Real conversation with real mortgage investors…
Steven: Welcome. It’s Thursday June 15th and I’m Steve from Modern Asset Management and we’re joined with four other folks right now to talk about Mortgage note investing.
I’ll go through the things that I have in front of me. One of the things that’s come up a couple of times talking with new investors and is understanding if the broker price opinion value that was given to me is real and if it’s something that can be relied on in the event of REL.
This is a broker price opinion on a property that we bought the loan on about a year or so ago and the BPO here is from April of 2016. 13 months in I finally have gotten foreclosure and put it out for auction and it did not sell and so now it’s coming back to me as an REL. The question is, what’s it worth? We see here that they have sale prices in the neighborhood between 35 and 85,000.
I paid 31,000 dollars for this note. Had to pay $9,000 in back taxes and my total position is about $45,000 so I need to sell it for probably 51 or 52. I see a lower 35 and I go, “Oh, uh oh.” The broker is from Clear Capital, and we pay Clear Capital the standard $100 and it’s probably like a 50/50 revenue share so you’re given a broker in the mid west, $50 to run by take a picture, give you three comps and move on.
I called a local broker and am waiting for a call back from her about whether or not she would want to list the property. Her suggested market price was $75,000 so I had some confidence that I should be somewhere close to that, then again if my all in is 51, well anything over 51 should be okay. We then ran a fresh sellers report. I like houses in neighborhoods that are similar because you get a much more accurate comp than a couple of acres out in the country or something that doesn’t fit. A five bed three bath in a neighborhood of three, two’s.
That’s just typical real estate stuff. Zillow, Trulia average came back with an estimated value of 92k and priced this out at $90 a foot and neither of us believe that. I’m hoping to be more in the high 60s is what I think. This report is fairly standard. It’s the information on the home. It’s a two story house, little tiny house built 60 years ago. It’s got a half finished basement on a little lot. Detached garage. The assessor value’s a page down here a little bit.
Here’s a three year chart showing just flat line for the market there. Like I said, I’m just getting this house back and these are the comps that he chose to pull. I think I’m going to be much more like this $64,000. That’s $60 a foot instead of $90 a foot. It had an older tenant, had an older owner in it so I don’t know that it’s going to have much damage.
One of the things I put up just to cover is I thought I’d go over what monthly reporting looks like for those of you that haven’t purchased notes yet. About the middle of the subsequent month, you get a report from your servicer about what came in and what are the fees and what your net is.
This is my net report from May. When we are pitched, we told gross potential yield, we’re pitched on this $13,000 number which is the gross and then we have a little protective advances that were advanced. I’ve got an escrow account that is short that I had to fill for one of the borrowers and so this is the net cash that’s coming out of the portfolio. This is security national and they charge a fee between $30 for preforming to $75 for bankruptcy handling.
$60 per account for delinquents so my fees were about 10% this month. They average 15% because I’ve got some foreclosure actions and we’ve had some people come pay and they charge a bunch of money when an account goes current. They charge the borrower fees and they get to keep all those. Check by phone and late charges. Next time I negotiate this I think it should be a 50/50 revenue.
This month our return was 11,000. One of the questions Kathy raised yesterday when we were talking was well, that’s great that you got $11,000 but was that all profit? No, a lot of it is return of principal. But, since I bought at discount, some of that is profit too. This report comes along with it and it’s a line by line for each transaction. It says the sum of collection is $13,000 and my principle recovered was $7,500 this month. I bought the paper at a discount so a fairly good size chunk of this is also revenue and then here’s my interest collected.
These other numbers are servicing fees, collections of advanced, this $1,100 is likely an advanced property tax that’s been repaid and scrolls across with borrowers and name. Tells you what the category is.
Here is that first page, the $13,000 came in and $11,000 came out to me. This breaks it out into the categories of what’s there and I was talking about this principle collected number. We collected $7,500 in principle so a lot of that is return to capital. I purchased this loan pool all in with boarding and BPO’s and all that stuff. I purchased this pool at about 85% of unpaid balance. About 45% of broker price opinion.
This was primarily a preforming loan pool and they break out the principle and interest payment, the taxes and insurance payment and here is the current interest rates on these loans. This portfolio is primarily sub-prime loan modification done in 2012 so I bought them with 4 years of payment history. Many of the borrowers have been in the home since the 90s. They were all people that took advantage of the crazy days of 2005 through 2007.
The loans were sold and re-sold and the owner who had them before was doing these kinds of workouts where they were putting them in new loans and collected them for a little while. Stabilized them and sold them. When I started, the pool was $739,000. The owing principle balance now is $649k so $90,000 in principle reduction has occurred.
Bruce wants to know if I’ve seen inside the house. No I haven’t because I haven’t the writ of possession from the sheriff yet. The auction was ten days ago and they tell me that their backlog is about 4 weeks right now. The other question is, what was the bid set at auction? I set the bid at $50,000 and that was the end of that. Nobody bid above that and so of course that gives you some pause. I would have been okay, as this was my first going all the way through the process, if I made $5,000 or $10,000 on it just to be able to get through the whole process and learn.
Let me just quick run through this a little bit more so we can get on to some other stuff and I’m really looking for questions from the group. Goes through the escrows and here is … This is current month corporate not advances non-recoverable. $1.25 to pull the county tax record through an automated service. There may have been some servicing fee with this.
Let’s see, monthly service fee. They charge $30 to take a payment, $35 if they’re escrowing money. They charge $5 to do the Escrow accounting and so my late fee, my late delinquent account here is $60 because he’s more than 31 days past due and $5 because we’re also impounding taxes and insurance. I found that maybe we’ll have forced placed insurance because they’re lower quality homes and the borrower can’t get a policy better than or around the price that the forced place insurance is.
I think that’s a detriment to the borrow if there’s a forced place insurance policy and the house burns to the ground, well then it’s … All I’m insuring is what my original purchase price was. I get paid and there won’t be anything left for them. The other tabs give you a summary of what we just looked at on the bottom line. They give you all the transaction detail if you want to go figure this stuff out. I spend some time looking at the corporate advance detail because it’s been teaching me.
Auxiliary fees. Late charges. Check by phone. Like I said, they keep those and that irks me but I’m just a little client with a great big loan servicer so they get to call the shots. What the servicing fees are. What the escrow detail is and on and on an on. There’s a little bit of money sitting and un-applied and those are, well they’re labeled what they are. A pre petition, un-applied payment. That means it was a short payment to match a total amount due and once enough has been collected to make a full payment, they’ll move that money from the in applied and apply it to the borrowers account.
Then they give you a monthly loan snap shot which I’ve distributed to some of you before. That shows you the status of the loan and all the payments collected since we took over. Somebody want to raise a hand or jump in before I move on to another topic?
Kathy: Hi Steve it’s Kathy. Quick question on the forced placed insurance. How is that decision made? Does a servicer talk with a borrower and determine what the insurance situation is and make that decision or did you make a top level decision saying, “Let’s go ahead and put forced place insurance on everything?”
Steven: I decided when I boarded my accounts both here and with FCI that I wanted insurance on all of the properties. Let’s say it’s unless you provide us with proof of insurance, we’re going to place insurance on the property and bill you accordingly. That’s often a default on the loan because their docs say that they have to keep it insured.
This particular borrower class, they’re not insuring their car. They don’t have health insurance. I see a couple more questions.
Why are servicing fees so high? You can board loans at allied or at FCI at lower price points and I have. FCI charges $15 for handling accounting for paying loans. $30 is a hands-off collection charge where they are just holding the account and providing monthly billing statements. Why are servicing fees so high? Because they’re a for-profit business and they’re billing FHA and big boys, maybe these kinds of rates or something smaller.
Can we discuss the title policy? Yes and that was from Bruce and that is a question that Dion wanted to dive into in some depth. The question is, can I discuss title policy when I am looking at a collateral file. We order a full O and E title report on every loan that I buy. I don’t know enough about this work yet to try to cut that corner and the $25 to $100.
I’ve talked to the folks at pro-title. I really like what Alex there has done. If I was doing big volume in seconds or doing files of 100 loans I would certainly run them through a much cheaper service rather than one by one. We do all this election criteria and contract that in our representations and our warrantees that full deliverable title is that, the owner has full-deliverable title with no encumbrances other than those already disclosed. Taxes, county yard maintenance lien, something like that.
That’s at the buy on my side and could I spend $100 to get a full title report and decide not to buy the loan? Yeah, I could. Let’s take this sheet down. We’re done with what the monthly report looks like?
Okay. We had an email going back and forth between Kathy and Dion and I and one of the things that’s been brought up is “what’s really the difference between a land contract and a mortgage.”
It’s basically the difference between buying a car and leasing a car. When you sign a contract for deed for $50,000 and you’re the homeowner, of course you still owe the note holder $50,000 but your rights to the property, the property’s not fully deeded to you and that’s why you’re able to reclaim the property faster because the deed is still held by the note holder. I’m of the mind that I bought a contract for deed and I’ve bought three that I bought the property and I have a tenant on a lease contract in it. That’s how I think of the difference – it’s still my house.
The borrowers equitable interest is the appreciation in the property as the property goes up he earns that money as he pays his loan down. He earns that equity. The collapse in the housing market that we had, if that happened with a contract for deed, all those homeowners or home leasers can just walk because most states there’s no recourse after them. I’ve done three new seller finance deals in Florida. The general thinking is you use a contract for deed in Florida to void the long foreclosure cycle and the attorney who handled those loans for me was of the notion that the courts, even with a CFD, are still treating the loans as mortgages to the benefit of the defendant. The defendant is their constituent. Not us.
My experience in filing thousands of cases in California while I was running collection agencies is typically the judge on the bench will defend the borrower against us, the big bad wolf. I went ahead and wrote those loans as straight mortgages and pitch those to the borrowers that, that was a much improved added benefit to them and so far money’s coming in. If you want to speak up you can jump right in.
Steven: Okay, we got Alex and Jim. Let’s take Alex first.
Alex: You mentioned you bought these at 85% of UPB.
Alex: Okay and what was it like the value of the assets? What percentage of the value?
Steven: The percentage of the BPO, of the broker price opinion, was about 45%. I paid up on BPO. I paid up on unpaid balance for the additional security of knowing that it would take more than the last apocalypse for any of these loans to go upside down.
Alex: Got it. Of the loans that you have, how many actually did you have that, I guess, became non-preforming?
Steven: There are four of 26 that are in serous delinquency. Two of them are going to go all the way to foreclosure for sure because I’ve already sent back partial payments to the borrower. One has a great wrinkle and just as to have a little side story, borrower passed way.
Before he passed away, he deeded the house to his daughter. His daughter’s been making payments and nobody found out until I did, so she went delinquent on me and said, “Hey, I can’t pay.” I said, “Get out.” She’s now filed a bankruptcy which is just a formality to get my case removed because she doesn’t owe me any money. The fourth of the serious delinquents is making payments and I think he’s got a pretty good chance of catching up.
Alex: Got it and how long have you had these?
Steven: I bought these in June of last year. We boarded them end of July. They started being mine in August so I’ve had them 10 months.
Alex: Okay so you’ve got 10 to 15% of them had some kind of issues that came up on the board.
Steven: Yeah, and given what these are, these are sub-prime loan modifications and lower end housing, I think that’s okay. I come from the collection world and I run a high interest rate lending business in California and I’m used to people paying late.
Jim? You were going to jump in?
Jim: In regard to contract for deeds, got a lot of the same rates treated differently and the premises is that if you have a tenant, if they don’t pay, it’s easier to send them out and apply an eviction. All though some states do, they require a foreclosure action.
In Ohio, if you’ve got four years on the contract and 20% equity, then you have to go through a court action and I think Indiana is just a straight foreclosure .They get them in with no money down and a lot of these people, you probably wouldn’t even rent to for what they’ve got going in.
Steven: That’s right.
Jim: Some of the companies … That’s really a low van but that’s caveat there because a lot of people put them in there under $500 down and whatever a month and see what sticks, you know? There’s kind of the big eyeballs on that with Harbor portfolio in particular. They’re getting a lot of bad press. New York Times had an article and I think I might of sent that to you.
Steven: I bought one of those.
Jim: I have a couple of those and yeah. I actually always check with the health department to kind of take the temperature. [No] matter how many they’ve got in their county and how bad they are, … companies are inheriting that.
Steven: All of these loans and this portfolio were modified. I have a general dim view of loan modification. Of buying a distressed asset that’s deep into the delinquency cycle and thinking that you can just get the borrower to pay you when they haven’t paid other people. These were these because they had four years of payments, were a better deal for me and frankly, I was greedy and trying to have my cake and eat it to, looking for a mid-teens return with some safety.
You’re not going to get that unless you take a little noise that comes along with it. We got other questions? People see that I’ve switched back to the BPO that I had? It’ll be a continued story that we’re going to write and publish about this, about the walk through this foreclosure in Cleveland. Jim’s got a lot of experience there and I’d sure like you’re feedback.
It’s a 60 year old little footprint of the house. It’s 600 feet. It’s two stories with a half finished basement. Classic mid-west starter home from the 1950s. Anybody got anything that they want to put in? Anybody have anything that they want to talk about next time?
Alex: I’ve just got a thought on this home that you got back. Have you just talked to one realtor or talked to a couple of realtors?
Steven: I talked to the big guys in Cleveland, a company called Holden wise and I talked to the listing agent who’s done the BPO and I have a call in to another. It’s not surprising that it’s not just California realtors that don’t call back, it’s the business. I’ve got three out there and again, I just started on that this week. I thought that I was going to be able to get the sheriff out there and change the locks faster than I thought. I wanted to get inside first but apparently I can’t until I get my root of possession. I thought I was going to get my root of possession last week and what I got last week was a magistrate’s decisions, which was something that I was unfamiliar with. That then has to go through some paperwork with the sheriff to be finalized.
Alex: I guess part of this collaboration is, it seems like there’s activity in Cleveland that might have been, with multiple people, helpful to have some boots on the ground in that area. Just as an added resource and I think that’s something that might come away with it. It looks like you and Jim have stuff in that area.
Steven: Lots of folks here run there to chase heel. I’m spread with 33 loans in 12 states and after doing that, I think there’s some significant inefficiency in that. I wasn’t sure what the market was going to be like for me. It’ll be nice to one lawyer, one realtor, one property reservation guy and funnel work off one process.
David: This is David Moyger. I have a question. Do you think it’s realistic for you to find enough of these notes in one particular market or does the availability kind of force you to look more broadly?
Steven: My loans are spread out across the United States. That has efficiency issues. You would need to buy from a larger source. Most tapes are scattered. I just got approved to buy Kondaur paper. They have enough that you can do region or state specific file and that’s more what I’m looking for. The Pensacola assets are seller finance homes that I did. I’m testing whether I can get better returns, simplify, and be stable clustering properties. I had boots on the ground there. Did I touch on that at all?
David: Got it thank you.
Steven: Got anybody else that wants to jump in?
Kathy: Steve I just have a question about BPO loans again. Do you use other companies primarily or do you just use clear capital and do you actually have boots on the ground for major Have you used just clear capital or have you used others? Are there pros and cons? Before you’re actually purchasing a note, did you have anybody go by the property physically to check it out or did you rely entirely on the BPO?
Steven: I relied on the BPO and I relied on Dion’s guidance to use Clear Capital. He’s been using Clear Capital for the better part of a decade. It’s just a service. They contract out to people out in the field. I know somebody who does it here and there’s a qualification process you have to go through. You have to give them comps, show that you know what you’re doing and work your way into it. Clear Capital verifies that this work is being done accurately and the end result will be what happens when I sell this property, right?
I’ve always taken a 10% cut on it. I got a BPO of 75 so I knock 7,500 off of that figuring that the inside of the property is going to look a lot like their note payment history. I did property management hands-on for about 300 units out in the desert and I don’t want to do that business again. I want to be in the paper business. I’m not too concerned about this and so maybe I’m going to learn that I should be but if I buy at a deep enough discount then I should be covered for my inefficiencies.
Buying in California five years ago would have been easy, buying in California today I think would be really hard. One because the prices are so high but two because we’re so close to the top and like we saw in one of the pages we passed, this market, Cleveland has been linear for the last three years. There’s been no movement up or down. I think this $75,000 house was $75,000 three years ago and it’ll be $75,000 three years from now.
I’d also sell this on a seller finance note. I’d sell this on a contract for deed or mortgage and build a little more profit in that way.
I’m looking for topics for future. I’m looking for things for us to do in-depth look at to do some recordings and send those out. One of the ones we’re going to do that Bruce brought up is to go through an actual collateral file. What it’s supposed to look like when it’s all nicely done and we’re going to go through that slowly and record it so that folks can study it.
After my first experience with the harbor note. I realized that I didn’t now what was missing. I didn’t know what I didn’t know and that’s when I found Dion with this pool of 26 that I bought. I did it with his guidance. We made joint decisions but he made sure that everything was right. If you can get into the Dropbox where I’ve put these files, we covered that in one of them about two thirds of the way through. He went through what his processes are, when he puts all the documents in order and makes sure that everything’s there.
Do we have any more questions?. I see some more. James, it’s almost been a year since you purchased this tape. Have you calculated ROY to date? Hey Kathy, did we calculate ROY to date yesterday? Yes it is in the Dropbox file. Kathy and Dion spent an hour yesterday going through this file. I’m looking to sell some of these loans to turn into capital over into other things. If I sold them at the same price I paid for them, my yield would be about 17% today. Right now I’m running at about 12% and a little better than 12 so I’d be at 17%
Under the annualized basis that’d be 21. I see a couple of people have jumped on late – this is recorded and I’m going to put it up in the Dropbox that I think you’ve all gotten. If you haven’t gotten a Dropbox link from me, just email me. It’s Steve at Modern Asset Management .com. Any more questions before we call it a day? Coming up on an hour.
Oh! One of the things that Dion and I have been talking about is flying him out here to maybe do a little meet up. Maybe do a full day or a half day training session so we’re going to continue doing these to encourage you to share your stories too. If you wanted to see that happen and maybe mid July, you should let me know. Okay?
We’ve had eight visitors and me for a total of nine on this call. Almost all from the L.A. Notes group that Jim Workman put together. I’m thinking I can put together a half a day training class by Dion then keep him around for another few hours for questions. He’s going to come out here and talk to the folks at Kondaur. I’m going to go take that meeting with him to go meet … Kondaur’s got tens of thousands of loans.
Steven: Now you’re talking. I wanted to give you a heads up on yeah I’d like to see that with Dion I think that would be very valuable. Some of you have met him who was out here a year ago in at IMN in Santa Monica but he’s in Indiana so getting him out here is going to be a team effort. You guys know where I am. I’m really looking for you to tell me what you want us to talk about and I am, clearly as you can tell, I am not an expert in this. I’m an old bill collector and that’s the experience I bring, so I’m looking for you to bring up ideas that you’re struggling with and to teach us all. The work that Kathy and Dion did yesterday was just great.
I did a summary of a spreadsheet breakdown yesterday and that’s up there in the Drop box too. We’ll get a little more professional as we go forward. I’m certainly not trying to be the next note MBA podcast or the next Scott Carsen by any stretch of the imagination. I’m looking to build a tribe of people that we can work together and collaborate and learn from each other and all make a safer investment. Any last questions before I hang up and say goodbye?
No? That’s it?… Oh, thank you Kathy. I greatly appreciate all of you coming on and if you haven’t met each other you should. I’ve met most of you and I think you’re nice folks. I hope to continue. All right? You all take care. We’ll talk to you soon. All right. Okay thank you everybody. Bye bye.