Bought a note, boarded a REO

[Mazen Al Ashkar]

Hello All,

I bought a note (CFD) about 3 weeks ago and it boarded to my servicer as a REO; What seems to have happened is the hedge fund started forfeiture and by the time the collateral was sent to me, the homeowner had already received the notice of eviction from the court.

I thought i'd write about this situation and share with you for your input/throughts because the homeowner contacted me and is interested in keeping the house. Here are some numbers. 

BPO: 40k

Location: Gadsden, AL

PP: 18k

Here's what i proposed to the homeowner:

- I'll write a new land contract

- Homeowner will sign on termination letter and not date it (as a guarantee for him making payments, since he has very bad credit and i already have the history of him not making any payments on previous note)

- Sale price: 32,100

- Downpayment: 2100

- Loan amount: 30k

- Interest: 6%

- PMT: 400/month

Homeowner is currently discussing with his spouse, let me know your thoughts on this deal and will keep you posted on what ends up happening with this.

Cheers,

[Daria B.]

Great! Like to know how this works out for you.

[Christopher Montgomery]

That's good to hear. Please keep us posted as to the resolution..Is this your first one?

[Mazen Al Ashkar]

Definitely not my first one :). I've been trying to keep my network up to date with each workout i do on my notes. I have 800k worth of them so far. 

Will keep you guys posted.

[Juan McLemore]

@Mazen Al Ashkar, thanks for sharing your deal!  I'm working on my "FIRST" note deal right now.  It's fascinating how the note process works and the ability to help the right homeowners by controlling the note!

[Mitch Stanley]

Hi, I'm not familiar with the abbreviation - P P ?  Please provide Definition.

Thank you, Mitch S. 

[Mazen Al Ashkar]

Originally posted by @Juan McLemore:

@Mazen Al Ashkar, thanks for sharing your deal!  I'm working on my "FIRST" note deal right now.  It's fascinating how the note process works and the ability to help the right homeowners by controlling the note!

@Juan McLemore, Great stuff! Let me know if i can help in any way! Cheers!

[Mazen Al Ashkar]

Originally posted by @Mitch Stanley:

Hi, I'm not familiar with the abbreviation - P P ?  Please provide Definition.

Thank you, Mitch S. 

 PP: Purchase Price

[Linda Hastings]

I'm not very familiar with CFDs, but is it legal to have the borrower pre-sign a termination letter? Is that common practice for CFDs, or could it be considered predatory lending?

[Mazen Al Ashkar]

Hi Linda,

Good point; I know a bunch of note investors that do this and i'm trying it for the first time. Especially in a CFD environment where the title is in your name as the lender. Definitely don't do this before you consult a lawyer but in my case, the homeowner was actually open and offering to pre-sign the termination letter as a guarantee since I helped him stay in the house at a very discounted price and adjusted his PP. Though we haven't finalized yet but i found it interesting to see how cooperative homeowners can be when you're offering them a win-win situation.

Will keep you posted.

[Steve Hodgdon]

@Mazen Al Ashkar  Assuming your numbers are net of expenses, you created a note yielding you 27%. Good job on the buy side. My basis has averaged 70%, all in. 

You wrote the contract with a local lawyer or used an MLO? Closing with a title company? Again, I'm looking for liquidity, so loans have to be by the book. 

We've done 3 seller finance deals so far. I follow the 10/10/10 rule. 10% down, 10% interest, 10 year term. This was after talking to corporate buyers to see what they want to purchase. 

We have about the same size portfolio. Most of mine is performing at about a 15% gross yield. 6 in some stage of foreclosure right now. 

Don't know AL foreclosure law. But are you denying borrower access to his legal rights? That could void the agreement. CFD eviction may be short in AL so is it necessary?

[Mazen Al Ashkar]

Hi Steve,

You are absolutely right RE: necessity of termination, i was just highlighting what the homeowner was willing to do. It really does not make a difference for me because of forfeiture timeline in AL which is what i mentioned to him. At the moment, the bigger problem is him convincing his spouse than it is the paperwork and terms (in homeowner's words :)). 

Great job on your Portfolio!

RE: Interest, per AL code, I don't think i can charge more than 6 or 8%; while others said there could be exceptions, i decided to just go with 6%. 

What I also did is called First National Bank to get a Hypothetical estimate of how much they would buy the performing note from me which i've posted below:

HYPOTHETICAL QUOTES: xxxxxxxxxxxxx, Gadsden, AL

Full Buyout w/ 6 mos. Seasoning: $22,544.00

• Based on pd. thru 6 mo. UPB: $27,855.76

Full Buyout w/ 12 mos. Seasoning: $22,472.00

• Based on pd. thru 12 mo. UPB: $25,602.05

Full Buyout w/ 24 mos. Seasoning: $17,070.00

• Based on pd. thru 6 mo. UPB: $20,743.57

Thanks for all the feedback so far, hope this is helpful!

[Jordan P.]

@Steve Hodgdon @Mazen Al Ashkar Thank you both, this is great info. On your re-performing portfolio, what default rate do you guys experience?

[Mazen Al Ashkar]

@Jordan P. i'm not sure i can give an exact number or %. I can tell you as of today, on our re-performing loans, we have zero default rate. I could probably wake up tomorrow and this would change :), so don't quote me on this, but i think the one thing i can mention in this area is this: 

When you're trying to do a loan mod, don't be blinded with the money coming in (i.e. don't get greedy), you might get a good deal on the front end, go celebrate for a couple of months, until you wake up and realize that this deal did not match the home owner's situation and he/she is in default again.

I always try to make the homeowner put a price they are comfortable with and i try my best to knock-off 10-20% of that monthly PMT to show goodwill and show that i'm trying to keep their homes by allowing them to make their payments on time. 

Hope this helps

[Steve Hodgdon]

I bought a pool of 2012 seasoned sub prime loan modifications. Out of 26, 3 are in 90 day+ default.

[Jordan P.]

Thank you both, very good insight. @Steve Hodgdon My guess would've been that these types of loans experience higher default rates than you're seeing. I've heard 5-10% is the average on performing notes without previous issues. Not sure how accurate that is, but your RPL pool is only a bit higher than that after a good deal of seasoning...and sub prime originations no less. Seems like a good place to stretch for some yield.

[Jay Hinrichs]

if your writing new notes to home owners I would think you need to follow dodd frank and have a MLO in the picture.. is that your thought process. or do you just wing it..  I think most probably wing it.  Unless the other poster who wants to sell the note.. institutional note buyers will want to see that all the regs are followed

[Mazen Al Ashkar]

A quick update to all on this one. The homeowner notified me, he's not interested in staying in the house, unfortunately, had big problems with his fiance. I even offered this house to him with no down payment and he said the problem is the spouse and not the money, well, at least we tried. 

He's going to move out on Monday, and the good news, is that he was very cooperative and he even let one of my real estate guys go into the place to check it out and feedback was perfect, he even has granite countertops in the kitchen! 

Will keep you posted as i'm planning for two things at the moment:

- Seller finance it to someone who's interested with 10% down

- Reach out to wholesalers and get it sold for cash quickly! 

- Rent it (Which is really my least favorite option)

More to come...

[Jay Elggren]

Be careful with the seller finance. It can be super risky and costly for the seller if it's not done right. I had a note called due and the only thing that saved me was I moved the property into a title holding land trust and I remained a beneficiary. According to The Garn–St Germain Depository Institutions Act of 1982 the lender is prohibited by federal law from calling the note due. 

Make sure you're protected by having the title help by a trust.

[Linda Hastings]

@Jay Elggren I don't follow your logic or see what a due on sale clause has to do with this case. The OP bought the note and ended up taking the property back as an REO (i.e. he was the new lender, but now owns the property since the forfeiture already happened and there is no bank involved anymore). He is now considering selling the property via seller financing (i.e. he is the seller). How is this super risky and costly for the seller (i.e. him)?

Perhaps I misunderstood your post, but it seems like what you are describing is a subject-to or wrap around type deal where the OP would be the buyer. That is not the case here. 

[Mazen Al Ashkar]

Hello All,

Just to bring some closure on this note and keep you all posted, please see below: 

Summary of situation:

- Borrower not making payments

- Prior noteholder filed a complaint for ejectment

- We purchased the loan and property from prior noteholder

- Default judgment was awarded to prior noteholder and loan boarded to my portfolio as REO

- Homeowner was cooperating with me and changing moving out date for over a month

- Looks like he was buying time until Homeowner's lawyer filed a Motion to set aside the default judgement

Resolution as of today:

- I accepted to fight it in court

- His lawyer reached out to us on Monday

- I offered Cash for keys (500$) with a deadline to approve by today and moving out by EOD Friday (Aug 11th) or the deal is off the table

- Signed CFK agreement was sent today

- Realtor is going to meet Homeowner tomorrow at 4 pm for the keys

- I've instructed lawyer to list it for a quick sell asap (Property is in a great condition in Downtown Gadsden, AL)

It was a bit rocky but when you look at the 5000 ft. view. As long as you keep an honest intention to help the homeowners find a solution to stay in their house, you will always find a solution even if that involves them leaving it. 

In my case, i even offered the homeowner to stay in the house with no downpayment but only promise to pay monthly payments that he is comfortable with making. He clearly stated that he needs a change in his life and wants to move away from this area.

Hope this was helpful for those getting started in Notes and be able to see an exit strategy completed LIVE. 

Cheers,

Mazin

[Gail Greenberg]

@Mazen Al Ashkar how did you arrive at $400 as the proposed PI payment? My mortgage calculator shows a $30,000 balance at 6% gives a $394 payment if the term is 8 years. Is that what your term was? I also understand CFDs in Alabama - if buyer won't sign a cancellation of contract - require full foreclosure. True?

Oh and why do you even have to board an REO at a servicer? You're saying it became an REO while the service transfer was underway?