All Forum Posts by: Dion DePaoli

@Chris Seveney

You can source BK data directly from Pacer at www.pacer.gov.  Additionally, you should be able to ask your seller to provide answers to specific questions if they are viable questions.  You really do not have an interest in the BK case until you file a transfer of claim post purchase.  

@Wayne Snell

Do you mind describing the "Stair Step" price method you mention?  I am sure some of us can speculate a little but curious what is actually taught/suggested.

The [Identity influences to the price by initial data?] question was me trying to drive deeper into pricing metrics.  When bid data is supplied by a Seller can you identify data points which will influence your bid?  

That influence may be an increase in pricing or a decrease in pricing.  For instance, a common data point we see absent from bid data for NPLs is foreclosure start and milestones.  Having that data present helps lift our bid pricing since in theory time to disposition should be reduced.  So less time to disposition should mean higher bid.

I often find myself discussing with sellers what I will bid well and what I will not void of geographical and other top line data inclusion or exclusion.  In other words, we get there is a bid difference between New York and Texas, what within say Texas asset populations can we bid well and why.  

I am pretty curious how much confidence folks have in their pricing and if they understand how to be aggressive in their pricing model without drastically increasing their risk.  

As an interesting aside observation, I think there is a little bit of a trend of folks as they gain more experience feeling like pricing is increasing.  I think I can date that trend back many years from lots of folks.  That sort of begs the question, is it really an external market influence - sellers asking for more money or is it an internal market influence - your model doesn't price that asset/segment/population as well as it use to with experience under your belt?

Good point on the tax and accounting of the actual asset.  

Hopefully we can get some more folks to chime in.  

I would like to open a discussion which drills into the actual content of these note investing courses that are offered.  I would like the conversation to steer away from identifying which or whose course you took but rather deal more with the actual substance of the course.  I am talking about a paid course which offered to teach you how to invest real property secured notes.  This doesn't really include going to your local REI meetup and listening to someone talk about investing in loans.  

I suppose we can outline some topic areas to which, if you have been a student, you should be able to identify whether or not you feel you are competent and comfortable on relying on your knowledge and skill developed from these courses.  Like a student of any trade craft, even as an apprentice you should have some basic skills above that of a layperson.  What do you think those are?  What do you think you didn't learn?  Have you gone out and mostly found yourself prepared or ill prepared?  How many actual note transactions (not real property) have you closed since class?

To further segregate subtopics to identify, can you confidently and comfortably do the following (Apply to all any PL, RPL/SPL, NPL):

• Source real product for sale outside of the internet exchanges such as FCI Exchange?
• Price a loan when no indication of price is given by a seller?
• Identify influences to the price by initial data?
• Identify trade terms which are not in your best interest or do you simply expect to trade how a seller demands to trade?  (ie - making deposits, closing in 24 hours, etc)
• Conduct due diligence extending beyond ordering a title report and looking up taxes - can you identify defects in documents, servicing and origination?   Do you know how to price that defect accordingly?
• Are you familiar with regulations that affect how a loan is made, serviced and dispositioned?  
• Do you use self servicing, limited servicing or full servicing platforms?
• Do you understand the regulations around soliciting investors and raising capital?
• What didn't you learn or feel like you could learn more about?

That should give a nice rounded out set of topics.  Again, the point of this discussion is not to bash any course or promoter of course.  Rather, I would like to quantify just what folks actually learn in these courses.  "I learned a lot." is not an answer to this thread.  If you have stepped into the industry and out of the unknown at some level you should be able to identify concepts to which you do not know much and those which you feel like you are properly knowledgeable and skilled.  

I hope some folks participate as I think the content of this type of discussion can be valuable for many.

@Bob Malecki you posted as I was typing.  So there is a $20k value surplus but a $17k short?

So the offer is too low.  If your numbers are accurate, I would not be entertaining that deal.  That seems to require a counter and it sounds like you and the borrower need a deal that is above your TAD.  Again, selling under duress is a claim a borrower can raise against you.  

Bob,

Just as a rebuttal to those who vote to proceed with foreclosure and forego any sale.  You should have your foreclosure counsel involved with the approval of the sale.  Especially if you are bumping up against deadlines.  The details missing regarding equity and the timing of the events in file will matter.  On one hand you have agreed to work with the borrower to allow them to sell their house which is an alternative to foreclosure.  On the other hand you are at a decision point in the foreclosure case which can be seen as dual tracking if you proceed with sale.  I would move forward carefully.  

It's not hard to imagine that a borrower claim they were in distress and lost out on equity due to the lingering foreclosure or claim the big bad mortgagee foreclosed on me after he said he would let me sell my house.  Like I said, get FC counsel involved and have the bless the plan of action so you don't work yourself into a corner.  

Sarah,

It is good you are trying to learn, no harm in that.  Also, I don't want to steal @Don Konipol thunder but he is trying to give you a little bit of a reality check.  (Usually I am Debbie Downer so it's a nice break)

Do not confuse what your father does in his realty dealings with trading loans.  Once a loan is originated the terms of the loan are set.  They can not be amended at the whim of a buyer and seller of the note and security instrument.  The loan is made, that is what is bought and sold.  The loan can not be amended without the approval of the borrower.  

While there is a lot of chatter about being able to purchase loans from a bank, I would tell you with over a decade of experience in secondary market those deals are very few and far between for street level investors.  That is sort of what I believe Don was alluding to.  

It will be beneficial for you to go learn a bit more about how our current market works in regards to financing and capitalizing loans.  Residential loans are often originated with the intent to distribute the risk by selling the loans in large pools into the secondary market.  Generally speaking the largest investors in the secondary include Fannie Mae, Freddie Mac and Ginnie Mae.  Loans not sold off in the secondary market which are held by the originating institution are called "portfolio loans" while loans that are sold off are called "agency loans".  Meaning they are originated with the intent to sell to one of the agencies I mentioned.  Sometimes also called "conforming" loans, meaning they conform to the underwriting guidelines of those agencies.   

The majority of the some $9 Trillion mortgage market are loans that are not sold at a discount.  If we pause to contemplate that, hopefully it makes a little sense.  If you continually made loans for 100% and sold them for less than 100% you would run out of money rather quickly.   So the other implication there is loans that do sell for a discount have some type of defect about them.  Those defects can vary widely from minor issues to major issues.  As such, the discounts will vary accordingly from small to deep.  Nonetheless, discounted loans are a small piece of the overall mortgage secondary market.  Albeit, a portion of the overall market at less than 10% is still a pretty big number.

A bank or financial institution has no mandate to take a loss, which is what selling at a discount would mean if they made the loan.  Further, their cost of capital is far cheaper than that of most private investors.  This allows them to mitigate their losses on those loans better than selling to a private investor who is going need a steep discount to achieve their desired rate of return.  As an example, the big banks are happy to earn 3.0% while a private investor seeks 10%.  That is a pretty big gap to fill.  In addition, the likely counter-party for a financial institution who seeks to sell defective loans is another institution with a similar cost of capital which in turn minimizes the discount on the loan.  Probably the largest and most apparent barrier there is.

In addition to that and contrary to what @Scott Carson is saying is that local community banks have a charge off and default rate on loans around 3.0%.  That includes all loans and if we drill just into residential loans the charge-off default rate is around 4.5%.  A very manageable number.  We can actually see how manageable it is by noticing the dip in all loans vs the increase in just residential loans.  Banking nowadays is not all about residential loans.  Local banks plug a lot of resources into business and commercial banking.  That is more of their bread and butter.  Residential loans are ancillary not primary business nowadays.  These are not George Bailey banks anymore.  Further, you will not pass any type of counterparty risk assessment for any of the big banks and likely not for the regional banks either.  

All of this should be fairly intuitive if we understand the actual market and how the players operate.  Local and community banks are intimate with their loans and their loan production.  As such, we would expect lower default rates and those loans that do default are generally handled in house so the bank can best mitigate its loss.  There is very little incentive for a community or small bank to sell to a street level investor who wants steep discounts and poses headline risk for the bank.  The loans that are trading are still legacy loans with vintage (age) of the mid to late 2000's.  So stuff from 2007 to 2010 with a diminishing inventory in later years.

Last but not least, those types of institutions have a duty to their shareholders, that if they did need to sell for some reason they would be required to put the loans out for auction to obtain the highest and best price for those loans possible.  This would mean they get auctioned off by DebtX, First Financial, Garnet Advisors or some of the broker-dealers that have trade desks and books of well capitalized buyers.  It would not be in their best interest to simply take the loans and sell them off to the first person who called or walked in off the street wanting to purchase loans.  There is a bit more to it than that.  

None of that is meant to discourage you but rather nudge you toward getting a little more knowledge about the industry that has sparked your interest.  There is much to learn.  Like anything, many folks have answers but that doesn't mean they are the right answers.  Good luck.

Hey Bob, 

If the property has equity, then there is no short.  Do you need to have the borrower counter on the sale price so that you don't short?

 For the sake of saying it, the borrower still has to sign off on the deed. 

Generally when I get pre-quals in sensitive situations I call on on the LO/Lender and inquire as to how much work went into prequalifying the buyer.  I ask direct questions about if the applicant turned in income and asset documents and if that was used to qualify or if the interaction is only verbal at this point.  If it is only verbal I will look to try and have the buyer get the documents turned in and request an updated letter.  

I also look at the down payment.  As per usual, little down payment offers don't do much for me.  In general, I am looking for a strong but fair offer.  Excessive inspection periods or contingencies on financing arrangements may make me shy away.  I may also shy away from contingency offers where the buyer needs to sell in order to buy.

You should have a set of documents which have disclosures that deal with accepting the offer and the offer being non-arm's length to the borrower.  The buyer should have sign that as well.  Most servicers will have this packet available.  If the sale is truly requiring your approval on a short then that needs to be disclosed.  

If it all looks good then you need to suspend the auction sale.  I would suspend to a date a two weeks beyond the closing date.  Unfortunately not all real estate deals close on time.  Additionally, if the local permits, I would take backup offers until the closing date.  Good luck.

There are lenders out there who will do it along with private investors.  Terms will vary depending on entity providing funds.  Local banks will likely shy away from loans that are not local.  

Factoring AR is not the same as taking a loan as collateral.  The amount of time it takes for the capital to be returned is shorter in factoring and longer in loans in general.

Sandy, 

The primary thing to understand is these are not "notes".  The contract is an installment contract it is not a promissory note.  So these instruments do not operate like traditional mortgages or deeds of trust.  Therein lies the confusion for many.  

We have purchased them before, so I am not advocating to fully avoid them.  What I have advocated is that many do not understand what they are getting into and that causes trouble.  Many newbies have tried to treat these like traditional notes.  I have even seen some of the popular gurus treat them like notes.  As I said above they are NOT notes.  

The Purchaser (Vendee), a.k.a. buyer, holds possession of the real property with an equitable interest in title.  The Seller (Vendor) retains legal interest in title and is obligated to the conveyance terms within the contract.  Once full payment has been made along with any other conditions within the contract the Vendor (Seller) must deliver a deed to the Vendee (Buyer) which formally conveys the property once and for all.  Until such time, the Vendor (Seller) is the owner of the real property.

As @Wayne Snell stated, specific requirements and regulations on these vary by state.  That includes what type of deed must be used - some states require a Vendor to deliver a Warranty Deed.  States vary on how default must be treated with varying degrees of the Vendee earning a right of redemption over time or immediately upon execution.  

The issues we have seen with these is they have not been made correctly in structure or they are not being enforced correctly. We have seen sales where the instrument is treated like a note and the Seller and Buyer of the instrument attempt to simply assign the CFD/LC and fail to actually convey a deed between each other. In order for the transaction to be take place properly, well, in the spirit of what is likely sought, the Seller of the instrument must sell the real property to the Buyer of the instrument with a Deed conveyance like any other piece of real property and also deliver an assignment of the CDF/LC. Simply assigning the CFD and not delivering the deed would leave title vested in the Seller of the instruments name and would prevent the Buyer from performing per contract terms upon payment and contract satisfaction.

Additionally we often see these instruments used in a very predatory manner.  There are some firms that attempt to use these instruments as way of circumventing predatory lending enforcement which include inflated property values, selling properties which no longer carry a certificate of occupancy or are in pretty bad shape, high cost interest, lack of underwriting for ability to repay and circumvention of rights of redemption through eviction instead of a process more like foreclosure.  Another honorable mention in predatory practices is using CFD/LC to have a borrower with a conventional mortgage or deed of trust surrender their property and enter into this type of contract as loss mitigation strategy on a delinquent or defaulted loan - I would just stay away from that all together.

That is not to say they are ALL bad but our stance is they seem to often be abused and the abuse so far has not been reigned in but it is coming.  Thanks to many of these Vendee (Purchasers) who have been taken advantage of complaining in local headlines and to their state AG's, we have seen some legal actions starting to come forward going after these abusers.  That legal liability and/or the chance of the transaction being void and all sums required to be delivered back to the Vendee with damages is a real risk buyers of these instruments should be afraid of.  

I would be leary of the contract for deed/land contract non-performing market place.  A seller with a bunch of NP-CFD's laying around is probably not a good counter-party.  Unlike the majority of whole loan mortgage and deed of trust note transactions the counterparty risk in these instruments can be quite large.  A private buyer in a true note transaction buying a loan which was originated by Countrywide and held by institutional parties until being sold down to the street is generally not at the same level of CP risk.  Again, that doesn't mean they are all bad but in brutally honest opinion, I don't think private street level buyers have the skill to really flush out the risks on these.  So Caveat Emptor.  

OP there is a bunch of information missing here that would be paramount to giving you any advice.  To mention the borrower didn't have any money each month is a pretty huge red flag.  Without understanding that backstory, the loan could be a high cost loan (Section 32) which if not originated properly could be void.  If it has usurious interest, it could be void.  The list goes on...

It is typically never a good sign that somebody made a loan and didn't try and collect.  That makes me lean more toward a predatory loan the originator didn't want to enforce since most lenders are not charities.  So it depends on how it was made.

The loan of topic is mentioned to be in 2nd position but then later in the post it is mentioned there are no other liens.  Do you mean beside the first?  If the subject lien's security instrument recorded? All you mention is the note.  

The use of funds will have a large impact on the collection of the loan.  Contract SOL can run 4 years.  Construction loans can be argued with different terms.  Other arguments have used time after the recorded (if any) maturity date.  So it all depends on what you really have.

Deficiencies are not allowed on primary residence purchase money loans.  So this too may create a barrier to collect.  

Your best bet is take the entire loan file to a debt attorney in CA and have them review it for you and see what they say in regards to collectability.  As Wayne mentions, 8 years is a long time and it really sounds like this has hair on it from the start.  You need to rely on someone who can ascertain the whole story on the loan to make sure.  Good Luck.