintain yield. In some cases we have treated loans to bring the amortization term to 10 years or less which is a pretty good selling point to a borrower who can’t see the light at the end of the tunnel.

i.I think many folks who do Mods, especially folks learning by earning, simply look to extend the debt out in time – I wholly disagree with this idea. Distressed borrowers are better served and held better as investment as short term instruments and therefore, we, when we have the chance, should reduce the longevity of the debt obligation. In my opinion, that is the only real true way to release them from the perpetual debt servitude they exist in.

ii.In addition, as distressed investors, we want to realize the principal discount faster for better return – another idea commonly misunderstood. Why do we need a loan to yield 15% for 28 more years? We don’t, it would be better to have that pay to zero in 5 or 10, etc.

c.Accounts with equity are a race against time for the borrower. Failure to act will simply erode what little equity they have. So in the case of the Adams girl who I believe has some equity, it is in her best interest to simply sell the property. The longer she waits, the more fees and interests rack up and the less money she gets.

i.I have sent real estate agent door knockers to these with some success. Select the agent and give them some marching orders in regards to what the property needs to sell above in order for payoff to be made and they can compute potential borrower equity gain. As I mentioned, in my experience, door knockers seem to only really work well if they have a line to a decision maker. A licensed real estate agent is needed here since the desired outcome is the home actually getting listed for sale.

ii.There is not any real magic to these, either the borrower responds or you simply continue down the path of foreclosure. By law, the Servicer has to send several foreclosure alternative notices. In states where mediation is mandatory, that simply becomes the conversation topic. Sell or deliver a DIL. Cash for keys. Typical stuff, I think.

I think the Adams account suffers from ostrich syndrome and some inadequate collection work, as you discovered at the Servicer. In the past she was open to attempting to reinstate. Seems the story is she just can’t make ends meet. So the path that seems to best suit her needs is sell and do it now where she can realize a couple dollars. If you can get her attention, it would be a good idea to explore a cash for keys so she doesn’t fall back into the void.

“Jenifer, I want to help you get out from under this debt and mitigate the effect of foreclosure on your credit. I would be willing to give you $xxx to surrender the property and we will agree not to pursue any further obligations under the note as a deficiency and you can take the $xxx and get back on your feet.”

I think the key with her or borrowers like her, as with any potential slack given to folks who live in a constant state of chaos and distress, is set specific dates, times and actions. Having an agent/door knocker/rep go buy on a specific date to deliver the check and get the keys. Might have to arrange the moving van or something. Just have to work through the particulars of those specific situations. Most of the time, folks in severe distress want the money more than anything else. They will get somebody to help them move. So you just set the final date. Not a bad idea to follow up once or twice depending on how far out the delivery date is.

What kind of licensing do you need to go knocking on someone’s door? If we get some answers, bet there are different points of view. State issued licenses are required for interactions here. Unlicensed door knockers, which are not uncommon, are a liability. The SAFE Act portion of Dodd Frank reaffirmed many state laws which require anyone who receives monetary gain for negotiations between a borrower and a lender (mortgagee) to hold a license. So a licensed Mortgage Broker will work. Additionally, a licensed real estate agent is required to sell the home. A licensed real estate agent can share lender (mortgagee) terms with a borrower and carry out some level of negotiation communication provided the agent receives no additional monetary gain from the act. They must only be compensated from the sale of the property. Any other type of door knocker should only carry out courier type duties. Deliver a notice, letter or request the borrower call into the servicer. Unlicensed persons should not engage in any type of discussions with the borrower regarding the account.

Keep FDCPA, UDAAP, and other rules top of mind. Borrowers can get a free house if you’re caught with egregious violations.

While I’m less than a year into mortgage collections, I’ve seen and heard enough violations to kind of hammer the licensing point. We’re threatening someone’s home and there are plenty of consumer attorneys looking for work. Don’t give them a chance to come after you.