The savviest players in today’s mortgage and note market see this crisis as a great time to buy if you’re smart enough to know how to do it right. It’s time to meet the banker and learn about his buying criteria to stay in sync with the market’s pulse. Joining Scott Carson in this episode is Richard Mason, the founder of Northern Star Mortgage Fund. Listen in and learn a thing or two as they talk about the mortgage and note market and what Richard is purchasing today. You might want to take some notes for this one.

 

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Meet The Banker: Market Updates And Buying Criteria With Richard Mason

We are always honored to have you join us. We’ve got a very special guest here, a friend for quite a few years now. I’ve been trading and always touching base with this guy annually, every six months to say, “What’s going on? What are you doing in the business? Where do you see things going?” We’ve got a great conversation for you here. We’ve got a few things. You’re here to meet the banker and we have a very special conversation to talk about where the market is going, what you’re going to do, what we see in things and opportunities. Before we dive into that, if this is your first time, welcome. We’re glad to have you here. You can always catch the replays by going to WeCloseNotes.tv. That will take you directly to our YouTube channel and make sure while you’re there to hit the subscribe button and feel free to comment on the video. I answer those.

We take questions from there. I’m always glad when you’re there. Feel free to leave a five-star review and also give us a subscription there as well too. I have to give a big shout out. Thank you to everybody for our big podcast, The Note Closers Show Podcast. We exceeded 25 million listeners on the radio network. We have over 600 episodes, over 625,000 downloads on iTunes and anywhere else you listen to your podcast.

You’re here to meet the banker. We’re honored to have our banking friend here, our special guest interview. He has over twenty-plus years in the mortgage market, not just as an originator and a mortgage broker, but also on the distressed side, special assets side. I originally met him when he was the Portfolio Manager at Vertical Fund Group. I bought some nonperforming notes from him. We’re trying to trade it back and forth, resources for performing or people buying and selling as well too. He’s the Founder of Revolution Mortgage. Along with being the Founder of the Northern Star Mortgage Fund, he calls Irvine, California home. He was one of the first speakers at one of my Note Mastermind groups years ago. I’m honored to have Rich Mason join us here. What is going on, Rich?

Scott, it’s good to be with you here remotely. It’s a little different than coming to the mastermind and speaking in person. As you can see, this is the new reality, the home office. I have a data taped up on my computer that I’ve been placing out. This is what life looks like now.

Tommy Bahama shirts and basketball shorts is the new norm for you. I put a collared shirt on. I got too dressy for you. Rich, why don’t you give a little bit of your history, share a little about your background and why people will want to read.

Scott, thanks for having me with you. It’s great to connect with you as always and the people involved with you. I’ve had the most regard for you and your training. It’s exciting to be with you. As far as I go, it’s all mortgage, banking and secondary marketing. I worked for some of the big stuff lenders out of college. I opened my own subprime retail shop and ran that for about ten years regional. After 2008, I got into secondary marketing, distressed mortgages. I helped run the trade desk at Vertical, publicly-traded funds for quite a few years.

That’s where you and I met. For the past few years, I’ve been a little bit back in the origination business, but I have been primarily buying distressed loans of all kinds. We have our finger on the market these days. It’s definitely changed dramatically. Personally, it’s a good time to buy. Opportunities like this don’t come along that often where you have big downturns. If you’re able to set aside your fear and your worries that the future is going to implode, there are probably some good buy opportunities out there right now if you’re smart.

I’d love to ask you what your thought was in the market say 1st of January. When we first met when everything hit the fan in 2008, ‘09 and ‘10, especially in 2008, a lot of us that were trained were like, “This is going to be maybe a 3 to 5-year cycle.” We didn’t think it would last a little bit as long as it did. It went a lot longer and the market kept going up, even as of 2019. You and I were talking about the market. I don’t think I can keep going. Thinking back to the first year before we hit Corona, social distancing and all that good stuff, it’s a crazy 90-day period. You said there are some great opportunities. Let’s talk a little bit about that. Where do you use current opportunities being at right now, and then we’ll fast forward to the second half of 2020 to the first of the year?

I have been doing this particularly in the distressed mortgage market and marketing side for years. My focus early on was scratch and dent, and it got more and more competitive and the margins got more and more compressed. I decided it was time to branch out, so we did that. Right before the downturn, for the most part, we had exited the scratch and dent market completely due to the competitive environment. We branched out. I don’t know that it’s changed much, but before this happened, we were buying a lot of RPL mortgages, re-performing mortgages. It’s a pretty wide box. It made two payments in the past 12 months or 12 out of 12, we don’t care. Our biggest two drivers are yield and equity. We can look past almost anything else if we have those two components and property type.

We’ll buy some funky stuff as long as we have equity protection and that’s even more so in this market. I’m still looking for yield, still willing to take on risk, and even a little bit more now. I have to have that equity comfort. No matter what happens, if you have enough room, people are always going to need houses to live in. Maybe the rents go down, maybe your payment streams go down or whatever, but you’re still going to have a performing asset, just maybe at a lower level for a while. We buy performing conventional mortgages. We’ll buy the orphaned loans that were non-QM stuff that was meant for all these investors that stopped lending during the pandemic. A land contract, seller-financed loans, private money loans, just about anything.

Our two primary criteria are where is our yield going to be? We don’t necessarily think they will, but do we feel safe if things continue to deteriorate when things are going the other way? It may be a slow recovery. I don’t know if it’s going to be the big swift V that people have talked about, but it’s going to generally go up for quite a while. Some bumps in the road, maybe some ups and downs, but I don’t think we’re going to have a W. That’s my personal opinion. We’re excited to buy into this market and we’re seeing quite a bit of stuff available and it seems like pricing has come down.

Let’s dive into that. What yields are you looking for when you talk yield? Maybe explain that a little bit to our readers. I guarantee you’re probably going to get some invites on LinkedIn and people are like, “Do you want to buy my notes?” Let’s clarify that.

Here’s my benchmark. I have friends who have run hard money or private money companies for decades. I know that I can pick up the phone, call one of these and have virtually zero risks because I know their underwriting criteria. They’re very safe, low loan-to-values and I can get 10% without lifting my finger, without having to do any work. I can go on vacation. I don’t have to work one hour a week. They manage the loans, they do everything. I literally send them the money and I get a 10% return. I get a monthly check. It has to be better than that for me. That’s my bottom line. Other people may have different investments that they like. For me, that’s where I start.

When I look at it, I look at my discounted yield. What am I getting on a cashflow basis? I have my discounted yield. I have my cashflow that I’m getting, which could be higher than the discounted yield, depending on the term of the loan if it’s shorter. I have the discount amortized over time. I’m usually pretty conservative because you don’t know how these loans are going to perform. That’s probably everyone’s little special sauce if you want to call it that. How long do they think the average lifetime of this portfolio is going to be? Someone’s got a 2% rate that it’s never going away. My personal opinion is that guy is going to pass that little loan to his kids.

 

 

Everything else, if you have a super high LTV borrower, it’s less likely the only exit is a sale. What parts of the country are they living in? There are unlimited factors that go into that analysis. I usually try and be conservative, and I look at an 8 or 10-year period and divide up that capital gain and add that to my yield. If that gets me over ten, I’m interested. I’ve got to look at the overall risk of the loan and maybe I have to bump my price up a little bit more based upon if it’s in a long-term foreclosure state, if it’s rural, if it’s had a sketchy payment history or it’s got a sub 500 FICO or tons of different things. That’s how we generically look at our pricing.

There are a lot of factors that go into it. When you talk about wanting to have equity in your loans, is that you’re trying to be at least at 20%, 30% equity? I’m sure that number changes. Obviously, it’s a higher interest rate with performance, probably a little bit less.

It’s all over the place. Let me give you some examples. Everybody will think this was probably overpaying, but I paid around $80,000 for cool land contracts. Smaller balance, not rural, kind of suburban, semi-rural mix. I’m paying upper $80,000. The coupon was $11,000, which is fine. I have a nice yield, but the kicker was every single one of them was below 50% LTV. The average seizing on these loans was close to ten years and they were twenty-year loans. Some of them were like at 20% and 30% loan-to-value. Basically, I’m getting better than I get with the hard money. I still got a 10% to 20% cap gain. Those loans are going to be paid off in ten years no matter what.

I’m getting at least a 2% bump, if not more. The pricing is individualized. If I’m looking at sub performing loans, if something has a lower coupon, my minimum coupon is probably around 5%. It’s not that I wouldn’t buy below 5%. It’s that the discount is going to be so drastic to get to where I need to be. It’s unrealistic. Unless the seller is super desperate or something wrong with the loan, people generally aren’t selling in the $30,000 and $40,000. If it has above a 5% coupon and I can get to where I need to be, I’ll still price up. I’ll do trades off my loans. I’ll bid $50,000 and $60,000 on some stuff and we’ll get some deals done in that price range, mid to high $60,000 to low $70,000. I’m not as concerned about things like FICO score and some of the more traditional metrics. I’m looking at it loan by loan. We don’t buy in such volume that I can’t do that. I can look at every loan, envision the borrower and what they’re going through. I could look at a loan that is two years past due but made eleven payments in the past twelve months.

If you’ve got somebody who wants to stay in the house, obviously it went through some financial hiccup, a layoff, medical or divorce. It’s the same thing I look at. Somebody is still two years behind, but they made eleven straight payments, that’s motivated. I’m willing to worry about the back payments put on the forbearance agreement, put on the face by loaning and then roll from there.

Do you know what else is interesting? I don’t know if I set about to do this, but we own about 250 loans that we’re servicing and own outright, a lot of those are in the middle of the country. We have very few coastal loans and we have lower average loan amounts also. I didn’t set about to do that. It’s the way things happened. Now in retrospect, I can tell you out of 250 loans, I’ve had two forbearance requests. Those people are in touch every month. They say, “Could you give me one more month? I’ll pay my escrow so that doesn’t get behind. Can you waive my interest in principal?” It’s amazing.

I’m thinking some portfolios have a lot of forbearance in that. I don’t know what the numbers are, 10%, 20%, 30% on some, I’m not sure. Looking at your average loan amount, your locations, what you foresee in the future. I used to love the coasts. The coasts used to be a bonus and now they’re a detriment. I down priced for the coasts. I can tell you something else that I realized during this downturn is I had a loan. I purchased it not that long ago. It had a perfect payment history, 750 FICO score, low LTV. No matter what, I’m protected, but that’s a loan you would look at and think, “We’re bulletproof. That thing is going to pay like clockwork. I’m never going to have to talk to that borrower for a long time.”

During this downturn, both have lost their jobs. Sweet people, they’re in communication, but their one of the two loans went into forbearance with us. That’s something else that this type of unusual downturn they were in. It’s not like the economy slowed down. It’s an unusual downturn that we’re in. It’s even very different than the 2008 downturn, which was a financial crisis. It was a loss of equity but people were still working. The GDP didn’t go down. It was a different deal. This one, you’ve had a sudden loss of employment, a sudden downturn in GDP. It’s a different animal. Sometimes the basics are so critical. That equity position that you’re in, what could be more important than that equity foundation? I know some models they’ll overlook that based upon other criteria or they’ll weigh it down based upon other criteria.

That’s always my number one focus no matter what. I’ll take less yield to have equity. The fact that that borrower went forbearance, when I looked at that loan in that portfolio, that was probably the one loan I said, “People will never have a late payment,” and they were one of the first to have a late payment. It tells you it’s a good time to analyze your buying criteria and your underwriting criteria. It’s a good time to analyze your portfolio right now and see what’s happened. I do think we’re going to come out of this, but we’ve entered into a new situation with some of the geopolitical stuff that’s going on and the political stuff that’s going on, the economic stuff, the employment. Some of these changes are permanent. You and I were talking before about how it would be a terrible time to be an investor in office. That’s not going to go away when we come out of this. It’s going to be ten years to get back to equilibrium in office. It’s good to look and see what changes have happened that are permanent and how are those going to affect your portfolio and what you buy moving forward in your criteria.

I read an article that Google here in Santa Clara has given every one of their employees a $1,000 check to buy office furniture to work from home. That should tell you something. We’ve been virtual for several years. We still have an office that we work with, but our team works remotely, but you look at others out there. I was talking with the head of PR relations for Buffer.com, a social media platform. Their twelve employees worldwide have always worked remotely. With Zoom being the new norm, you can do it whether it’s in the office or in the closet or if you’re in the Supreme Court in the bathroom.

Think about all the stuff that you can do remotely, you’ve got to pivot to make things happen. Those asset classes that have required the industrial, the office space, even the big box stores, we know they’ve been hurting for a while now. You’ve got to find some flexibility if you’re going to dive into those asset classes to be able to pivot or create something else. You mentioned non-QM stuff. Could you share a little bit about what you consider non-QM and what comes across your plate? I’ve been seeing a lot of stuff, and you and I need to talk to Mark because I had an interesting email with a non-QM guy.

I’ll tell you, we haven’t bought a lot. In talking to people who are out there, not a lot of it is trading. The feedback, the intel I get is somebody will go to market with 100 loans and they trade ten of them. That has 100% to do with the price expectations and what the market is willing to pay. There has not been an equilibrium formed in that. It was so sudden. They have all these loans. It was like the subprime meltdown. You have 30 funded loans you’re planning on shipping to New Century and you get the email saying, “We’re not buying anymore.” Every other lender you go to, they’re not buying either.

It was very sudden, and that’s why there hasn’t been price equilibrium. For me, the non-QM stuff is anything that can’t go conventional or jumbo conventional. It’s anything that has irregular income, even the larger loan amounts. Anything over the 680 is almost non-QM now. Some of the jumbo is coming back from what I see, but still, primarily what we saw was income-related and loan size related to a little bit of credit score stuff. That’s the non-QM space. We’ve bid it. We haven’t bid a lot of our resources. We got so little traction. When the feedback is you’re 25 points off, there’s not much to do there when you keep getting that feedback and you keep hearing the ones starting trading. There needs to be a narrowing there for that trade to happen.

There’s a divide between those that have it and the buyers. There are a lot of knee jerk reactions. We’re going to offer pennies on the dollar. We know we’ve got to bring it up to something that makes sense, $0.40, $0.50, $0.60, it’s protected with the yield and also the equity positions and figuring out that there’s going to be a drop in some value. Also, the guys that have this stuff, they don’t want to take a blood bath for it. You’ve got to spend the time finding the right buyer for the right products. The thing is you’ve mentioned finding the right product for your portfolio, not everything makes sense.

 

 

The feedback I got on that was that stuff, they’re looking for low $90,000, maybe high $80,000 and the coupons aren’t that great on those loans. Some of them are 5%, 6%, 7%, 8%, but a lot of them aren’t. It just hasn’t happened. The thing is where are those loans and those have to sell them. Are they sitting on a warehouse line that they’re getting caught on and they don’t have the financial capability of taking off the line? They’re in a desperate situation. My feeling is there’s not that much desperation on the non-QM side. Those who were running those funds and those companies had to have a fair amount of capital going in and maybe they’re okay holding on to those loans for a while.

There are a lot of them hoping and who knows what’s going to happen? I’d love to get your insight on this. I’m hoping that the government is going to come in and bail out a bunch of people though, too, on the mortgage side. What are your thoughts on that?

I don’t know. I personally haven’t heard anything about that happening. I think the government is more inclined to go down to the individual level. It’s their focus. It’s not like the big banks need to be bailed out. The other companies, the banks seem to be doing fine. They’re well-capitalized and I’m sure they’ll take the money. The forbearance isn’t a loss. It affects the cashflow, the bond payment and all that. If there’s liquidity there, you’re tacking on six payments to the back of the loan or even three payments. That’s why I don’t even mind doing a forbearance. If you’re in a good equity position and you can help somebody out, some blue-collar guy in Ohio who’s living on $3,000 or $4,000 a month or whatever it may be, I can go, “We’ll tax six payments on the back of your loan. No problem. We’re fine.” It helps them and we still get paid in full eventually. It’s not a loss to us and we help somebody out. As long as you’re in the position to be able to do that, it seems like a no-brainer.

I agree with that too. One of the things I told my staff is like, “If you get a phone call for a forbearance agreement, let’s go ahead and give them 60 days. We’ll extend it and go from there and see if they’re working.” I do have a friend who’s got a fund that he had six borrowers call and ask for forbearance agreements. He did a little research and found that all six in the household were working full-time too. You have some people trying to take advantage of the situation.

I’ll tell you some other strategies that we’re implementing. I like the size that we buy at. We’re bidding on stuff at $10 million below in UPB and we’ll buy a single loan. Anywhere in that range. It’s amazing that if you’re diligent, you’re willing to look at a lot of stuff, do the pricing and keep the relationships going, you will find the loans you want to buy. I’ll give you an example of how you can do well. I bought a loan and I got a nice discount on it. It got a paying borrower. There were two funky things about it, but a good credit score, good equity and good payment history. I bought the loan and I called the guy up and I’m like, “Do you know we’re your new servicer? It looks like you have a good credit score. It appears you have enough equity. Have you ever thought about consolidating?”

He has multiple mortgages. He’s a Hispanic borrower, multiple people in the house working, probably a tricky loan, but it looks like it’s going to get done. We paid probably $0.70 or something for that loan. We’ll clip $50,000 to $80,000 capital gain in 60, 90 days if that loan funds. That’s one loan out of the whole portfolio. They’re not all doing that, but still, we can do that on one loan and then something else on another loan. You can accelerate your returns is what I’m saying. If you’re loan-specific and if you’re multifaceted, another strategy that we’ve developed is on land contracts. We have found that a lot of the land contract borrowers would prefer to have regular mortgages because they know their entire equity is at risk.

To me, if you’re in a good equity position, does it make a difference for me from a security position to have a land contract versus a mortgage and a note? Not at all. I may have to spend some more money kicking them out, but I’m going to get it all back because there’s plenty of equity. As long as you have capital liquidity to do these things, you’re well-positioned. We’ll go offer people land contracts the opportunity to refinance into a mortgage. They love it. It’s very low. It doesn’t cost a lot of money to do that from a servicing perspective. It bumps up their payment, shortens their term so we get our capital back more quickly. We buy at discount, so that boosts our yields.

They love it because they now have a mortgage loan. They don’t feel like this hammer’s over their head that they could lose everything if they somehow stopped paying and they own their home more quickly. As long as they can afford the payment, that’s even a benefit to them as well. It’s being creative and trying to maximize your portfolio and thinking about these strategies when you’re buying. Everything is important, Scott. As we’re bidding portfolios, if you don’t get into due diligence, you don’t have a chance to buy the loans. I am not overly picky when I’m bidding. I try and err on the side of caution. I can say, “This could be a problem, but it might not be a problem.” It’s unknown.

Why put the cart before the horse? I give my best realistic pricing upfront. I get into it. I know that if I have a good counterparty, I want to buy loans at a fair price. They want to sell loans at a fair price. You’ve got to get into due diligence to have a chance. They get into due diligence. You can have a conversation and you say, “This is high price up front but now look, we have this, this, and this. This is what we think is fair,” and you get it done. If you price that way up front, you never even get to have that conversation. They don’t get to sell a loan and we don’t get to buy a loan. I’ve developed that over the years where I don’t want to be too loose where you create false expectations because that doesn’t work.

You get a bad reputation as a bidder and you definitely don’t want that. If someone has a little pull through, you don’t want that. Not being so worst-case scenario at everything because when you’re selling loans, you have very little fear because you know every fact about that loan. When you’re selling loans, it’s a whole different thing. You’re comfortable because it’s your portfolio. You’ve talked to the people, you’ve known them for years. You know what the deal is inside and out. When you’re buying and you don’t have that comfort level yet, you can have a lot more fear and that can result in lowballing the pricing. You have to keep it a little bit, have some faith in the process and not be quite so tight upfront.

That’s a big fear we see from people. They will judge based on every worst-case scenario on their ROI calculator. Kick the ROI calculator out until you get a true bid back or get deals accepted. We all know we could kill every deal with every possible worst situation out there. If you take the common sense out of it and you go to the worst side. You’re right. Getting the bids and getting into due diligence, even if you’ve got the bid a little bit higher than expected, but then as you dive into it, sellers will fade bids if they’re understanding things or the value is not there on this one. There are some troubled children here. We’ll fade it down and make a deal happen versus let’s start to try to retrade the whole damn thing over another 90 to 120 days.

Sometimes I’ll get into it and I’ll be like, “I’m paying up for this one.” I picked my bid on this one and then we’ll get our BPO back and it comes in $50,000 higher. My LTV is twenty points lower. I’m like, “This is fantastic. No problem.”

You’ve got to get to that journey versus killing the deal on the frontend. How much are you following up with bids that maybe you didn’t succeed on and then following up every 30, 60 days? Are you seeing some pull through and closing from that and being diligent in your touching base with your sellers?

We’re probably not the best at that. That’s a good strategy. We are not having an issue deploying our available capital, so we haven’t had to do that, but we have a marketing program. We send out emails once a month through our databases we’ve developed. That seems to work. What I do when I have money sitting around that’s not deployed, I pick up the phone. I’ve called you and said, “We have someone with the work. Do your people have some reporting loans that they want to sell? It’s a big turnaround.” That’s what I do. I start at the top of the list with people I’ve done the most business with and I work my way down. There’s so much in this business to be said for that relationship, that first trade is absolutely the hardest and you don’t have that trust level completely. You’re having to double-check everything and people are always seeing if you have an ulterior motive. You get that first trade done. You’re above board, I’m above board. This is great. Let’s do more business. The first calls I make are the people that I’ve done business with.

 

 

Jeff Wolf from San Diego asked the question, “What’s the percentage of winning bids do you end up fading?”

The answer to that question is it’s 100% related to the quality and accuracy of the data tape. I do like bidding so you get the mountain views of the world, but other intermediaries like that. The thing I love about that is they have a whole department dedicated to putting that data tape together. Not only is it accurate, but it’s like 100 columns wide. There was more information than I would ever use. Everything that I would want is on there. It’s amazing how many data tapes that I get that either is missing stuff that is important. Can I price without it? Absolutely, but the accuracy of my pricing is going to go down.

You tell me they’re current, but can I see what they’ve done? Give me a twelve-month payment history so I can see what they’ve done. You tell me the interest rate, but what’s the P&I payment so I can make some additional calculations? You can go on and on forever the more detailed the information gets. I have found that when the information is extremely detailed and extremely accurate, meaning my BPOs come back, they’re within tolerance, the credit reports get fold. What they said is what’s on the credit report. I review the payment histories and the payment history is what the data tape said. The rates match up. There are no other red flags on title that pop up, then we’ll buy 100%.

There’s no reason not to buy every loan on there and we will. Sometimes it’s the opposite of that. We’ll get due diligence and the BPOs will come back and they’ll be low. I’ve had trades where we’ve seriously kicked 80% and 90% of the loans we’ve come back and said, “We’ll buy 2 out of these 20. They’re trash.” Of course, the seller is upset and we’re like, “Don’t worry because we’ll never bid anything from you. You don’t have to worry about us buying from you because you wasted our time. This is ridiculous.” It’s usually not like that. People usually don’t intentionally mislead. I always ask for stuff too.

I get a data tape. I’ll get an initial review and I’ll say, “Our FICO score is available. Our updated value is available. Our twelve-month pay history is available.” These are the things that are critical to us, and pricing loans. If they are, great. If they aren’t, we say, “We’re going to price it as it is, but we’re going to make estimates.” We’re going to throw in an estimated average credit score. We’ll assume that everybody’s made the last twelve payments on time and we’ll go from there. It’s almost impossible if you don’t have values. If the seller doesn’t provide an updated value, that’s hard because am I going to take the time to go in and look at Zillow’s for all these? Zillow is off by 30% sometimes, especially in smaller areas and it’s even more inaccurate. That’s probably the one thing that we absolutely will not bid if it’s a no value tape.

Do you have a size of the city that you buy loans in that you’d like to stay above as far as population-wise?

We don’t look at the city population. We look at it as more like rural, semi-rural. We’ll buy loans in the middle of nowhere. Once again, it’s yield and equity-driven. If there’s a 9% or 10% coupon and I can pick that loan up at $0.40 on the dollar. It’s a full-blown agricultural property with a house 5 miles out of town and the town is 1,000 people, but it’s got a good pay history, I’d buy that loan.

You wouldn’t move there. Your wife wouldn’t move there.

I’m not going to go and be owner-occupants if we take it back. Those people tend to stay in those properties a long time. If they can pay, they will. Even that property, you do have to take it back. At $0.40 on a dollar, you’re at least going to recoup your initial investment. You may lose your capital gain, but you’re going to get your money back at least.

How do you capitalize? Are you using your own funds?

We are. We’d never take on investor capital. It hasn’t been our cup of tea. If we needed to, we would. It’s interesting you brought up the government. I’ve been thinking about pursuing that because we did get some. It’s amazing. The federal government will literally wire you money right now. They’ll send you an email, “You’re approved for this, sign this.” A day or two later, there are six figures in your bank account. It’s hysterical. When you’re doling out hundreds of billions or trillions, what do they care? It is pretty loose. This time around, I don’t know if the government is putting much money into the real estate and mortgage arena because there are many other places that are hurting.

People who can’t pay their mortgages, getting direct payments or can’t pay their rent. People have to work and increased unemployment and then all the industries, the travel and restaurant and all those. They need so much money, but I have thought about, I don’t know how much I want to be in bed with the government particularly. I need to think that part through. To say to the government, “We will provide liquidity.” It’s exactly the same thing they did in 2008. They’re just not doing it because they’re doing all this other stuff. To say, “We’ll buy these loans that are in forbearance so those banks can make new loans.” We’ll buy loans that are trade discounts because the borrowers are past due or all the myriad of stuff that’s going on. Provide liquidity at all levels of the spectrum makes more money available for new loans or to give people more time to get back on their feet. We might do that, take some low-interest rate government money and redeploy it.

When you were at Vertical, you had a pretty interesting way of raising capital going broker-dealer desk-wise, turning your shares into mutual funds, if I remember correctly.

That was the only mutual fund in the mortgage loan space. It could still be. I don’t know. It was interesting running the trade desk as a consultant for those guys and seeing the capital raising. That was a very institutional capital raise and still to see the amount of time, effort, costs and oversight that goes into that. Every investor is amazed and you have to hold. If I can get one guy, “I’ll write you a check for $50 million or give you a credit line, just me and you.” That would be one thing. If you have 500 individual investors and they’re all accredited, but still even the word $2 million, probably some are going to be more worried about their investment than others. It could be a bigger deal to some than others and fluctuations and exponent. We haven’t gone there.

 

 

Terry asks a question, “If you’re getting started as a note buyer, note investor, where would you go first to find notes to bid on?”

I’ll tell you what I did, and this is when I got into this space. It was 100% networking. I started going on LinkedIn and it’s easier now because there are many trading groups and note buyers. There are huge groups, but that’s what I did. I started a few of those groups. This was many years ago and started networking, getting people needing to connect with me. I would access their email and I had a whole process in place. I got the email. I had my first email I sent to them and then I had been wanting to get a call and then I would go to the conferences. I never went into any of the presentations literally to this day.

However, many dozens of conferences that I went to over the years, I never went into the presentations. Maybe 1 or 2 out of 30 conferences, I went and sat through a couple of presentations. I would take a whole stack of my business cards. I would stand right outside the big doors where everyone is going to come out after the presentation. I had a twenty-second spiel, “Rich Mason, Northern Star Mortgage Fund. We buy discounted mortgage loans. What do you do?” If they say anything that wasn’t related to that, I would say, “Have a great conference. My name is Rich Mason.” I could meet probably 100 people in an hour. You spend maybe 2 or 3 minutes with the people who are engaged. Have a pen, write it down.

This is what they do. They buy NPLs, they sell RPLs. Whatever the big point is, right on the back of their business card, stick it in my pocket, “I’m going to follow up with you,” then the next person. Walk around in the meet and greet area the whole time saying, “What do you do?” Find the people that are doing it. When you don’t have a lot of capital, it’s okay because you can get in there and bid something. You can bid in a smaller pool, say you only have a few hundred thousand bucks. Whatever it is, you can still go and bid a $2 million, $3 million pool. Loan level it out. When you hand it into the seller, whoever it is say, “I’m looking to deploy $300,000. If you want to cherry-pick 1 or 2 of my bids, I’d be happy to do it.”

This other strategy still works. I was talking to a guy and telling him, “I love your RPL bid, first and second.” He’s all, “I have a pool of RPL seconds right now. I’m in a beautiful home run. It’s about $70 million.” In RPL seconds, that’s a little big for us. We’re not even going to take a sizeable carve on that. That’s to scale. I said to him, “We love that stuff. We’ll buy a few million.” If you have a tail or there are going to be kicks, hopefully they’ll price and sell them institutional. They’re easily going to have $5 million in kicks or whatever stuff that doesn’t trade through, we’ll buy all that. Send that to us. Strategies like that, but the number one thing is networking, getting out there, meeting people and following up with people. It’s amazing what you were talking about following up with the sellers.

Not even to be motivated to follow up because you can be. It’s hard to follow up with a lot of people. You have to have an organized system, you can do the emails, but how many actual where you know the person and you’ve done business with them? How many of those relationships can you actively manage? Twenty? That’s a lot of people to stay up with all the time because they might be a seller 1, 2, or 4 times a year. If you’re not talking to them or connecting with them every month on a meaningful level, that’s why the broker community is also very valuable. People will say, “Do you mind?” or “What if?” What if you buy from a broker and it’s somebody you already have bought from in the past or somebody you know? I’m like, “No problem.”

I am happy for that guy to make his point or two because there’s no way I can manage all these relationships. I have been stopped where I bought something from somebody months earlier and they didn’t send me the data tape because they can only deal with whoever was most recent in mind. That’s who generally gets it, especially if you’re dealing in multiple arenas. If all you buy is scratch and dent, that’s it. That’s all you do. Everybody knows it. That’s a little bit easier to manage in 100% scratch and dent. Even though you can break that down into geographies and loan amounts, issues, kick reason, whatever, it’s still that. For us, we’ll buy the land contractor, the RPL, the first and second, the small balance in the rural, the bigger loan in the city, and the seller finance loan. It’s hard to stay in touch with many different people with many different products. It’s great to engage with the broker community and keep those relationships strong because they will bring you a lot of stuff and very important.

It’s hard to touch base with everybody on the list. We’ve got to have an email system. I was looking through here and I have probably 40 emails from you. It’s like, “You’re going to the conference? Let’s meet. Let’s grab a drink. I’ll see you there,” or whatever. That’s touching base with people at least with conversations. If you’re not marketing to people or building a list of some sort, you’re not in the business. You build those relationships. You have those 20, 30 sources that probably feed you on a semi-regular basis. You’ve probably got 100 that are going to do like once a year or once every other year. You still touch base with those through dip marketing. You build your core, but do exactly like you said. Jeff will sit on here, Terminator networking with you at an event with a card. Go hang out at the local bar in the hotel nearest event and save on the fee of the tickets.

Go and sit in the bar in New York at the secondary conference. You don’t need to go up or down any floors. The way I used to schedule it, I would do every meeting 30 minutes and do one break for lunch. If you think about it, you start at 8:00 in the morning and you’re willing to go to 6:00 at night. You have 20 to 30-minute slots. Take a little break. You can meet with eighteen people. We literally used to grab the same table year after year in New York. People are like, “You’ve got your table.” We’re like, “Here we are.” Once you start doing that and then people are coming by and you see people, “Here’s my card, here’s your card,” the same two-minute spiel, “What do you do?” If they are a potential seller to you. Even if they say like, “We don’t sell,” but they own loans, you want to connect with that person. They will be the seller eventually. Even at Vertical, we weren’t a seller, but we eventually started selling stuff.

I made some great money off the first three notes I bought from him. It was phenomenal. It was a win-win. We’ve got one question from me. Are you still buying seconds right now in this market?

Absolutely. I love seconds. I do not differentiate that much between the first and the second. Some people think it’s such a big difference. If you combine them together and then underwrite it like one big balance, there’s no difference. You don’t have to deal with taxes and insurance from the second position. There’s a lot of stuff that you don’t have to deal with in the same position that’s nice. Once again, if you’re in a good equity position, I don’t mind. I’ve had first foreclose and I got to sit around and wait for it to go to foreclosure and wait around for the city to get their act together. Two or three months later, a check shows up in the mail for my full balance. Thank you. No problem. I was going to tell you, in this specific market, not only am I a buyer in this market, I am ecstatic to buy in this market.

Warren Buffett and all those guys like him, sit around waiting for the stock market to tank. That’s when they buy. They do little buys all the time, but that’s primarily where there’s $100 billion. They are waiting for that once in a ten-year downturn where they can go in and buy quality companies at discounted prices. Warren Buffett says, “Whenever everybody else is in fear, that’s when you want to buy. When everybody else is in a frenzy, that’s when you want to sell or stay neutral.” I love that this has happened. I love that there’s a lot of uncertainty and it’s continued. It looks good for a while.

Something happens and people get concerned again. It’s a great time to buy. I am slightly more cautious because in the 5, 10, 15, 20-year horizon, it’s all good. All goes back up on the long-term trend, but there could be slower payment streams over the next 12, 24, 36 months. Unexpected things could happen. Once again, I like to keep dry powder because I want to be able to ride out the storm, whatever that is. Maybe I’m slightly more cautious. As far as my bid, it might be a little bit lower for sure because prices have definitely come down. My bid is lower than it was maybe days ago. I might come back a few points or whatever because there’s a little uncertainty, but it’s a great time to buy. I want to deploy all my money right now.

When there’s blood in the water, it’s the time to strike, not waiting around for it.

 

 

I feel like you said a win-win situation, it’s one of the reasons I love the RPL buy. What is a better win-win situation? You got somebody that went out and paid $0.03, $0.10, $0.20, $0.30 for an NPL loan, depending upon which time and whatever that could be or not. They work and work and then they get the thing turned around and the guy makes some amount of payments over a twelve-month period of time, 6, 7, 8, 10, 12 payments. They can turn around and they can sell that loan and double or triple their money. They can still afford to sell it to me where I can make a good amount of money still, but I’m not going to have to do any amount of work they did. Maybe a little. There’s still some borrowed communication, but not like they did. They’re getting paid for their work. I’m still getting an above-average yield. I’m comfortable with all the background noise. I love that buy. It’s a win-win for everybody.

What’s the best way for people who’ve got something to run across your desk to see if it’s something you might be interested in? I’ve got people here like, “How do we get ahold of Rich to send them some stuff we’ve got?”

NorthernStarMortgage.com is our website. My email is my RMason@NorthernStarMortgage.com or call me or text me on the cell, (714) 273-8547. We have money to put to work and we’d love to do a trade with you.

You can email me and we’ll make sure to forward it on over to Rich as well. Rich, thanks as always for coming on. It’s always great catching up with you to connect. We’ll be in touch some more as well too. You be safe out there in the craziness of Irvine.

Thank you, Scott. God bless.

That’s going to wrap it up. Thank you again for joining in. Hopefully, it was valuable for you out there reading. We’re glad to share his contact information. Drop me an email directly at Scott@WeCloseNotes.com. Be safe. We’ll see you all later.

 

Important Links

• WeCloseNotes.tv
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• Buffer.com
• RMason@NorthernStarMortgage.com
• Scott@WeCloseNotes.com

 

About Richard Mason

 

 

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