All Forum Posts by: Sean M.

Hi,

I've got a number of notes, most of which are (so far) going reasonably well, however, I've got one that is just lagging the rest - it was a non-performing 2nd and the 1st has got in the way, making a short term foreclosure or work out unlikely.  To be honest, it's the last of my non-performing notes and as soon as I started buying performing notes I released my preference for performers.   I was in cheap and at this point I'd be happy to just get this off my books - though when I'm less fed up with dealing with it, I don't want to pass up maximising my return. 

Enough NPNs don't pay out that people must have a rule of thumb regarding when to walk away - what are your thoughts?  It costing me $40 a month to hold it, I'm in for $4,000, plus some future legal if I hold it.  Are there some good rules of thumb for when to capitulate?  I'd rather focus on the performers (and if you get into the note game at some point @Dion DePaoli will likely tell you of the benefits to performing - he's right), but I'm having trouble knowing when I'm cutting my losses (ok) versus quitting on a note (not ok).

Thanks   

I've heard the real push behind the price increase is the hedge funds that are buying large chunks for the revenue streams which they're securitizing just like they did with mortgages and car loans (and frankly every other revenue stream you can think of, student loans, credit card debt.....).  Interesting to see how that shakes out. 

@Paul Murch

You're not wrong - the bankruptcies in question are chapter 7s.  You might find that the court would use the opportunity to address the law of stripping secured creditors generally (maybe only mortgages, maybe to secured debt of every kind).  Similarly even if the court limits its ruling to Chapter 7s, the reasoning might result in Chapter 13s creditors challenging the equivalent provisions in Chapter 13. 

My guess, and its just a guess, is that there is going to be a change in the law around stripping - if they wanted to keep the law the same, they could have just not agreed to hear the case (as they did the year before).  With this affecting so many creditors now, I wonder if they are re-thinking whether the stripping provisions are having a negative impact beyond their intended effect. 

@Boyd McClean I'll defer to those who know more than me (and that would be many many people on these boards) but my understanding is: 

(i) Chapter 7: the borrower is discharged but the lien stays attached to house (lots of rules about not calling the borrower, as they are personally discharged, so your only real exist it to start a FC - though some disagree on this point/are willing to risk it); and 

(ii) Chapter 13: the underwater lien is put through the plan, if it has no equity, it can be stripped from the house and 2nd debt is treated as being unsecured.  It then goes into the pool with the other unsecured debt, so likely that you receive very little.  In a chapter 13, the borrower must complete the plan for it to have effect, so a stripped loan can be reapplied in the event that the plan does not complete. 

Any of @Dion DePaoli  , @Bob Malecki , @Bill G. , or ,@Mike Hartzog,  will be a great resources to correct me if I'm pointing you wrong, but that is my very simplified understanding in a nut shell. 

Wait a few months, I think this is going to the supreme court right now.  Any answer you get today will be moot once they decide.

http://www.cnbc.com/id/102191661

So I'm a Canadian looking to buy some more notes and to shift from the NPN to the performing side.

Issue. My existing NPN notes are at such a discount that I've never cared much about the exchange rate in the past, but with performing notes, with the CDN dollar being where it is, any strengthening in our dollar could wipe out my return (literally to zero or less). What are other cross border note buyers doing? I've got a few local sources of notes in Canada, is it time to stay local (the down side of Canada, is the note prices are higher and the lender rules are not as friendly).

I know I'm not the only Canadian that looks south, what solutions are people using to mitigate the exchange rate risk?

Thanks   

@Paul C,  my experience with funds does not include any note funds - unfortunately I have no experience with what note funds return.  If I had to guess, I'd say the answer is very dependant on the asset mix and would be unique to each fund's specific strategy. @Dion DePaoli would be much better informed of that than I.  All I can really contribute is where Note funds see to offer terms that are different from the terms that you would expect to see in other types of funds. 

Dion, as you see people build portfolios, what sort of asset mixes are popular? Aside from regional and NPN/Pre, 1st and 2nd etc mixes, I can't think of a way to diversify that acts as a hedge if interest rates rise or the housing market tanks again. What are you seeing out there?

It's a weird thing about note funds that they seem to get away with paying really low returns relative to profits. I'm a finance lawyer in Canada and I've formed lots of pe funds (which is really what these note funds are) for all sorts of different industries but never for notes.  I've never seen a fund in any other industry manage get away with more than the customary 2/20 fees, and even that has eroded a bit.  You hear on occasion about the super star fund managers getting more, but nothing close to the amounts that these note funds retain.  To be honest, investors in note funds should start demanding more - if I'm ever in a position to run a fund it'd have to be at least 2/20 or I'd feel guilty.  

Re: accredited investor, I'm not licensed in the US, so this is not legal advice, but investors in a fund that is not subject to disclosure requirements would generally have to rely on an exemption from the prospectus/registration statement requirements.  You'd have to speak with your own counsel to see what is available in your jurisdiction and see if you qualify.  

I'm assuming by worth $19k that you mean the UPB on the loan is $19k. How much did you pay for the note? What are the details? It's unlikely that the cash advance rate will be less than the rate on your note, so it sounds like you might be in that negative leverage situation that was so talked about a while ago. If it's a NPN the credit card interest will (I'd guess) eat up any room you have to profit on the note and will mean any thing with lead time, like a FC isn't a viable route any more. The only 3 ways I see of getting out of that are: (i) have someone make a FFF loan to you at a rate that is much lower so that there is still a profit; (ii) offer a deal enticing enough that the borrower will want to make a payout to you (or get lucky that they want to payout the full amount); or (iii) sell the note - in which case, hope you haven't over paid, otherwise you're taking a loss there (but I'd say there are good odds that you'll lose less selling it for a market price now then you will holding on to it at credit card rates if it doesn't get paid off soon.)

Thanks Dion, 

Yes, by cleared I mean discharged. Sounds like I'll have to rely on either their desire to stay in the house or the FC (or DIL etc) proceeds. Though I guess in practice that's the case with every NPN,

Cheers