Not all note exit strategies are created equal. While each of them may have their own merits, they can have different net effects on your fundability. In their monthly episode together, Scott Carson talks with Merrill Chandler from GetFundable.com about how the ten different exit strategies with notes affect the borrower’s credit and FICO scores. They discuss everything from mortgage lates to modifications, forbearance agreements, short sales, payoffs, loan assumptions, bankruptcies, and foreclosures and how you can use this knowledge to work with your distressed borrowers. Listen in for this extremely valuable and timely conversation.
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Understanding Note Exit Strategies And How They Affect Borrower’s Credit With Merrill Chandler
In this episode, I’m going to be sharing how to speak borrower fluently and how to teach your borrowers how to speak banker fluently.
I’m excited to be here and excited about this topic. We’ve got the mad wizard, the Credit Messiah, Mr. Merrill Chandler, joining us. We are honored to have you as always. How’s it going?
I’m doing well. We got great things happening. COVID is treating us right. If you’re the guy who is running the bell to tell people what to do to protect themselves from the hurricane that’s coming, you might be a popular guy. We are literally stopping people from going into or how to manage the pre-foreclosure process with their lenders, how to actually navigate and negotiate deferments better. We have a way to scripts on how to navigate not getting your credit lines and credit card limits lowered. Our clients are students raising limits in the middle of COVID. We’re at over $3 million in client fundings. It’s working and we’re the great storm warning. To say, “Here’s how to protect.” It’s been wonderful. What we’ve got for your readers is kicks ass.
What we thought we would do is there’s a variety of issues that we deal with borrowers, different exit strategies in the note business. Obviously buying a note at a discount from usually something that has been paying for a while and working through the different exit strategies, the forbearance, the short sales, loan assumptions, the foreclosures were ready. Merrill, I thought we’d break down how the opposite side, how it affects the borrower in good and bad so that A, you’re talking with your borrowers or B, you have your third party, your asset manager, your vendor. This is something to educate them on, it’s like, “If you do this, this will help you the long-term. If you don’t do this, this will affect you in the long-term.” We thought we’d roll it up with that. What do you think?
I think it’s a great idea. There’s the, what happens to your borrower? The person who is residing in your new property. We can talk about strategies to protect you against them in that same scenario. If you’re looking for somebody to assume the loan, for example, how you get to be the underwriter and what things to watch for to see if they’re going to be legitimately capable of doing some of these things with you. Fire away, this is a great topic.
We all know that people go out and to originate a loan, lenders will look at your mortgage history, especially if you’re refinancing or buying a new home. They’ll sometimes allow 1 or 2 missed payments in a 24-month period, as long as you’ve made it up to be late once or twice. What is one missed payment of a 24-month period that roughly affects somebody’s fundability or the credit score?
FICO calculates it in an either-or, which means that if you have one 30-day late and another 30-day late, it equals one 60-day late. It aggregates the lateness. Anything greater than a 60-day late is called a serious delinquency. That can be in the same 24-month lookback period. Many of your readers already are bootcampers and are part of my tribe as well, but that 24-month lookback period, it can be two 30s, which equals 60 or one 60, but no other 30s or anything else. A 30 that turns into a 60, turns into a 90, any of those are serious delinquencies. The first delinquency is going to drop you approximately 50 to 100 points, depending on where you are on the credit score pyramid. The lower you’re on the pyramid, the greater the negative effect. The higher on the pyramid, the less impact it has because you’ve got all this proof that you’re an awesome borrower. It doesn’t impact you as much. Contrarily, that if you get too high like you’re in the 830s, 820s, 850s and you go down, then that’s falling off a cliff.
The sweet spot is under 800 but above 760. If you’re going to be late, don’t be over 800 because that takes even longer to recuperate. I have an episode about mortgage recoup times from a late mortgage. The bottom line is your 850 to 100, but the second one doesn’t harm as much because they’re giving you that grace of that 60 days. The second you hit that 90 days, that third payment, then it’s another teardown of another 50 to 100 points. You could be an 800 and be at 610 in the second double tier drop. Whether it’s your property or somebody else’s laid on it, that’s the serious negative impact. It’s an awesome podcast.
We’re not looking at notes until they’re at least beyond 90 days in default. FICO score, no matter where it was, is going to be down in the 400s of the 500s like we see. The next phase what’s happened with a lot of people versus going late is that they go to a forbearance agreement. How is that affecting their scores?
This is important. For you as a note buyer and real estate investor, not for the paper you’re picking up. All the forbearance agreements allow up to twelve months so far. We don’t know if COVID continues. They may push it out, but now it’s two six months periods. There’s a six month then a review, a needs assessment. Another six might be possible before they formally start the notice of default and foreclosure process. The problem is that during that forbearance, they suspended. They’ve never done this before. No other natural disaster anywhere else. The Consumer Financial Protection Bureau suspended the truth in reporting law sections of the Fair Credit Reporting Act. They said, “We’re going to report it and it doesn’t have to be true.” That’s why they’re saying that paid is agreed. Current, a lie when it comes to the factual terms of the Fair Credit Reporting Act, they suspended the truth in reporting.
When you get down into the consumer disclosure version or the 24-month lookback period of those, every lender I’ve seen so far will say that they play dirty. Instead of being current, it’s current but natural disaster relief is the notation. The natural disaster relief is the crutch they rely on, but FICO and lender software can now tag it and devaluate it because the language is identical. It’s required by statute. If they’re in their little algorithms, all they have to do is say current. If it has this reduced by 20%, reduced by 40%. That’s where they look like they’re being heroes. If your loan says current due to national disaster, you’re not getting all the good juju.
I encourage my clients to actually negotiate if they’re going to take before they approve a forbearance agreement and take it out. This is worth the price of admission all by itself. You want to say, “I want this to say current, but not because of national disaster.” Make sure that notation is not added then it’ll be straight up paid as agreed. The second that they can use that national disaster thing, then what looks like everybody trying to be heroes is them giving a new way to filter the data and lower and lower your fundability. That is a big one.
I’d forgotten about that. Current due to national disasters, I have seen that in the past when we saw what happened in New Orleans years ago, in New Jersey with Katrina, Rita and all that stuff. We saw that pop up where they delayed things six months, a lot of people get back.
That is a devaluation, any time that they’re going to put a comment on there, people who go to a debt consolidation house where they negotiate it all down, but it says in credit counseling, that’s the equivalent of having a homegrown chapter thirteen. You’re dropped by 75 to 100 points. Be careful guys. That’s why these are so valuable. That’s why Scott’s literally got the pulse of what’s going on out there. You need to know that things are possible if you know the right questions to ask and what answers you’re looking for.
The reason I’m bringing this up is because our servicing companies that we have, we’ve had Madison Management on here before. Not every loan servicing company reports to all three bureaus. Madison who we work with, they report directly to TransUnion. When we had people calling in asking for forbearance agreements, that was one of the things that we had let our servicer know we’re doing a forbearance agreement and work in that aspect as well, “How do we report it?” We’ll get the bankruptcies in here. Let’s say we get the borrowers on the phone and they want to reinstate and start paying, but they’re still six months behind their mortgage. If the FICO scores have dropped after six months but they want to get back on track. We start reporting them, started making payments, but still showing six months behind, what does that show?
Let’s say the servicers reporting to all three bureaus. If that is the case, then what’s going to happen is the amount of the balance counts against you and how far behind, what the catch-up is. The more money, the more egregious the error. If you’ve got a $50,000 house, it’s $169 for the mortgage and you’re behind six months. It’s $800 behind or $1,000 behind, it is completely different than being $70,000 behind because your payment is $8,000. The actual gross amount of arrearage is worse the more you owe. It’s total Americanisms. It’s not prejudiced per se, but it evaluates an $8,000 payment, you have more means to handle your business than somebody who’s paying $169 for a business. The wealthier you are, handle your business.
Even though we tend to be a detonation and we get into debt to the degree, we make money. We spend every dime plus one than we earn. The amount of the debt weighs in against you, the actual arrearage. In this case, you’re six months behind. The question is, giving the deal for the servicer, are you re-amortizing the loan? If you were the servicer and I was coaching my client on how to work with you, I would say I totally get it. What if re-amortize the loan, pull it in, and I can go paid as agreed because it’s brand new with you. I want to do right by you. I only get one shot at that with the grace of the funding gods. What I would coach my team to tell you is, “Why don’t we reset and give me a shot at this? I know you want the money back, it’s a $1,500 payment, but I’m going to pay $1,700 until the arrearage is done.”
The idea that I’m coaching my clients and I’m coaching your people to do is to ways in which you can show goodwill to your borrowers and lean in heavily without creating animosity because they got out of a horrible lender-borrower relationship. How do you become the hero? We want to capture as much as we can, but how much easier it is to speak to a borrower to one of your tenants or one of your mortgagees? How much easier it is to say, “You owe me arrearage,” versus “Here’s your payment, which will be reduced when we catch up.” The good news is what’s being reported is on time.
That’s how you make the deal with them. I will report your mortgage with me as paid as agreed if you will do it this way. You cast forward $300 a month or whatever until you catch up that arrearage, but make the note for the whole amount. If you do it that way, that extra money towards the note would be, would reduce the balance faster than the timeline, which is we know from the bootcamp actually gives you more juice with future lenders, because you’re at 95% utilization when you should be at 97% in the pay-down slope. As long as you’re ahead of the curve, you look great to future lenders. That’s another benefit you can tell your borrower or your students.
Would it be advantageous if someone’s on a forbearance plan where they do own 6 and 9 months, instead of going and paying a lump sum to get paid up on it, to recast the loan? I’ll get a great example from a loan. The borrower was $9,000 behind, $1,500 a month, six months. Instead of paying the $9,000 and so being where he was would have been made more sense for them to recast the loan and add the $9,000 to the back of a loan and then paying the $9,000 and reducing the LTV down.
Let’s say they’ve got the $9,000. I would still recast the loan. I’m speaking directly to your reader, the big benefit you guys that you can give your borrower is I’m going to get you ahead of the payment times curve, the slope. If you know what I’m talking about, go to the bootcamp, GetFundableBootcamp.com and find out. The second you’re a borrower, you’re giving them a solid and you look like the superhero. You’re walking in with a solution to their problem that actually benefits them in the long-term.
Could you go back and remove the lates? If they brought that $9,000 and pay, would you be able to go back into the Credit Bureau and say, “Go ahead and remove these lates and show paid on time?”
That’s the relationship. There’s a system called e-OSCAR that every reporter called a data furnisher. Your servicer is a data furnisher to the bureaus. They have a terminal that based on certain criteria, you can update it. You would have to talk to your servicer about that. This is the bomb. That e-OSCAR is an eraser. It has to be uncertain terms. It has to be some clerical error. It’s unverifiable, erroneous or inaccurate. If your servicer picks one of those three things to re-calibrate the loan, then you can say, “It wasn’t verifiable because nobody’s been here to even record it. I bought the paper that might fly by. No, my payment is $660, not $700 a month. That’s an inaccurate amount.” It’s what your servicer can tell the bureaus about those things. I’d love to talk to your servicer because that could be a strategic thing that they can offer people as a servicer to all of your students. They can say, “We have a new feature here. It’s called take care of your brother during COVID. Here are the bullets that go with that thing.” If we meet this criteria, we cannot recast the loan, not make you look fundable, but perhaps even get rid of the interim negative payment history.
It increases the value of your paper because now it looks like it can be a performing loan versus it being a non-performing that re-modified.
Modifications don’t have the same value as paper, as a what you call a newly re-casted loan or a refinance. You’re refinancing this loan with me or you’re re-amortizing the loan based on national emergencies.
If they didn’t, it was like a one-month blip. How many months would they need to pay on time to have that one 30-day or those two 30-days drop off?
You reclaim 40% of the negative drag of that or those payments within the first 24 months. In the next 24-month look-back cycle for a total of 48 months, you get 70% of the negative drag back. If you lost 100 points, you’re getting a 40 back after two years and a total of 70 points back after 48. The last three, unless this item is deleted through a legal audit or otherwise an accuracy audit, the last $30,000 or 30% is evenly split over the next three years, about 10% a year until it falls off or due to the Fair Credit Reporting Act on your credit report for seven years.
We talked to the borrower. We’ve made the right party contact. We’ve got him back to work on something. We never do a loan modification right off the bat, because if we did a loan modification within twelve months of buying the note, it becomes a short-term capital gain. It can get expensive that way. After twelve months, we then modify the loan. We do a loan modification of interest rate and amounts, what effect will that have on the borrowers?
That all depends on how your servicer showing not paid as agreed during this negotiation process. Remember in 2008, you were there as much as I was. You had to be late 90 days before any lender would even talk to you about a loan modification. It would take six-plus months to get the loan modification. By the time you do the loan mod, the old loan has a 6 to 12-month derogatory listing before you start the new loan. What it does is, a loan modification stays the same loan. You’re reshaping rate, term and balance. If you’re pushing the arrearage to the end of the loan, then you’re modifying the current loan. In my world, fundability, all bad juju. You want to start a new loan because it’s easier to delete the derogatories of a closed loan than an open loan.
You don’t get to show as much good faith. I went through it in 2008. I had eight properties. They went sideways and south every single one of them. There is psychic drag associated with a current loan. I want to capitalize on building a new relationship with my borrowers. If I’m new to them, I want to build a new relationship with them. That’s why if you’re recasting the loan, you don’t have to wait the twelve months. You’re literally refinancing in your terms. The refinance is owner-carry. It’s being reported to the bureaus. You’re getting rid of all that psychic drag of the old loan. You’re like, “It’s you and me. We won’t worry about that. Let’s set something up that where we have an opportunity because ultimately, I can be the big, bad Wolf. Let’s start fresh and new.”
That benefits them psychologically and their fundability. Now you get a brand-new loan. If we can’t get rid of the e-OSCAR’s strategy or the derogs previously, at least in my team is an accuracy audit. There’s a 30% to 50% chance that we can re remove that old loan. You can’t do it as well when they’re re-reporting every single month, it’s modified the terms. Loan modifications are not my first and favorite because you’re keeping all of the negative, old energy with that. We know some of these lenders are horrible servicer companies. It’s BS. I’d rather start fresh. If I can do that, then we’re back to the previous situation.
That’s a big thing with loan servicers like ours, if a borrower pays three months, if they get back on track with a trial payment plan pay in three months, we start reporting it as performing again. They can still be six months behind but we’re giving them, performing. It actually reduces our servicing costs from $90 a month down to $25 a month. I have a question for you. If somebody owes $125,000 but the markets drop, which we’ve foreseen and we modify the loan to say we bought the debt and $50,000, houses worth $100,000. They owed $125,000, twelve months of payments. We recast the loan for market value at $100,000. We say, “You only owe $100,000 now, not $125,000.” If we’re given $25,000 in debt, which we have to send them a 1098 Form, but what does that look effect wise on a person credit?
It’s brilliant because you’re closing down the old loan. Once that loan is done, we’re back to the new loan scenario. I know you teach this, but I would leverage the hell out of that gift of $25,000 that I shave it off. I would base it on good faith. I’ll be like, “Every six months a fateful payment, I’ll take another $5,000 off of whatever your strategies are.” For every positive year, I’m going to reduce this note over and over and over again. You’re way better at this than I am. The point is, if it’s a new loan, then it does not matter what the terms and conditions of the loan are.
The fundability part is the amount and their faithfulness in executing the terms. The terms can even change on a dime when it comes to FICO’s algorithms and a future underwriting possibility for the borrower. None of that matters. Your students and clients have a crapload of options in rearranging the contents of the house, as long as the house stays good-looking and can appraise at value. It doesn’t matter where the furniture is. FICO, they don’t like the rates in terms of all that is not included in their calculations. It’s the amount of the loan, the length of positive payment and are they being fastidious? Is it being paid on the due date?
I would set up with your servicer mandatory auto drafts where they can’t be aware possible and mandatory at the same time. Those are all benefits you can create with a borrower if you teach them. Send your borrowers to the bootcamp so that they can see how much of a superhero you are in hooking them up. Not in the reduction of the rate or in the balance, but in setting up and protecting their interests. You’re showing up as a fiduciary, hardcore.
It would be better to instead of doing a new loan, because we don’t have to do a new loan. It’s the same loan, but maybe reducing the principal by $25,000 in that same scenario would be a better value for them. It’s the LTVs down below what it was originally. Even though they’re at 100% technically LTV, it’s 80% of what it was originated.
That looks solid for their profiles. It doesn’t matter where the LTV reduction came from or the balance to loan ratio. The loan amounts $125,000. Just because you give them a credit, the renew reported balance is $100,000. They are looking sweet for future fundability and future lenders will look at the borrower and go, “Solid.” There are only into this loan two years and they’re already at 75% balance to loan ratio, utilization. They’re like, “I like these guys.” That’s another big win. You as the note holder can serve to help your people climb out of a hole, but that benefits you and benefits them.
They start climbing back up to a year hopefully. That’s why I wouldn’t adjust the interest rate that much, where they can then hopefully get qualified after 12, 24 months of on-time payments and you may finance out.
That’s one of the things. We’re working on a self-study program that’s fun and easy for you to be able to give to your borrowers. The bootcamp is the best thing for your students to give to the borrowers. Go to the bootcamp so that you know what’s going on. For $97, give them a hook your people up, give them a comp ticket. It’s comp only if they mandatorily attend as borrower education for you as the new owner of the loan. I’m taking the silver. I’m going to willing to shave this off, move this around and do these things if you attend this borrower education camp. You get them to go there, now they are going to know how solid of an offer you’re giving them and the different strategies that you’re in a position to create massive goodwill and change the entire dynamic. They wouldn’t be where they are if they did not resent paying the last one. There is resentment that builds up on the people that are trying to take your damn home. Let’s clean that up and send them to an educational forum where they can find out, “This is awesome. My lender is the bomb. This guy, this girl is awesome.” We changed the complete attitude for all of this.
I might be having images of servicers working together to notify all the nonperforming borrowers, trying to get them to listen. You’re in a contract for deed. Let’s talk about the things to do, or you’ve been behind, “Here’s a credit not counseling, but maybe a mortgage counseling bootcamp for you to figure out some options for you.”
They’ll find out what possibilities are there. The people that are carrying the paper, if we’ve got the note owner, the servicer and the borrower, they’re partnering on this project together, it’s a win for everybody. I’ll keep them entertained.
Let’s move on to the next strategy. If we have to modify, it’s great or trial payment plan. Loan mod, we know how that works for you. The next step is if somebody can’t pay their mortgage and we talk about assumptions, can they bring somebody in? A mother, family member, friend to start paying on time that we make the new person come in and get qualified as a co-signer of a loan. How does that affect things?
There are 2 or 3 simple things to watch for. You as a lender can’t count on their score.
By their, do we mean the new person coming in and taking over or the old person?
The new person because if you’re like, “They got a 780-credit score,” if I were in your shoes as the owner of the note and I’m looking for somebody to co-sign on this or to backstop it, or even a student completely, I’m not going to look at their score. I’m going to be looking at their criteria. I’m actually thinking a half-day training to do this with your people to literally go through the details. We haven’t got time. Even Note Night in America is not going to give it enough time. You got to evaluate. What is their relationship? It’s not with their credit card, it’s for you. What’s their installment loan? What is their car payment looks like? What’s the value of the car payment? How much are they in? How long are they held that car payment?
There’s a weight attitude-wise, car payments and revolving accounts, credit cards have sent different messages. I would look at all of their installment history. Make sure that they don’t have late pays or anything else. I would see how they’re treating their installment because you’re giving them an installment loan, you’re giving them a mortgage. You would also tell them that it’s beneficial to be reported if they have their own mortgage or it’s their first, do you realize if it’s their first mortgage, they haven’t got their own home, but they’re willing to co-sign on this one. That’s an additional 10 to 20-point immediate bump for the first mortgage reporting on their profile.
In addition, if it looks good and we could go through what the criteria to look at, then I’m assigning it. I would make it a co-borrower environment rather than an assumption because every positive payment will benefit the current owner of the house who’s likely making the payment or contributing in some way to that payment. You want to make it a win as much as possible. There’s a whole section on this. Whatever we do Scott, we got to talk about gifts becoming entitlements. There are ways that we can remind them gently that I’m doing this because we’re building a new relationship, not I’m doing you a solid every month and now you’ve come to expect it.
A gift becomes entitlements is vital to this conversation, but you would be able to establish something valuable by lifting up the one who can’t afford it, but by giving them a better shot. If it’s a wholesale slaughter, then just foreclose. If it is a cluster mess, then we’ll get into that one. If you can have a parent, sibling, a guardian, somebody who has the ability to give the borrower a leg up, then there’s some great benefit to both parties on their credit.
It sounds more looking at their DTI, making sure their DTI is at a low percentage rate versus a credit score DTI to make sure that they can take that extra installment loan and go in from there.
Keep under that 35%. The lower, the better.
We’ve seen liar loans already starting to pop back up with higher DTIs out there in a crazy fashion. That was part of the portfolio we looked at. It was higher. It’s above 50% DTIs, the income wasn’t verified. The new recalculate DTI was at 60%. That’s a good thing to be in.
Were those portfolio loans or were they Fannie or Freddie?
They were FHA loans that did not evaluate. They missed something on the underwriting. They didn’t verify, call and check assets. A loan processor screwed up at some point without checking everything.
We can help that.
We’ve gone from assumption. The next phase would be either do be a short sale or I throw it in as a negotiated short payoff. How does that affect somebody?
Define short payoff.
Let’s say they owe $60,000 and we agreed for them. They cash out their IRA or their 401(k) to pay us off. We agreed. Say, “You owe us $65,000. We’ll take $50,000, $40,000 if you can pay us off on that.”
A settlement for less than the full balance, but it’s a lump sum. Each one of those. That short sale, if we’re already out of the old portfolio, then the derogatories have ceased because there’ll either be, what’s the indicator on these people’s credit profiles when you get the paper? Are they in foreclosure? Was it deed in lieu?
The deed in lieu is a different strategy. They’re already in default. Maybe they haven’t gone the foreclosure route, especially in the short sale side or a short payoff, we can see that the property has been listed before or currently listed. If it was listed at full value, then we’re like, “You need to do a short sale.” If it was vacant, we would do then a deed in lieu and say, “Let’s have you sign the property over and provide that there’s not a second lien out that we have to foreclose out.
Given that, since the old loan is already done, then a short sale or short payoff simply means there’s going to be no credit reporting whatsoever. If they made three payments in the process of this, those would be reported, but nothing on an installment loan is worth anything to FICO until six months have been paid, 24 months is the only meaningful metric. The best we can, the fastest we can. What does it take to get them to pay it off? What can we do to short sale it and get rid of the property and we get our money out? There’s going to be no reporting since it isn’t a formal loan yet. It hasn’t been listed with a servicer.
These are loans that have been with a servicer that we bought the debt at a discount. When approaching the borrower, we give the borrower the option like, “If you can’t make the payments, you can always pay us off, or we wouldn’t be willing to negotiate a short sale.”
This is with their original servicer.
It would’ve been, but the servicer would be transferred to our servicer.
You’ve still got the derogatory listings, whether it’s 3 months, 6 months, 12 months or 24 months. You’ve got the derogatory listings from the previous loan at the same time. All those are going to be there. You’re inheriting the paper then the question becomes, as a service or what can they do as part of the negotiation for the payoff? Can you reduce the number of derogatory listings? Can an e-OSCARs affect anything about those negative notations? There is no difference in a settled for less than full balance and a short sale. It’ll be the final pre-closure listing that if it would’ve stayed with the original servicer went into foreclosure.
It’s your people, your students are now the ones who are doing it. You’re executing this with a new servicer. It’s going to go into pre-foreclosure, which is what a settlement would be. That will show up. It’s like an I7 installment, I1, 3, 5, 7, 9. Foreclose I believe is an I9. That would be the notation because it is the same loan. We have to talk to the servicer about what they can do. Your servicer you say only reports to TransUnion. It can’t right the ship because now it’s only negatively reporting on one profile. The way I would do it is, I could optimize two bureaus and keep the hit, whether it’s 3, 5, 7 years on TransUnion. It’s taking a blood bath, but I can optimize the other two because that’s no longer reporting so the short sale or settlement would not be listed. You wouldn’t get an I9, you’d be stuck at an I5 or I7.
Let’s say we go into the foreclosure route, finishing the trial or compared to that to bankruptcy. They’re going to kill their credit for seven years for the most part.
The foreclosure as a notation is going to be the I9. It is going to be the worst possible outcome. The foreclosure stops the reporting process completely like a bankruptcy would. It’s like, “I went through this process at 6 months to 1 year.” You now have a stop to that process. If you’re still laid, if you’re negotiating all this time and it goes on for months and years while you’re going through this, remember it’s 7 years and 6 months from the date of the delinquency that led to the foreclosure. It’s a long haul.
It varies though. In Texas, if it’s 90 days to foreclose, that’s 7 years, 6 months, plus the 3 months, versus in New Jersey, which can be a 24-month process, 7 years, 6 months, plus 24 months of dragging stuff out.
That’s interesting to look out. I didn’t know from that perspective. The Fair Credit Reporting Act says that regardless of the debt, it is 7 years and 6 months from the last delinquency that led to the foreclosure. If it’s a five-year process, they may only be negative for two more years because it’s from the last delinquency that led to the charge off foreclosure. It’s maybe different on installment. That’s something that I need to review, because I know it’s true on charge offs and collections. Foreclosures are secured so it may have a different timetable. Regardless, it is the cessation of the reporting. If that’s the direction it’s going, the faster you can get your borrowers to that point, the better it’s going to be for them ultimately. It’s a gun to the head, but at least I’m out of my misery.
Let’s talk about if they file bankruptcy. Usually, it’s a Chapter 13. They’ve got to be appointed in a Chapter 7 these days to say Chapter 13 BK. It’s the same things that stopped the reporting for that five years that they’re making payments and their payment plan.
It stops the reporting because it’s says included in a bankruptcy. Here’s what’s messed up. On their credit, the reason why I tell people to do if you’re going to do it, I prefer no bankruptcy at all. There are some great bankruptcy alternatives. The way to do a bankruptcy is, whatever your repayment is, it’s seven years after its discharged for a thirteen. It’s ten years after its discharged on seven. You’re looking at a bankruptcy being gone for 10 to 13 years or 10 to 10 if it’s a three-year paydown. On a Chapter 13, the bankruptcy clock doesn’t even start. It’s seven years until it’s been discharged with the agreed-upon payment by the trustee. It’s gnarly either way. Bankruptcy takes over the negative reporting on all three bureaus. If it’s only on one bureau with your servicer, then it’s better to stay out of bankruptcy because then that’s going to be a three-bureau reporting process instead of a continuing arduous negotiation on one bureau showing up with continued lates, working on a short sale, 120 days late or 180 days late, and short sale eminent or whatever.
Let me ask you a question. What’s going on now with health care and stuff like that, if somebody is filing bankruptcy against the medical bills, we said, you can remove the mortgage from the bankruptcy and keep paid as plan on that. How does that affect? It’s still negative that they’re showing bankruptcy, but if their mortgages are not part of the bankruptcy, they’re still paying.
It’s going to have the original. If it’s not included, if it’s been reaffirmed, there’s going to be no negative impact for their mortgage payments, even though that their profile’s going to have a huge impact because you did a BK. What people do and why I’m saying a bankruptcy alternative is what most of your readers may not know. The credit bureaus for the most two versions of the FICO software don’t even count medical collections. You use this as an example, if there was a massive judgment or something like that, I totally understand the process of avoiding the collection. It is a ten-year hit. We find that it’s a minimum of five years before you can get any kind of unsecured revolving accounts, which are essential to looking valuable to business lenders and growing your financial reputation again. You can get a car. You might have a Fannie and Freddie, but what FHA considers after three years or sometimes four years? It’s depending on your profile.
You’re trading a BK from reporting a late that’s still being worked out over time, depending on the servicers. By and large, it’s difficult that medical bills being the reason because they’re not counted, but people don’t know this. They’re like, “I have $200,000 in medical bills and they still have a 730-credit score. There’s a way to navigate those conversations with lenders like most mortgages don’t count the medical. They’ll run the software and say, “Will you please see what my score is without the medical bills in it?” Except some untoward mortgage brokers rely on the ignorance of the borrower, and they run the score and say, “I got to get you a tier five loan.” Even though in truth, they could get a tier two because they’re trying to count the medical collections when in fact the software or Fannie, Freddie isn’t. There’s a landmine you can avoid by knowing the rules of the game.
This is the thing, people with small business owners all across the country, 52% of small businesses are being affected. If you’re set up properly where it’s the business that’s going under and filing bankruptcy where it doesn’t affect your personal stuff, that’s a whole different ball game as far as affected.
Prior to 2008, that was true. Since automatic underwriting, everything is based on the personal borrower. They give you more latitude. It could be 60 to 90 days late on a business credit card like a Chase Ink may allow, may not negatively report you to your personal credit profile until it’s 90 days late, 60 days late or even in collections. The second you are that late, whatever your terms of agreement are, you’ve got to make sure you know what you’re talking about, it will negatively impact your personal credit. Everything since 2008, for small businesses, entrepreneurs, real estate investors, there are no such things as a non-PG loan. Every dime, credit cards, credit lines, business loans, they’re all personally guaranteed. Going south on business, they have more elbow room. Once you hit that 60 to 90 days, they will begin to report on your personal credit profile as late or in collections. A collection is worse than a 30 day late and now you avoid it for a minute. It’s like a slingshot, avoid it for a minute but when it releases, it’s going to hit you in the head.
I learned a lot. I think everybody has learned a lot. We need to do a half-day event next time we do a virtual workshop.
Imagine a slide deck with the content. This is awesome. Make sure you give me a copy of this because I want to debrief myself.
That’s the thing to think about, especially if you’re buying. This is the thing for you guys out there note investors, this may be something that you want to create. If you’re going to do a loan modification or trial payment plan, you require a mandatory attendance in an event like this. You see a lot of that happening. I’ll give an example. I was thinking of NACA. Back in the day, NACA used to require you to go get credit counseling before you got your first mortgage for a variety of things. If you’ve ever been in and had a DWI or driving under the influence, you got to go to counseling for that to go sit through that things. It’s not quite the same thing, but you get what I’m saying. Showing up, learning and being educated versus being ignorant. We all know that ignorance is not an issue.
I didn’t know that. The cool thing is most attendees get amped about it. They’re listening to a fire hose, but they’re being empowered. It’s like, “What do you mean? I do have power. This is awesome.” When I feel apathetic is because most of us don’t understand what’s happening around us so we shut down. I know exactly what’s happening and I can do something about it. I want to keep this damn house. I want a new loan. All of a sudden, we’re speaking a language that the borrower is aligning themselves with the note holder.
Merrill, when is your next bootcamp?
Sign up, come and find out for yourself if you haven’t done. If you’re already one of my gold or platinum members, a client and we’re mutual or you’re a part of each of our tribes, come back. Get a refresher. Find out how this is. I’m interested, Scott. I don’t know if it’s 2 or 3 more hours, we tack onto an event. I don’t know if it’s a deeper dive. I don’t know how you do all of your events. Having them be able to speak to a lot of borrowers. Teach your noteholders how to speak borrower, teach your borrowers how to speak a lender. That’s my end game.
Merrill, thank you as always. It’s always educational on both sides. Check it out, GetFundableBootCamp.com.
We’re going to be dropping a GetFundablePodcast.com or Get Fundable Podcast in any of your platform, Stitcher, Apple. Take a look at the topics, they’ll blow your mind. I’m going to send you over the podcast that we referred to so that your people can have an idea of another podcast source to deep dive into what we were talking about.
Go out and take some action. Learn how to speak borrower, the translation between borrower and banker and you’ll be a whole lot better off. We’ll see you all at the top.
About Merrill Chandler
Since 1997, Merrill Chandler has led the transformation of the personal and business borrowing space. With its basecamp in Utah, GetFundable.com helps entrepreneurs, real estate investors, and business owners, supercharge their personal and business borrower profiles to reach their funding goals.
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