Bidding Guidelines for Notes?

Question

While I am sure this topic has been discussed, for some reason my search of bidding guidelines for notes has not yielded any information other than for bidding on HUD homes.

I have traditionally focused on NP junior liens. I am a newbie when it comes to bidding and buying NP firsts.   I have recently seen a lot of tapes come across that are for re-performing firsts.  Does anyone have any general rules of thumb for how much these go for?

Most of the ones that I have seen on these "re-performing" tapes are making some payments but are far from being considered performing notes.  Some are BK with good payment records at present presumably because the trustee is making the payments, the majority of others have been sporadic payers.

As an example, I see a note with a low UPB of approx $15,000 payoff with a low LTV of approx 25% at a rate of approx 14% that is in a rural area.  It had a long history of no payment but it has had approx 5 months of regular payments.  Of concern is that its maturity date was in 2012.  Is purchasing a note that is already past its maturity date ever an issue?  What is an appropriate bid for this note? Its rural area makes it a risk if it ever goes non-performing as I think it would be hard to re-sell.

Additionally, does anyone else avoid these low UPB notes because they find that the servicing fees eat up a significant portion of the monthly payment that you receive?

Any insight anyone could provide would be very much appreciated.

Thanks,

Sandy

Bob Malecki · Answer

Hi Sandy, if you are looking at reperformers, you should probably be looking at your annualized IRR based on how much you want to earn from the P&I payments, tempered with the risk associated for each asset on the characteristics that both @Scott Carson and @Wayne Snell discuss above. The higher the risk the higher the discount which increases your IRR. and yes, the lower priced assets will erode your profit from servicing fees and possible force placed insurance expenses. In addition a lower priced asset requires mostly the same amount of effort as a higher priced asset, so we acquiring loans with asset values over $100K currently and will keep climbing the price ladder as we have the means to do so.

Bob

Wayne Snell · Answer

Hi @Sandy Uhlmann! We tend to avoid rural areas for the exact reason you listed -  if we need to foreclose it would be harder to resell the property.  We do not sell any of our re-performing loans until there is  at least 12 months of consistent payments recorded with our servicer.  We also wait before granting the borrowers a permanent loan modification until either the 13 or 25 months so that if they comply with the trial modification or forbearance agreement then the chances of them defaulting decreases. It never totally eliminates that risk however.

Regarding a BK Chapter 13, yes it's true that the trustee pays on behalf of the borrower most of the time but not always. We have many Chapter 13's where the trustee is handling the arrearage payment to us but the borrower is still paying their payment itself.  In this situation, if they're going to default they usually do it fairly quickly (e.g., a few months-  we look at those payments as funding our foreclosure fees 😉)  Another one we see regularly is where the borrower does not comply with some of the requirements  of the Chapter 13, so the court  discharges the BK. One example we see a lot in this area is where the borrower does not provide their income tax returns as required.  Lastly, be aware that sometimes the BK agreement includes a cram down. This is where the unpaid balance is reduced. Why that's important is you could be buying loan with a payment stream however the unpaid balance is not accurate.  Typically the seller tapes show the full UPB owed, not the amount of the cram down. So be careful there. When you're considering buying the loan all of this data is available to you - so read it.  Good luck!

Scott Carson · Answer

Hi @Sandy Uhlmann

Pricing on NP 1st's will vary a bit depending on foreclosure timeline, state, and values.  Judicial foreclosure states will be cheaper then your faster non judicial states.   But when you consider how far along a foreclosure that an asset is, that will also make it more attractive.  For example, a NPN in FL that has not started FC will be cheaper than an asset 90 days out from sale.   Also, a borrower interested in a DIL/CFK's will be priced higher then one with no loss mitigation.

I use the stair step guide as a loose guide for pricing....Assets in the $50K FMV range will start off at 55% of value.  Assets in the $40's will be at 45%.  Assets in the $30K's will be at 35%.  Assets below $30K will be at 25%.  As I said, this is a loose guide if the seller doesn't give me color or pricing guidelines on a loan level price level.  If there are taxes due, I reduce my bid by that amount as well (and send in proof to the seller as well).  Assets over $50K in value will often be priced in the upper 50-60% of FMV depending on the state and foreclosure timeline.

Exceptions to these pricing guidelines will be assets in CA, NV, AZ, TX and GA.  Basically anything on the west coast is over priced in the upper 60's to 70's and all the crack addicts wanting to buy deals in CA will go as high as the 90's of FMV depending on value and area.

Often times, my bids are soft bids until I have a realtor drive by or put eyes on the assets.  If the asset needs work, I will fade (or reduce) my bid down depending on how much it needs work.

I usually avoid sub $25K valued assets.  I also avoid assets with 25% equity after calculating payoff. For example, if a borrower owes $100K (UPB + back payments), and the asset is worth $125K, I don't waste my time on these deals as the borrowers will fight you for that equity, and the sellers will often want a near payoff bid based on that you will be made whole at the auction.  I'd rather buy notes with negative equity by the borrower so that they don't end up fighting me for something that doesn't exist.

Hopefully this helps!

Bidding Guidelines for Notes?

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