Cold calling for note leads

[Matt Devincenzo]

So I've begun researching purchasing notes, and found a few different threads with the suggestion of cold calling people that are in contact with note holders. Bankruptcy attys, financial planners, CPAs, title companies and the list goes on and on. Now other than an afternoon and the risk of rejection in person, I've figured out this is probably the best way to start finding note leads.

Now as I'm beginning to plan this out I find myself with a question. When you call on say a CPA and you walk in and his secretary is there, how do you get face to face with him for a couple minutes to actually talk about what you're looking for. Obviously just dropping off a business card with the secretary is not as effective as taking 5 minutes of his time.

So what do you do once you're in the door to "seal the deal" with the person you really need to talk to?

[Dion DePaoli]

David Beard the roles in the market place of each of those firms is a little different. Granite and Kondour are investing firms. Those firms have funds and purchase pools of loans. The performance status of the loans can range across the board from performing including sub and re performing along with non-performing. Granite is more geared to purchase and turn around and resell the loans in a 'Downstream' trade opposed to owning and working the loan. Kondaur sells and manages their loans in little more of a 'regular' manner where working the asset is as high of a priority as re-trading the asset.

FCI is a loan servcing company which also has an internet market place called FCI Exchange. This is a brokering function, FCI does not own the loans. The owner of the loans lists the assets on the FCI website.

Loans in all performance status and other marketable characteristics trade in bulk. It is a little easier to understand that loans trade in three ways. Premium or more than the UPB. Par or for the UPB. Discount or less than the UPB. UPB stands for Unpaid Principal Balance. Generally a loan trading for a discount has some sort of defect. That defect can be in the paperwork or the borrower's performance. Point is, the loans do not HAVE to be NPN's to trade in bulk, they can have some form of performance to them as well.

FNMA/FHLMC sell their loans through an approved loan sale advisory firm. Examples are DebtX, First Financial and Garnet, but there are many others. FNMA and FHLMC are in the business of taking new originations which trade for a premium and par and pooling those together and teaming up with a Broker/Deal like JP Mortgage or Citi and selling the RMBS or MBS. The RMBS or alike are sold in the form of bonds in the fixed income market by the B/D sales force.

If the loan is pooled within a securitized pool, the loan is not considered 'whole' any longer. When the loan is pooled into a security different portions of the loan such as interest payments or servicing rights can also be bifurcated from the loan and sold separately. The investor only owns a partial interest in the loan and their interest is in ratio to the number of bonds issued minus any portion of the loan that might have been sold outside of the security.

RMBS/MBS trustees typically do not conduct loan sales. If an investor purchased a majority share of the security, they may elect to try and unwind the security but first would have to purchase the outstanding issues of the security and make it whole again. To deal with these instruments a securities license is required.

A hedge fund and distressed asset fund or any fund is really just and investor. The label 'distressed asset fund' simply notes what type of investing they are doing. Any investment fund can hedge. Moral of the story, for the most part, those are all the same thing.

A broker and a trade platform are pretty similar in most cases. The trade platform, such as FCI above, doesn't own the loans but knows a seller and finds a buyer. FCI does this through their website and sales staff. Brokers do the same thing. They find sellers and then go find buyers. That said, not all brokers are made the same. Many have zero experience selling a loan or owning a loan. Since the crash, many folks have migrated to the distressed loan sale market place in some broker form in hopes of turning quick profits. This creates ghostly deals, pools of loans floating around and eventually had folks pretending to be principals when they indeed were not. Because of that, which still takes place in some corners of the market, makes legitimate investors ability to find real deals or assets to purchase difficult and frustrating. Those brokers who step outside of their role and try and 'wholesale' loans like wholesalers of real property have a very very small chance of actually trading. There is simply too much complexity to a loan trade for this to really be effective without being an owner. I suppose some of the broker scene was filled with folks who misbelieved that the discounts to these assets would always be so great that there is plenty of room to jump in the middle. Not true.

Loan from of a private nature or originated by a private lender such as a hard money lender or even seller financing can be sold in any performance status. That said, typically these are PAR trades as a private hard money lender doesn't have an interest in taking the loss for trading at a discount. Neither do some seller financed folks. Although on the Seller finance side of things you do find Seller's whose cost basis into the real property which they agree to finance is less than the loan amount in the instrument so selling at a discount is not unreasonable in those cases.

Institutional loans have more of a conventional underwriting process and can include conforming loans and non-conforming loans or prime and sub prime. There are much more institutional grade loans that trade as performing and sub/re preforming loans than private. There are simply more institutional grade loans although the private loan market is pretty sizable, it's not the size of the institutional market which is in the trillions. Due to the size and nature of the investor who owns the institutional loans it may seem like more there are tons more non-performing and sub/re performing loans trading that are institutional in nature than private. The institutional investor is more inclined to take a loss on bad loans and sell at a discount.

You can track loans down in all sorts of ways. Certainly one of those is look up in public record who the Mortgagee is and make an inquiry about a sale. Additionally, you can work with some of the firms above or firms like the firms above in accordance with their role.

You don't purchase "through" Granite (specially), Granite owns the loans they sell so you are purchasing from them. They simply might have only owned the loan for a couple of days. Same with Kondour. You purchase 'through' a firm like FCI as they do not own the loans. Same with any other broker.

The question about returns is not a simple answer. It does depend on performance and paper grade. The point of a loan is lend money and have it paid back. Those loans which have good credit grades where the risk of default is small will trade for more money as a percent of the UPB. As the credit grade goes higher on the scale the price for the loan will approach 100% or more of the UPB (Par and Premium). Since there is no discount to the principal balance the only return will be from the interest payments. At par a 7% interest rate loan will pay a little less than 7%. You could sell that same loan for say 102% of UPB which might drop the yield and total return down to 6%. (made the numbers up)

I want to make a terminology distinction. I sometimes see folks refer to their investment level as "LTV". That is not the correct concept. LTV is simply the loan to value, the UPB divided by the value of the real property. Not to be mistaken for the idea of "ITV" or Investment to Value, which would be the amount of capital into the loan (say purchase price and due diligence) divided by the real property value.

So the example of a $50k SFR at 75% means the UPB is $50k and the property is valued at $67k. The loan is at 75% loan to value. That loan purchased at PAR will return, in the form of yield, a little less than the interest rate of the note.

If what you were describing was the mix up and your example was purchasing the $50k note for a 25% discount or at a 75% ITV then the return will be what ever the yield turns out to be plus any collection of the discounted principal. The question did not include an interest rate for the loan. Let's say it's 7%. Then you would purchase the loan for $37.5k and the yield would be around 10%. The total return of the loan, depending on how you disposition the loan can be more than that since you have the discounted principal now function as a portion of your return. So there is $12,500 hanging around out there which the borrower owes to you but you didn't capitalize. Depending on when and if you collect those funds your total return will increase.