When you are just getting started in real estate investing, you get all excited once you’ve bought a note. But what do you do now that you’ve bought a note? Joel Markovtiz discusses what you should do after buying a note and the exit and workout strategies. Joel is the Client Relations Manager from the Singer Law Firm and has an extensive background in loan servicing and special servicing where he focuses on distressed assets. He says it is always important to start at a foundational level, do your due diligence, and remember to get the collateral file and all the information you can on the asset from the seller. You also need to manage your expectations because when you buy a distressed asset, they’re not selling it at 100%, so there are going to be certain challenges that come with buying it at a discount. Joel also shares some things you have to look out for to avoid pitfalls and and cut down on turnaround time significantly.
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Special Servicing with Joel Markovitz
We have Mr. Joel Markovitz. We love to call him The Connector because he is. It’s an old affectionate nickname but it is very true. Joel is in Client Relations at Singer Law Group. For those of you that are already involved in notes, many of you know of Singer Law Group. They’re a fantastic outfit out of California. Joel is going to talk to us about what do you do now that you’ve bought a note, which is always a hot topic for everybody on the loss mit side. Joel, I’ll turn that over to you and we’ll get started.
Hopefully, I’ll be able to give you some things that you can take away from it and then help use it to create a foundation for your business. To give you a little bit of background specific to notes. I’ve been focused since 2009 on distressed assets. I’ve always been in some form of distress both personal and professional. As far as the notes are concerned, I’ve been focusing since 2009. Loss mitigations always seems to be that missing piece of the puzzle for people. It’s finding the note, going through it, and then doing your due diligence on it.
Lots of people talk about it, but it’s that a-ha moment like, “I got it. Now, what am I going to do with it?” That seems to have been the mystery historically. First, it’s important to start at a foundational level and that means is, “I buy the note, what are my expectations?” Meaning you’re buying an asset that at one point in time was originated by a bank, by a mortgage company that was sold off into the secondary market. Now, they’re coming to you and they’re saying, “We’re going to sell this,” but they’re not selling it 100% on the dollar. When a new loan was originated, most of the time they’ll sell it at 102%, 103%, 105%, depending on where the market is. 100% on the dollar plus 3%, plus 4%, plus 5%.
When you come into the space and you’re going to buy the asset, let’s say you’re going to buy it at $0.55 on the dollar. If you’re buying it at $0.55 on the dollar, you’re buying it in a severe discount. When you buy it at that severe discount, it’s not going to be perfect like it is upon origination. It’s gone through the millage, it’s gone from maybe somebody bought it and sold it or something has happened. When you buy it, it is a distressed asset. There are going to be certain challenges that come with it because you are buying it at a discount. Sometimes, you may see a lost note affidavit, meaning the note on that mortgage has been lost or you may have a missing assignment or a missing allonge that needs to be cured. It doesn’t mean that that loan doesn’t have any value because obviously it does. Remember, you’re buying it at a discounted price. It means that it needs to be cured or there has to be something that needs to take place. Historically, that’s what we have done. We’ve always been able to cure loans. Not just us, Scott and other investors that you hear and talk about hedge funds.
There was a trade that took place 24,000 on trade and in that 24,000 trade there was a large number of missing documents. The seller has nine months to make sure that all of those trailing documents are found. That affects the downstream. It doesn’t mean that that loan that someone may have purchased as no value or is devalued. You’re buying at a discount. There’s going to be trailing documents. As an entrepreneur, as an investor, you’re taking that and you’re going to deal with it. You can cure that if you’re resourceful enough for yourself, sometimes we’re able to cure it. There are title curative firms out there. Remember, when you buy an asset, the expectation is there is something wrong with it, besides the borrower not performing.
Therefore, there are going to be times when you’re going to have to cure it or fix it or work through that. Sometimes you get a greater discount because you may have to do that. Keep that in mind when you’re looking at your assets. What I’m trying to do is manage expectations, manage and understanding. You’re getting a distressed asset and sometimes there’s going to be things that you’re going to have to roll to the left or roll to the right in order to get them to perfect a chain or to make sure that you can foreclose. You can foreclose with a lost note affidavit. It doesn’t prevent you in a non-judicial state, it doesn’t affect you. In a judicial state, you’d have to go through the court system and it may be an extra step or two, but you still can’t foreclose on that property if need be.
We have a question, “What happens if docs aren’t procured within nine months?”
There’s a buyback provision in every purchase and sale agreement. What you would do at that point in time is you probably want to exercise that. That doesn’t mean it’s going to be nine months, I was using that as an extreme case. Sometimes there are those that take a long time to perfect. It doesn’t mean that you can’t move forward with loss mitigation. If you have a borrower who you make right party contact or someone’s performing loss mitigation on that asset, it doesn’t mean that you can’t do that. It means that if you’re going to go to foreclosure and you don’t have the complete chain of assignments or you don’t have all the allonges in a non-judicial state, you may have to go through the judicial process in which to do so.
The Singer Law Group is a creditors’ rights advisory firm. It’s Daniel, myself and there are a total of seven of us in the firm today, a couple of attorneys or paralegal. We do outreach and we’re specific to the distressed asset space. What we are focused on is mortgage default. We do regulatory compliance. We work with our best practices. For our purposes, we’re going to talk about foreclosure and borrower outreach, collections, how to work out a loan. A significant portion of our practice or the practice of law is bankruptcy and foreclosure work. The reason being is the asset groups that we’re looking at have evolved.
Going back three, four years ago, Scott and I used to have a conversation, “Out of ten assets, what happens with those ten assets?” I would say, “Three or four of them would be in some type of retention or resolution. You have two or three of them that will be in a deed in lieu category and the rest would go to foreclosure.” That deed in lieu category, it’s not as prevalent in today’s world. You’re getting more workouts or more foreclosures. The gap is coming in a little bit. On the bankruptcy side, there are a lot of loans that we see that are in bankruptcy. Quite frankly, bankruptcy is your friend. Do not fear bankruptcy if you’re in a first mortgage position. You should never fear bankruptcy because it gives you the opportunity to have a dialogue with somebody on the other side of the phone, meaning the borrower’s attorney. Some way, somehow, they have to do something. They can’t continue to duck and hide. We look at bankruptcy as your friend, especially when it’s a Chapter 13.
We also will do a lot of review of collateral portfolio. Say you’re looking to buy a portfolio or an asset or two, and this is your first foray or it is in your infancy and you have X amount of time. How are you going to spend that time? We will review the collateral or review the O&E reports. We will review the BPOs, any information that you have, the servicing comments and look and make sure what type of chain you have on your assignments. Do you have a complete chain? Are you missing something? I was reviewing some collateral for a client and they had an assignment and the assignment was blank. They were like, “What do I do with this? It’s blank, it’s not even filled in.” That’s a good thing because you can now fill it in and complete that chain. We will review all of those different things and provide you back with a report.
I had a client who sent me eight assets to look at. He had to make a quick decision on the purchase price. The assets sell for $55,000. Initially my cautionary tale or statement to him was, “Be careful because that’s low price for eight assets. I’m going to tell you I have to believe that there’s some significant blemishes on these assets.” Sure enough, he sent them to me. These were eight of the hairiest assets I’ve seen in a long time. Especially once he provided the O&E reports that he got from ProTitle, there were breaks in the chain. There were assignments recorded out of order. There were city liens. The value of the property was $37,000 and they have $40,000 in city water liens. There were all types of stuff on it.
Let’s isolate on the asset that I mentioned that he had assignments recorded out of order. Maybe it went from ABC company to DEFGHI. That’s the way it should go, but it was ABC to LMN then to DEF. It’s not insurmountable, you have to have an understanding of what you’re doing to correct it. It’s not the end of the world, it’s going to take some time and effort in which to fix it. We’re buying distressed assets. In my post-conversation with him, he knew what he was getting into, thus the price, but now he knew exactly what he had and now he can go along and correct it. Not the end of the world, but now you know. Having a good sense of what your assets are is just as important as anything that you do because now it lays out the opportunities in the map on which to how to proceed to resolve the delinquency.
In a perfect world, every borrower is going to respond to your phone calls, respond to your letters and they’re going to give you a 25% yield on the payments and everything is wonderful. You report back to your wife, partner, investor, “Look what we did.” It’s not reality. Some of the things that we do are put in place from a strategic perspective in order to have a good understanding of what the client wants and what their needs are. Each asset has different characteristics. There are no two assets that are the same. I’d like to use the analogy sometimes. I have a pen. Most of the time pens are going to be very similar. I have a couple of different pens here. Two different pens, two different characteristics, but the bottom line is they both write. Does this make a difference to me? How do I want to work with it? Each asset is different. When you have an asset that is in Cleveland, Ohio; you have one in Nashville, Tennessee; you have another one in Indianapolis. Three different assets, three different locations, three different borrowers, three different UPBs, three different values, everything is different. Occupancy or vacant, each one is different. Each one has to be looked at on an individual basis as opposed to saying, “We’re going to do this for all things.”
I’ve had clients who come to us, “I have bought 100 loans. I want to modify them all.” That’s not reality. The reality that you’re going to have to do is you’re an entrepreneur. You decide to take funds and loans, joint venture partnership. You’re an entrepreneur, you’re going out there and you’re going to look at the landscape and then you’re going to adapt to it and if need be, overcome whatever the challenges are. That’s exactly what loss mitigation is. In essence, what we’re trying to do is we’re trying to bridge the gap between delinquency and performance. We’re looking to assess each asset on a loan-by-loan basis, and then we want to implement the plan.
Once you implement that plan, it doesn’t necessarily mean that that’s the plan or the path that you’re going to stay on. You might have to make a left turn, a right turn, veer to the left or go up and over a mountain. Each thing is going to be different. There are some of those things that you have that are going to throw those bumps in the road. Is the property vacant or occupied? I like properties that are occupied. Not necessarily mean that I’m going to get 100% of the time that we’re going to get some tangible resolution, but it does mean that I have greater options. That’s what we’re trying to do is we’re trying to provide options. I have greater options in which to try and resolve the delinquency.
There are people who come into the market who have been real estate agents or REO brokers and they want to get that property back. They’re looking to create some passive income. They don’t want somebody in there. They may be a fix and flipper. That’s your unique characteristic and that might be your secret sauce. We have clients who earn five specific markets and all they want to do is take an unoccupied property and take it back, rehab it, turn it into a rental or just flip it. Everybody’s want and desire is different. It doesn’t mean one’s right or wrong, it means what works for you and what works for your model. What we do is we are engaged to assess those options and then provide you with feedback and work with you as a partner in order to resolve the delinquency.
First thing that we’re going to do and frankly anybody should do, whether it’s working with us on loss mitigation, you’re working with Madison Management who is also a servicer. There’s a non-profit out of Polaris which is out of a South Orange County. Each one is going to assess that asset and then they should then be having a discussion with you and say, “The property in Palatine, Illinois, we think we can get some form of retention option.” They’ll come to you and you should have that conversation, that dialogue on how are we going to proceed? First thing that we do is we board all our assets on our platform. The platform will give you access to our system 24/7 so you can see what’s going on. You can see if phone calls have been made and letters are being sent, communication with the borrower. If the borrower has filed bankruptcy, we’re in the process of filing a proof of claim. If they previously were in bankruptcy, we’re filing a transfer of claim. If it’s moving to foreclosure, you’ll be able to see all of that in real time and then get a good sense of what’s taking place, then assess where we are, what we are and how we’re working together on it.
When we boarded our system, we also skip trace it. We make sure we have complete data in order to board it. Some of those data points obviously are the loan number, the address and the borrower’s name, their social security numbers, what the payoff and reinstatements figures are, if the borrower has been in bankruptcy or previously been in bankruptcy and who has been discharged or dismissed, if the foreclosure has already been filed. Sometimes you’ll buy assets and you’ll find out that maybe one way or another you didn’t know that the loan has already been in foreclosure and there’s a firm that’s already been engaged on your behalf in order to proceed with the foreclosure. What we will do in that case is we’ll coordinate with them. We’ll make sure all those invoices are correct. We’ll make sure that you’re being charged as per Fannie and Freddie guidelines, in essence be your advocate. Things happen and we have to be nimble enough in order to adapt and to deal with what’s placed in front of us. We’ll have a client and we’ll sit down and have a call and talk a little bit about what was taking place on the asset. What we see, what your wants and desires, what your criteria is, and then put together a strategy and then implement that strategy.
Our goal is always to make right party contact with delinquent borrowers. What we want to do is create a pathway to resolving the delinquency. Historically, we’ve always talked about what are the different options, and I’m going to go through retention and liquidation options. There will also be about bankruptcy. Borrowers do file bankruptcy, especially as it gets closer to foreclosure. We’ve had foreclosures that the borrowers file bankruptcy on the day before foreclosure sale. We have borrowers who have filed bankruptcy in judicial states after the judgment and now forestalls it, we’re engaged on one that I can think of right off the top. Borrowers will file bankruptcy and now we have an opportunity. That opportunity cuts both ways.
Then if you have to foreclose, filing the notice of defaults, if it’s not in states that we’re licensed to, we have partner attorneys that Daniel has worked with over the years. He has probably done in excess of 15,000 foreclosures in his career and then probably on the low side. We have a network of attorneys that we’ve worked with and we’ll coordinate and work with them on your behalf. You’ll have direct contact with them. We’ll make sure that you have an advocate and that if anything arises that’s out of the norm that someone could advocate on your behalf.
Let’s talk a little bit about loss mitigation. Scott refers to it a lot of times as special servicing. Loss mitigation is the crux of the note, the nuts and bolts of everything, because you’re buying a distressed asset. How are we going through it then to fix that distressed asset? We have to come to some tangible resolution by doing so on the borrower outreach site that helps bridge that gap. Once you receive that asset, once you have purchased an asset, when we board it on our system, on the borrower outreach side, there are retention options and then there are a liquidation options. Every loan that gets boarded, we customize the outreach campaigns. We’ll call borrowers at a variety of different times during the day, always making sure that we’re compliant with both state and federal regulations, CFPB regulations. It’s been in the news a lot lately with the new administration and how they’re defaming it. Nevertheless, that doesn’t affect you as the investor as much as it affects larger servicers and some other people, but there is still the RESPA. The RESPA guidelines dictate when you can call, how you can approach that call, what you can say and not say to the borrower, what you cannot say and say to third party individuals when they pick up their phone.
Everything that we do is compliant to RESPA and FDCPA as it’s presently constituted. All loans we’d skip tracing, we’re looking for borrowers, we’re looking for their location, phone numbers, things of that nature in order to get in contact with them. The ultimate goal is getting in contact with the borrower and resolving the delinquency. By resolving that delinquency, we’re able to provide value to you as our clients, but also at the same time in turn, you’re able then to provide that same value to your investors or your partners in order to create a profit. Then that also will directly affect your ROI. What we want to do on the home retention side and what we always start off with is can you reinstate? We’re not going to jump right into a loan modification.
I was looking at a pool of assets and the borrower’s payment was $446 per month. I looked at the rents and the rents in the market were $1,450 a month. Let’s just say the rents were off by $450. The borrower’s payment is $446. The rents even worst case scenario was $1,000 a month. There’s a significant way that their borrower needs to stay in that property unless they just absolutely can’t afford that for $446. That tells me upfront, if I’m doing my due diligence, that that loan has a really high percentage opportunity to get a result of the delinquency and keep the borrower in the home and get some form of modification. It doesn’t necessarily mean that we’re going to accept that $446, but now we have a basis to have that conversation.
As we’re looking at that asset or you’re looking at that, you can then calculate your yield before you’re buying the property and what your purchase price is. The first thing that we’re going to do is we’re going to talk about getting them to reinstate the payment. Next step that we’re going to talk to them, if they’re unable to do so, is we’re going to want to talk to them about a forbearance plan. Can you forbear a portion of this? Maybe put it at the backend of the loan. Remember, you’re the bank. You can do anything you want. The only limits that you have are based upon regulatory items and the lack of creativity. We have done a variety of different modifications. We have done a variety of different forbearance plans over the years. Being creative and working with a borrower that when you have a willing borrower, you’ve got to create a relationship, and sometimes these borrowers have not had anybody on their side or advocating for them or even working with them.
Daniel and I believe that philosophically, you don’t need to be heavy handed. Some borrowers push you to your limits and therefore you have to be a little bit firmer, but you don’t have to be heavy handed. I believe, and I advocate this to my kids all the time. I had this conversation with a client who was in the office. We can have a pleasant conversation on a pleasant topic. Therefore, sometimes you have to have those conversations with borrowers. It doesn’t mean that it’s not going to work out. It just means that you’re going to have to have that conversation or we will as your advocates. We’re going to look at reinstatement, forbearance or potentially then we’ll talk about a loan modification. A loan modification doesn’t mean that we’re all automatically going to say, “Let’s modify this,” and it gets implemented right away.
What we believe in is we believe in what’s called the TPP or Trial Payment Plan. The trial payment plan is like an audition for the borrower. Can you make these payments? Can you make these payments on time? Usually, it’s a six-month timeframe. We want to see that you can do that, and if you do that, then we can live permanently modify that loan but up until that point in time, you haven’t earned the right, because in essence, you got the borrowers going delinquent. If they’ve been delinquent or they’ve been delinquent on multiple occasions, in some cases, what makes us think that the borrower is going to re-perform? You have to earn that opportunity. That’s what the TPP plan does. It puts a carry-out in front of that borrower in order for them to make those payments.
At the same time, it protects your interest because then you’re not locked into a modification until the borrower has earned that and thus your cost basis gets reduced. For conversation sake, let’s say the borrower, we put them on a TPP plan and it’s $500 a month for six months so it’s $3,000. Over those six months to $3,000, now you have somebody who’s covering some of your cost and you’re servicing your loss mitigation side. You’re now reducing your cost basis. If that borrower after six months defaults, you’re in a little bit better place in order to move forward with the foreclosure. Maybe you’ve collected the partial or enough of those funds in order to pay before moving forward to foreclosure. The whole idea is to get the borrower in case of a modification on a TPP plan.
In order for them to do so, you have to have that conversation and you also, at that point, “I’m going to have to gather their financial information,” and that is critical. Because you don’t want to put somebody into a forbearance plan or a modification that doesn’t have the opportunity to be successful. There used to be this mindset that, “Let’s just get them into a model.” We had a borrower who get $775 a month in disability. The payment on the property is $400 and somewhat a month. How can that borrower eat? The borrower is in a difficult position.
We can be empathetic, but at the end of the day, this is not a philanthropic endeavor. This is an endeavor that is out there to make profit, to generate income, to create wealth. As much as we may be empathetic with people, someone who’s making $775 a month is not going to be able to make a $400 or $500 a month payment and then still be able to live and be successful. Therefore, in a case like that, we would then have to turn them down and then talk to them about a deed in lieu. A lot of things come out of these conversations and then gathering the financial information, it gives us a good sense of where the borrowers are at on what they can or cannot do from a financial perspective. Want, will and desire, maybe in that case, she can bring in a renter or people.
I know people here locally, a couple of women, they’ve gotten divorced. They wanted to keep their property so they rent out rooms to the college students. It’s a win-win. Maybe that could be the case in this, but the borrower needs to provide us with information in order to make those decisions. In order to make those decisions on your behalf and in consultation with you, we need to know what the borrower can or cannot do. We want to gather a lot of information from the borrower.
There are potential Hardest Hit Funds still sitting out there. Not something that we spend a lot of time on. There are groups out there that do it frankly at this stage of the game. Where we are, the Hardest Hit Funds emanated back in the 2011, 2012, which was federal funds that were given to each state and each state was then able to administer it as they want. I know in California they’re still running commercials about Keep Your Home California. At this stage of the game, if you’re able to be successful, you’re probably looking into the success ratings instead of the team. Sometimes borrowers have rehab their credit to a certain extent and maybe there’s an ability to do a short refinance. For a long time, there was a 1023 short refinance program, not as significant as it once was, but there are different state programs out there that potentially could create that value in order to get the borrower to then refinance out.
Most of the time in today’s world, you’re going to need to get that borrower to re-perform at the very least on a six-month basis. The TPP plan comes into play and then potentially refinance you out of that loan. When making contact with the borrower, we structure the outreach campaigns via a multi-pronged approach. First is a letter campaign, call campaign and then if we need to, upon consultation with our clients is field services. We’ll send somebody out to the property and what they’ll do is they’ll attempt to make contact with the borrower in essence to get them to call into the office.
Sometimes you’re successful, sometimes you’re not, but there’s underlying value to that field visit. In that field is you get somebody going out to the property. When you purchase your loan, a lot of times people use the BPO or Broker’s Price Opinion. It’s a report that they will send back to you and give you comps and listings and tell you about the neighborhood and things of that nature. A lot of times those people just drive-by the property, snap a picture and keep going. A field service person literally goes out to the property. They will knock on the door. They will look to see how high the grass is. Is it six inches or under six inches? Is their gas hooked up? Is their electricity hooked up to it? Is there people living in it or signs of life? Are there children’s toys? Are there cars in the driveway? They’ll give a good inspection of the property and then provide that information back to us. Some of the information that we get back will indicate certain things and then we’ll react to it. If the borrower is in the property, we know that they’re looking to stay. If they’re maintaining it, there’s been recent construction. We have one where we send somebody out to the property and they were putting on a new roof. That’s great. That’s good news because we know that they’re putting money into it. They may not be paying their mortgage but they want to stay there. That gives us a little bit of leverage in order to get them to come correct or perform. If they don’t, I’ll just put money into a new roof.
The certain problem on that is the field services. If we’re unable to be successful in any of those approaches, then we’ll come back and say, “We need to move to foreclosure.” If we move to foreclosure, then at that point in time, that’s a liquidation option. A lot of times borrowers who you had a conversation with, like the woman who was getting $750 a month in SDI, the conversation is, “You don’t have the capacity to stay in that property. Let’s talk about a deed in lieu? A deed in lieu is a deed in lieu of foreclosure. We’re not going to foreclose you. You’re going to voluntarily sign over the property to us. We’ll take it back.” In a lot of cases, there are conversations about cash for keys, meaning signing that deed in lieu and maybe we’ll give you $500 or $1,000 based as a client’s approval. We’ve seen it as high as $10,000 depending on the type of asset.
Having that conversation with the borrower and sometimes it’s about, “You can’t stay in it. Your best bet here is to sell that property.” This is where you as an investor, you’re buying that loan at a discount. You have a lot more wiggle room especially based upon today’s values if you want that property. Let’s just say for conversation’s sake, the property’s value was $100,000 and you purchased that at $55,000, $0.55 on the dollar. The conversation with the borrower is they can’t stay in the property. There’s no way they’re going to do it, or maybe they don’t want to stay in the property and they want to move on. There was a divorce or something and they want to move on with their lives.
The conversation then turns around a short sale. If they can then turn around and sell that asset even though that value is $100,000, and maybe they have $150,000 in unpaid principal balance and arrearages and things of that nature. Now, you can play with it. If that borrower comes in and you buy it at $55,000 and the borrower is able to get $90,000 offer for it, it’s less than your UPB, but at the same time, now you get you a quick turn velocity in capital. They can liquidate it and now all of a sudden you’re in control. A short sale is also a very good exit option. Sometimes there’s a deed for lease. Sometimes borrowers just got behind and say, “I don’t want to stay here,” and come up with creative ways. If you take it back, you’re going to find somebody else to live in it or sell it. Maybe sometimes there’s an option for a deed for lease. On the liquidation side, before we get to foreclosure, there are additional options. There’s a short sale, there’s cash for keys, deed in lieu, and then there’s potentially a deed for lease.
Ultimately, if we have to move to foreclosure, sometimes the foreclosure is the shot across the bow. It is the bell that gets rung that get somebody’s attention. Then maybe they do come forward and are able to resolve the delinquency. If going forward and moving to foreclosure, we will work on your behalf in order to do so. In order to foreclose, we need certain documents. Once you start the foreclosure process, you want to make sure you have everything so it doesn’t get delayed. In foreclosure, there are judicial states and non-judicial states. The non-judicial states are states that you do not have to go through the court system in order to foreclose. The judicial states are states that you have to go through the court system in order to foreclose. Somebody said that they are providing a list of what was a judicial and non-judicial states.
Just as a general rule of thumb, if you’re looking at the map and you have Chicago East, most of those states are judicial states. From Chicago West, most of those states in the western part of the United States are non-judicial states. There are exceptions. Tennessee and Virginia are both non-judicial states. Texas is a very quick foreclosure state, they fall right in the middle. Michigan is a quick judicial state. In order to move to foreclosure, you’re going to need pieces of your collateral file, meaning you’re going to need the mortgage or the deed of trust. You’re going to need the note. Probably 15% of the time you’ll find that last note affidavit in the file. In essence, they’ve lost the note somewhere, but someone’s attesting that they do have the note. You need the mortgage or the deed of trust, you need the note. You need the complete chain of assignments, meaning that the loan was originated by GMAC. GMAC then sold it to Flagstar Bank. Flagstar Bank then sold it to a 123 Hedge Fund, and you’re buying it from 123 Hedge Fund. You have assignments that show the complete chain of ownership. Along with those, you also have the allonges.
People ask, “What’s the allonges?” In essence, if you have a check, it’s the endorsement. The allonges are the endorsement. Assignments need to be notarized, as allonges do not. Sometimes you’ll get complete assignments and/or allonges that are made out to blank. You just have to have your attorney or yourself fill those in. You’re going to need to have the loan with a licensed servicer. If you think you’re going to self-service, big mistake, don’t do it. It will create issues all the way along the process, especially if you’re going to foreclose. You’re going to need the information from your servicer, and from your servicer, you’re going to need the pay off statement with a payment history whether you’re using Madison or you’re using FCI or SN. You’re going to need to make sure that you have a payoff statement and pay history in order to move forward to foreclosure. You’re also going to need a reinstatement figures because that’s going to be needed also. Also, you’re going to have to have a copy of the demand letter, and that’s advising the borrower that you’re going to move forward with the foreclosure. Having all of those things together is the complete package and now you can move forward with the foreclosure without impediment.
The issue sometimes that you’ll have is the borrower may file bankruptcy. That will forestall the foreclosure. Certain times, you’re going to have to publish in certain states. We just did a couple of foreclosures in Alabama. In Alabama, you need to publish and if you can’t find the borrower in which to serve him, you have to go through different processes in order to foreclose. Once you move forward with the foreclosure, it can take anywhere, the very, very short is 45 days. If you’re buying something in New York or especially the five Boroughs, you’re looking at five or six years. I don’t advocate that, but if you’re in New York state and this is what you know and this is what you’re comfortable with and you’re an investor who’s comfortable with the timeframe, it’s great, it’s just not anything we do.
As investors, we do foreclosures in New York. From a personal perspective in loans in big states that we like to work in, Michigan is fine, Indiana is fine, Ohio is fine. Pennsylvania is fine. Atlanta, Tennessee, people like Florida, I can go either way on Florida, also Missouri. Some people have trepidation with regard to Kansas because of the redemption timelines. This is part of your due diligence which I didn’t touch on, is looking at that collateral file because in that collateral file, Kansas has a twelve-month redemption period. A lot of times people in the origination, they will end up waiving that. You have to see those little things and that’s part of doing your due diligence and looking at what you have there.
There are a lot of states that makes sense as far as buying assets. It’s about what you want, what your investors want, what your JV partners are looking for, what states were most comfortable for you and what do you want. I have people who only want to buy in Illinois and I’m sure that if I said I have a bunch of assets in Cook County, people will run for the hills. If you’re in Illinois and you’re comfortable with it, and that makes sense, then Cook County could be a good market because other people don’t want to be there. Being a contrarian also can be an advantage. We have one case in point that we bought an asset in Palatine, Illinois. It was a condo. Nobody wanted to buy it. I grew up in suburbs of Chicago and I said, “I like this. I know the area. I felt comfortable with it. Let’s buy it.” Daniel wanted nothing to do with it. He’s like, “No.” I said, “No, we should do this.” We purchased the asset in late November of last year. We then made contact with the borrower, and the borrower said, “Yes, I’m going to make payments.” He didn’t make the payment. We then have the conversation with him about a deed in lieu. To make a long story short, we got the deed in lieu from him.
We got the property back at the beginning of March, we turned around and sold it a couple of weeks later. We paid $62,000 for the asset. We put in about $3,200 in paint and carpet. We sold it for $195,000 in about five months. That was a situation where I felt I knew more than the market because I was familiar with it and I had comfort with it and our investor had comfort with it. Just because somebody else that doesn’t fit for them doesn’t mean it won’t fit for you. One of the things that we want to touch on is, “I bought the asset. Now what do I do with it?” Because a lot of times you’ll complete the purchase sale agreement and what takes place after that? I’m going to walk you through the process. When you purchase the asset, the seller should ask you who your servicer is and where do you want the collateral files to be sent upon conclusion of the transaction. They will then service transfer that loan to your servicer, if it’s not already there. It could be coming from Statebridge, it could be coming from Carrington, it could be coming from SN, it could be from a lot of different places. What the seller will do is they will then advise their servicers that this loan has been sold, and that this loan is being sold to XYZ entity, and they want servicing transferred to Madison Management.
They will then contact Madison and that’ll be a conversation that will take place between the old servicer and the new servicer. First thing that’s going to take place is they’re going to ask for approval on the goodbye letter. The goodbye letter goes out to the borrower advising them that servicing rights are being transferred from one service to the other. The new servicer will provide information to the old servicer who will then send out the goodbye letter. Generally, a service transfer takes anywhere between three and six weeks. There will be data that will be going back and forth between the two servicers. There’ll be a scrubbing of the data, making sure that everything is there in order for the new servicer to board it. There’s a variety of different data points, making sure that they’re in compliance with federal guidelines. If there’s something that a conversation needs to take place that I’m missing something, it will take place during that timeframe.
In the service transfer, sometimes there are hiccups. One servicer misses a data point or something. Those conversations take place and they’re supposed to resolve that. Once the servicing date, new servicing with the new servicer has been established, they will send out what’s called the hello letter. That hello letter advices the borrower that, “Servicing has been transferred. This is where you need to make your payments. These are when the payments are due. If you have any questions, please contact us.” Then there’s a fifteen-day quiet period where nothing takes place. It gives the borrower the opportunity to reach out to the new and/or old servicer to discuss any concerns, problems or challenges that they may have. Upon the completion of that timeframe, then the loan is on board with the new servicer and everything moves forward.
On a non-performing loan, it’s very unlikely that there’s going to be any conversation or communication coming from the borrower to you and/or the servicer. On the performing side, you get a lot of conversation when the loan is performing. They want to make sure that they have an ACH. A lot of times, the borrowers will reach out to say, “I want to set up my ACH,” and things of that nature. The goodbye letter and the hello letter are supposed to create and spur communication between the previous servicer and the new servicer. One of the things that is important to understand after you buy is where are you going to store your collateral. I have people who have a fireproof safe at their home, and have safety deposit box. Some of them stored at Richmond Monroe, or other document custodians. You need to know exactly where you’re going to store that collateral file. Once you store that collateral file, that’s where all your originals are. In essence, that’s the proof that you are in the law. It’s important that you safe care those documents. What you should have done in the due diligence process is you should have images of all those documents. For instance, Richmond Monroe, once they get a collateral file, they will image all of the documents so they have that and they’ll have it in a portal.
At this stage of the game, if you have one loan, I understand where you might want to store it at your offices, but once you start having multiple, it’s hard to keep track of those things because there’s a lot of moving pieces and you might want to consult the doc custodian and make sure that they are able to store that for you, create the images. You can then access the images usually through their portal. By the way, if anybody, whether it’s your servicer or us, if we’re doing loss mitigation or if it’s your doc custodian, they all should have portals for you. They all should be able to provide you with the images and information. If they’re not, then at that point in time, that’s where the challenge is.
We have a question, “Is there an allonge for every assignment?”
Yes, there is an allonge with every assignment. If it’s from GMAC to RWLS to Carrington, each one will have an assignment and an allonge with it. Unless there is some of them that they might be made out to blank.
We have another question, “Do we board with a servicer first and then board with you if delinquent? Why do we board with both? Why not board with you, get it performing again then board with the servicer to season?”
Yes, you need to board it with a servicer. We are not a licensed servicer. We are licensed to perform loss mitigation. From a compliance standpoint, you have to have it with a servicer. There are certain servicers that will board out of no collection basis and there are other ones that will board with servicing and do loss mitigation. Madison in particular, I’m just using because I worked with Shante and I speak with her on a semi regular basis. They will board the loan for no collection, and then we would do the loss mitigation. First thing, have the loan boarded with a servicer because you want to make sure you’re in compliance. You can board with them and with us simultaneously, but you want to make sure you’re always boarded with the servicer and you make sure that you stay in compliance.
“What is the difference between a forbearance plan and TPP? Are they not both temporary plans that could default back to the original?
Generally, a forbearance plan is where you’re going to forbear a portion of the delinquency. Let’s say, you buy the loan and the borrower is twelve months delinquent. He said, “A year ago, so and so got sick or I got sick, I lost my job, my hours were reduced and for the next six months or twelve months, I can make $700 a month payment. Then I can go back to my $1,000 a month payment. You may forbear for that time period X amount of dollars.” You’re saying, “For the next seven months or whatever the case would be, you can make a $700 a month payment. Once that time period expires, then I’m going to go back to my original payment.” A forbearance plan is usually a temporary thing. The TPP is a precursor to a permanent modification. This is an audition to a permanent modification and it might be only for a six-month period. The payment that you’re going to put that borrower into is most likely going to be pretty similar to what’s going to be in a permanent modification. The forbearance plan, the foundation is the original loan. Whereas a modification is a modification of the original loan. It’s a precursor towards a permanent versus something that’s temporary.
A loan modification is permanent.
Once the borrower gets through the TPP plan, then it can be made permanent. Theoretically, you can use a forbearance plan and TPP synonymously, but we try and make that distinction in order to, at the same time, manage the borrower’s expectations.
We have a question, “Do you have a minimum number of notes you require to do loss mit for a note owner? What’s the average cost for taking a note through foreclosure?”
At the beginning of the year, we have talked about not taking clients any longer who have less than ten loans. We’ve revised that thought process. One of the challenges that we do have in being transparent is that when you have a borrower or a client who has one or two loans, a lot of times they’re newly into space. What we usually charge is $60 a month for loss mitigation services. We spent a lot of time with people who have one or two or three notes and therefore, with the time versus value equation was creating, there wasn’t a benefit to the firm. We’re spending four hours or five hours a month with a client a loan or two. We’ve revised that a little bit as far as our pricing is concerned and how we’re going to do it and approach it as we go forward. We will take clients who have less than ten loans but we’ll sit there and we’ll talk a little bit, and we’ve structured things a little bit differently.
It’s on an individual basis as far as taking a loan to foreclosure. If you’re looking for estimates in a non-judicial state, I would estimate $3,000 in a judicial state, $5,000 as a rule. Certain states like Virginia, you’re talking in the thousands, $1,000 to $2,000. If you have to foreclose on Louisiana, we’ve seen it as high as $9,000, but as a general rule, it’s $3,000 for non-judicial and $5,000 for judicial. Just because you estimate that doesn’t mean you’re going to spend all that. If you’re working with a JV investor or providing funds, generally look at things along those lines and that should include servicing costs. If you have to file the borrower files bankruptcy, but that was a general rule. It might be up or it might be down, but as a rule of thumb from $3,000 for non-judicial and $5,000 for judicial.
Back in 2012, we had a group who bought probably about twenty loans. I remember there were three partners. We would get on a conference call with them every week talking about things. Long story short, they ran out of money. They didn’t have money to pay their servicer. They didn’t have money to do loss mitigation or pay those fees. Basically, they let the assets atrophy. Nothing took place on it. It was a complete loss because they ran out of funds because nobody told them how to plan accordingly. To me, that was always a tale of caution.
We have a question, “How often do you see borrower suits from loss mit activities?”
I’m not saying they don’t happen, but it’s relatively rare. When they’ve claimed FDCPA violations, say they pay off the loan and the lender, meaning you, you don’t provide them with a re-conveyance on the loans. I’ve seen those complaints rarely. We have one day with some litigation on a guy with the second mortgage who was challenging the validity of the mortgage, but not very often. It all depends on the asset class also that you’re looking at, if you’re buying an asset, and let’s say the value is $150,000 or less. The likelihood of that borrower having the capacity or the wherewithal in order to challenge you in court is less than somebody whose property is worth $150,000 or more. The higher you go in value of the property, the more sophisticated that borrower is and the more capacity or the wherewithal they have in order to forestall and to challenge you in court. If that’s a concern, there is a sweet spot. If you’re right, you’re right and they have a big challenge in you, then they’ll have to pay the court costs. Time is money, so everybody has different tolerance, want and desire. If you have an asset that’s in California and you know that you’re in a good spot, buckle up and let’s go for the ride.
There are a group of special people out there who understand very well it’s cheaper to pay their attorney than it is to pay everything else, and so they’ll do that sometimes. It’s a strategy. Joel, can you tell us what’s one of your more creative reinstatements that you guys have done?
I wouldn’t say it’s a reinstatement, but there was one. It was in Kansas City. It’s a bunch of years ago and the borrower was a common law wife and husband. We made contact with the daughter of the lady borrower. Apparently, her mother had been killed and so we were looking for a deed in lieu. Basically, she wants to be done with it. She said, “I’ll sign but you got to get to the man’s signature.” As it turned out, he was the one who committed the violent act and he was in jail. We had to go through his attorney, contact him to get him to sign the deed in lieu in order to get clean title to the property. We had to put $500 or $1,000 in campaign account. Not a pleasant situation, but it was a resolution that took some creativity in order to get resolved.
We have a question, “I’m researching a non-performing second mechanics lien in Texas. Loan mod on first mentions a forbearance amount, but it doesn’t state the exact amount. How might I find out what that amount is?”
Can you run a credit report? Maybe it’s reported there. If not, not that I would advocate this, but if you can find out who the holder of the first is, sometimes they have the information on an automated line. If you have a loan number, I would not advocate that, but I’ve heard people may do that. Generally, a credit report should be able to provide that, especially if they’re paying them first. Seconds are different than first. We deal with both. I’m going to make an assumption that if there is a performing first, that they’re potentially exactly there. You just have to verify into those things.
We have a question, “I still don’t get what an allonge is, a copy of check?”
It’s like a check. It’s like the endorsement on the back of the check. It’s a separate document and it will say, “Allonge to the note,” and it will give the different points of the note; who the borrower is, when it was originated, the amount that it was originally originated for. It will give you the loan number and then it’ll say, “This has been endorsed without warranty,” or something to that effect. It’ll say, “Pay to the order of.” Literally, it’s an endorsement. If you’re looking at any collateral files, you should be able to see it. Sometimes an allonge or an endorsement may be stamped on the original mortgage document or the note, but that’s only for one. If it’s going through a chain, there should be a piece of paper in the file that says ‘allonge’. It’s just one piece of paper. If it’s missing, it’s not the end of the world, the sky is not going to fall in. Sometimes you get people calling in panic, you go and you figure out a way in which to get it or fix it. Same thing with an assignment. I’m more concerned about a missing deed of trust or mortgage or a note than I am with a missing assignment or allonge. Those things can be cured.
We have a question, “What common mistakes do you see that can be easily avoided?”
Not looking at some of the simple things. There’s a lot of information that’s available to you online, meaning checking property taxes. If you go and you check property taxes and the name on the tax roll is different than on the tape or in your collateral, that’s a red flag. Sometimes you will see that the borrower hasn’t made a payment in ten years, but his taxes are current. It’s highly likely that somebody’s going to pay the property taxes and not pay their mortgage. It doesn’t work that way. If it says zero, there’s a likelihood that there has been a tax lien sale. You want to make sure to dive into that and peel back the onion and check into that a little bit more. Those are some common mistakes on the tax side.
The other one is making sure when you go through your due diligence that you have the names on the mortgage are the same with the note. Make sure that those names are all the way through. Especially in seconds or you have divorces, and sometimes a husband or wife will be on the mortgage. A part of the divorce decree is one spouse gets the home and the other one has to give them a quitclaim deed. Know who your borrower is because the last thing you want to do is do an outreach against the borrower who’s no longer a title on the property. That doesn’t happen often, but those things do happen. Making sure that you verify the unpaid principal balance.
Sometimes on the tape you will see UPB, you will see deferred principal, you will see total UPB and then you’ll see total legal balance or total accrued debt. Total accrued debt is everything lumped together. That is the arrearages, any escrow advances, any filing fees that maybe the servicer has had to advance on behalf, but that’s the total amount of money that you would plead for in a foreclosure. The UPB and any deferred principle and the total UPB, that is what your total unpaid principal balance is. That’s the number that you should be bidding off of, depending on its value versus UPB. Making sure that you have that information and making sure that the seller provides you with that information. If they don’t, simply ask for a payoff and reinstatement letter and the servicer should be able to provide it to you. Also, when you’re going through the collateral files, read the servicing comments. A lot of times they give you lots of good information.
We have a question, “How does the note differ from the mortgage?”
The mortgage and the note are in tandem, but the mortgage and deed of trust, for lack of a better term, it devises the state, the county who is the owner of the property, the note itself. That is the commitment from the borrower that they’re borrowing this money and that they’re going to pay it back. The note will list the terms. In essence when you go to court, the note helps lays out exactly what took place on the mortgage or on the lending, who the borrower is, what the borrower’s address is, what the interest rate is, what the term of the loan is, and so the note provides all of that information. The deed of trust is the legal ease up. The note is the nuts and bolts.
We have a question, “If the original title instructions for a loan are to have two people take title, even if the second person/ sponsor isn’t on the loan, and at the closing the title is not taken in both names, what recourse does the second person or sponsor have?”
What you want to do is you want to look at the title policy and see what’s in the title policy. Potentially, you would have a title claim, if there’s an issue on who took title to the property. Most of the time on a first mortgage or in your collateral file will be a copy of the title policy. It’s been a long time since I haven’t seen a title policy in a collateral file so you’d have a title claim, which is a good thing.
One final question, “What would you do with that title claim?”
At that point in time, you’re going to need someone like Daniel to advocate on your behalf and send a letter to the title company making a claim. The title company will come back and say that, “We’re researching it, we’re going to cure it. We may pay for it, pay the claim, but you’re going to need an attorney.” In my opinion, I could be wrong, but I think you need an attorney in order to advocate on that because now some things get to be a little bit more complicated. Therefore, you want somebody who’s able to pierce right through that. Frankly, as a law firm, we don’t get embroiled by speed bumps. We’re able to pave over speed bumps because there isn’t anything that Daniel hasn’t seen quite frankly. If not, he knows how to deal with it, whereas if you’re using somebody else for loss mitigation, an asset management company or whatever, they still have to go to their attorney. We’re full speed ahead.
It cuts down that time gap. We always say it’s great to have a good relationship with your attorney. If you don’t have an attorney for the assets that you’re working on, learn about the area you’re in or get someone on board for that because they can be a lifesaver in different types of things and cut down on turnaround time significantly. Joel, can you throw up your contact information one more time?
Joel, thank you for coming on again. We appreciate it.
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About Joel Markovitz
Joel Markovitz is the Client Relations Manager for the Singer Law Group. He has an extensive background in loan servicing and special servicing.