Be the Banker Part II!

Last month we provided an overview of why someone might want to be the bank. Because right now may be a once in a lifetime opportunity to invest in notes we have decided to expand on last month's discussion.  We'll discuss 4 methods for being the banker in this newsletter.

1. Loan money directly on a specific piece of property and carry the note.  We have loaned private money to other investors and borrowed private money for our own investments.  In addition, we have introduced our private money lenders to friends who have good investments in need of funding.
2. Purchase an existing note.  Individuals, banks, and other institutions routinely sell notes.  They do this to generate immediate cash, clear their books, or because they don't want to be bothered with collecting on a non-performing note.  Almost always, notes are bought at a discount from the balance owed.
3. Purchase what is known as an entire "Tape" of notes from a bank or other financial institution.  This is normally done by hedge funds or individuals with deep pockets because the tapes sell for high dollar amounts, usually more than one million dollars.  As you might imagine tapes sell for the highest discount because you're just buying a long list of notes, also referred to as a "pool of notes".
4. Purchase a "mini-pool" of notes.  The purchasers of tapes, banks, and other institutions will often break the tape into pools of notes, referred to as mini-pools.  The way you buy these mini-pools will affect the discount.  If you are fortunate enough to pick and choose the notes you want, then you will pay more for the pool than if you just purchase pools the seller creates.

Notes can be on anything.  We have some friends who buy mini-pools of non-performing credit card loans.  They buy the pools in $25,000 lots at about $.08 per dollar of debt.  So the $25,000 purchases approximately $312,500 worth of obligations!  I've asked them if they would write an article on how this works for a future newsletter.  Hopefully we will be able to share that article in the next few months.

We like the idea of purchasing pools of non-performing second lien mortgages, often referred to as "seconds", where the first mortgage is performing.  These notes are secured by the property and because the first is performing you know the home owners want to keep the property.  All you have to do is get the borrowers performing on the loan again.  Because you are not a formal bank you have a great deal of latitude on how creative you can get to create a win-win situation with the borrowers.

A natural question to ask here is, why don't the banks create the same win-win situation?  Two primary reasons, the banks are constrained by laws, and they are overwhelmed with the number of non-performing loans they have.   In addition, if the banks routinely modified loans because people stopped paying then why would people keep paying?     

Because second lien mortgages aren't viewed as favorably as first lien mortgages they are discounted almost as much as the non-performing credit card loans.  Currently, for about ten cents on the dollar you can secure a dollar's worth of debt. If we buy a mini-pool for $45,000 we secure notes with unpaid balances of approximately $450,000.  This mini-pool will be comprised of 7 - 12 seconds, which spreads the risk across multiple borrowers.  The beauty is these notes are secured by real property so the borrower is more motivated to pay!  

It is estimated that, when spread over 100 or more notes, 7 of the 10 notes will perform again within a year, thus creating a nice income stream.  Out of the remaining 3 it is estimated that one will pay off quickly and it may be necessary to foreclose on the other 2.  Surprisingly enough, because these notes are currently priced so competitively, it is probably wiser to focus on getting another mini-pool and getting them to perform rather than spend too much energy on the foreclosure process.  The 2 non-performing notes are still valid and must be paid off before the homeowner can sell or transfer the property so you can always come back to them later.  In other words, pick the low hanging fruit first.    

Bloomberg report's that Home Sales are Held Hostage By Junior Lien Holders. When the bank that holds the first mortgage approves a short sale (selling the home for less than is owed) and there is a second mortgage that mortgage holder must also approve the short sale.  During the first quarter of 2012 there were 133,192 short sales involving second liens.  The average time to process a short sale with multiple liens is 448 days versus 352 days to complete a short sale for homes with only one lien.  This is because second liens must be cleared before the home sale can be completed and the second lien holders are taking longer to negotiate the release of the second or are requesting too much for the second. 

Unfortunately for the home owner, this longer time to complete the sale and the uncertainty of sale approval make it very difficult to sell short sale homes to retail buyers who generally are looking for a new home because they want to move in the near future. Also if the home loans are in delinquent status when the short sale fails then the home tends to end up as foreclosures instead.  Not good for the homeowner. 

The article states that, with banks facing an onslaught of pending foreclosures, they are turning to short sales because their losses are about 15% lower than with foreclosures (repossessions), which can take years to complete while taxes, along with legal, maintenance, and other costs, accumulate.

Holders of first mortgages are pre-approving short sales, streamlining the closing process, forgoing their right to pursue unpaid obligations, and giving some borrowers cash incentives of as much as $35,000 for relocation expenses.

U.S. government programs have prodded banks to speed up short sales because they're less damaging to future ability to borrow and property values than repossessions are.  The Home Affordable Foreclosure Alternatives program, known as HAFA, pays servicers as much as $2,200 and homeowners as much as $3,000 for completing short sales.  The program was changed in March to increase payments for second-lien holders who agree to release borrower liability, lifting the maximum settlement to $8,500 from $6,000.

It should be noted that our note buying experts are teaching that banks are moving away from the short sale option and more toward selling the notes.  Selling the note also avoids all the costs associated with the foreclosure process and allows the bank to clear their books much quicker.

Laughs and Interesting Stuff 

  Olie the farmer has a car accident:

A Minnesota farmer named Olie was driving down the road when he was hit by a truck owned by the Eversweet Company. In court, the Eversweet's hot-shot attorney questioned him thus:

"Didn't you say to the state trooper at the scene of the accident, I'm fine?"

Olie responded: "vell, I'll tell you vat happened dere.  I'd yust loaded my fav'rit cow, Bessie, into da..."

"I didn't ask for any details", the lawyer interrupted. "Just answer the question.  Did you say, at the scene of the accident, I'm fine!?"

Olie said, "vell, I'd yust got Bessie into da trailer and I vas drivin' down da road...."

The lawyer interrupted again and said, "Your Honor, I am trying to establish the fact that, at the scene of the accident, this man told the police on the scene that he was fine.  Now several weeks after the accident, he is trying to sue my client.  I believe he is a fraud.  Please tell him to simply answer the question."

By this time, the Judge was fairly interested in Olie's answer and said to the attorney: "I'd like to hear what he has to say about his favorite cow, Bessie."

Olie said: "Tank you" and proceeded. "vell as I vas saying, I had yust loaded Bessie, my fav'rit cow, into de trailer and was drivin' her down de road vin dis huge Eversweet truck came tundering tru a stop sign and hit my trailer right in da side by golly. I was trown into one ditch and Bessie was trown into da udder ditch.

"By yimminy I vas hurt, purty durn bad, and didn't vant to move.  An even vurse dan dat, I could hear old Bessie a moanin' and a groanin'.  I knew she vas in terrible pain yust by her groans."

"Shortly after da accident, a policeman on a motorbike turned up.  He could hear Bessie a moanin' and a groanin' too, so he vent over to her.  After he looked at her, and saw her condition, he took out his gun and shot her right between the eyes."

"Den da policeman came across de road, gun still in hand, looked at me, and said, "How are you feelin'?"

"Now your Honor, wot da heck vud you say?"