Legal Balance Vs. UPB

[Chris Seveney]

@Tracy Z. Rewey

This was brought up by Tracy and I wanted to start a new thread. We are seeing many lenders attempting to sell loans off of legal balance vs. UPB. I would say in 99% of these instances I do not bid off of legal balance and only bid off of UPB. The reason is its very easy for a borrower to contest the legal balance as you will need to provide proof of all the invoices and advances. Some of them may span several lenders and servicers and the chances of getting that information is slim. Whereas the UPB is much easier to defend.

What are your thoughts? What do you bid off of?

[Mark Hegenbart]

I will take the counterpoint on this one. Should make for a good convo. :) We are happy to bid based on legal balance. In fact we have paid PAR + (including all advances made) on 84% of all assets purchased. The key to this for us is two things. Loan amount has to be $100K or higher, AND our LPSA (Loan Purchase and Sale agreement) has protections against misrepresentation of the servicing history and associated disclosures so we have downside protection. We rarely have to use that LPSA protection but it's a nice to have and tends to root out issues in the DD process. The other thing to keep in mind here is we don't purchase any GSE/Legacy loans and only purchase Hard money and Non-QM so the rates are a bit higher and this also offers some downside protection in the way of higher overall yield. And finally, I would say that we are also not a "buy and foreclose" shop. Meaning we are not dependent on discount to UPB to make our yield. We work with borrowers and have workout teams in place that help borrowers not end up in foreclosure. This model on the paper we buy allows for a higher yield through reperformance or full payoff using creative note restructuring.