All Forum Posts by: Dan Deppen

I could be misunderstanding how this deal was structured, but wouldn't the seller who is on the underlying mortgage have an incentive not to let it go into foreclosure since their credit is at stake?

 That's correct, you've got it.

I'd do the latter. It will make the loans more valuable if you ever decide to sell them and decreases the chances of default. 

Would the buyers/borrowers be purchasing with the intent of putting a mobile home on the property and making it their primary residence? If so you'll want to follow Dodd Frank and the other consumer rules.

 You aren't required to offer a loan mod prior to foreclosure. Is there a particular state or scenario that calls for this? I know PA has a process to go through before you start a foreclosure, but have never seen a requirement to offer a mod.

 Thanks, got it! That's what mine was. 

 What's a friendly foreclosure process? I had a non-performing loan once where a borrower would do a deed in lieu, but there was a deceased co-borrower, and my attorney required me to go through the foreclosure process to clear title.

 Buying for $40K and selling for $80K with no improvements doesn't make any sense. As Jay said, someone is getting screwed. Most likely, it's a home with serious problems and an unsophisticated borrower who is probably a first-time homeowner who doesn't know what they are in for. Any attorney general is going to frown upon this seriously.

Contracts for deed are not what they used to be. The CFPB made it very clear recently that all of the same consumer protections apply to them: CFPB Takes Action to Stop Contract-for-Deed Investors from Setting Borrowers Up to Fail There are very few if any places these days where you're just going to easily toss a borrower out with a land contract. Even if you can, why do you want to create a note that has such a high risk of default?

That system is basically: 1/ take advantage of PMLs who don't understand the market, 2/ Take that money and use it for a predatory lending scheme. All the various consumer laws exist specifically to stop bad actors from doing stuff like this.

1. There are a number of loan servicers who cater to individual and small investors. FCI, Provident, Madison Management, Allied are just a few. There are larger loan servicers who cater to institutional clients you won't be able (or want) to use.

2. Yes, if you are doing more than 3 per year. What state(s) are you working in?

3. No, you don't need an appraisal, it's not really a compliance issue. But it's in your interests to make sure the property value makes sense and the borrower has skin in the game. For example, if someone takes a small down payment and inflates the value and the borrower figures out later they are upside down the loan could default. Being able to document the collateral value increases the value of your loan.

4. There are some things that will always disqualify a borrower, like bankruptcy, foreclosures, being 60 days late on mortgage payments, etc. Most credit issues can be addressed in some way. If they are self employed and their income on their tax returns is understated because of deductions you can use data from bank statements. This is a deep topic.... But if the borrower is doing everything in cash and not running it through a bank and paying taxes on it, then there isn't much you can do to create a compliant loan.

This is a big topic with many sub-components, so there is no way I can address it all in one post. But I'll try to break it down a little.

Whether you are doing 1 consumer loan or 100 there are certain rules you still need to follow. Depending on the state there may be max interest rates you can have on the loan (people violate this all the time..) You need to send Loan Estimates and Closing Disclosures on the appropriate timelines so the borrower has the opportunity to review everything before closing. You need to avoid certain high risk features, which include balloon payments within 5 years, excessive fees, validate that the borrower has the ability to repay the loan, make sure they are likely to repay the loan based on their credit history, excessive late fees, long loan terms, etc, etc. 

If you are originating more than 3 per year, then an RMLO should be involved.

Debt collection and following other consumer laws after the loan is created are other topics. As Chris mentioned, use a licensed servicer and let them handle it. 

The situation you are ultimately trying to avoid is the one where: the borrower defaults, you start foreclosure, the borrower fights the foreclosure and says they didn't understand the loan / could never afford to pay it / you didn't follow the consumer rules, etc, then the judge asks if you followed those rules and you can't show that.... 

As you mentioned, many people have been originating loans for decades and not following any of the rules, just letting it rip like its still 1980 or something... There's another set of people who go to pains to cross every T and dot every I. There are a lot of investors who land somewhere in the middle. Then some people are frozen with fear of regulation and who don't do any deals or stick to investor loans.

It's not actually difficult or scary to get it right. You just hire the right vendors and attorneys to make sure you are compliant with the federal laws, not violating any state specific rules, and have a borrower who is going to repay the loan, and are servicing the loan properly. A lot of people cut corners out of cheapness, but most of the costs can be passed on to the borrower, and if you do it right, your new loan will be more valuable should you decide to sell it.

My suggestion is to build a spreadsheet and include the net cash flow to you for every month of the deal, then use the IRR function to figure out your return.