The Defaulted Paper Mill & Bankruptcy
May 19, 2008 by notebuyingprofits.com
Filed under Bankruptcy
Floyd Norris over at the NYT carried an interesting piece on a note pool of Merrill Lynch 2nd liens.
The loss rate on those 2nd mortgages, originated by OwnIt Mortgage which filed BK in 2006, is estimated to be close to 60% at this point, and the bonds have seen their ratings drop from AAA to junk in the course of a year.
The reason for the losses? Well, the numbers seem to be pointing to more borrowers stopping payments on their 2nd mortgages altogether.
Ken Andrews, a savvy San Diego bankruptcy and foreclosure attorney who represents borrowers, has what passes for sound advice for borrowers with those 2nd mortgages - just stop paying. And for those who aren’t quite satisfied with the pesky 2nd remaining secured on their home, he’s got a solution for them – strip the lien by filing a Chapter 13. It’s worth reading his recent piece here.
So what’s the big deal? As a note buyer, you need to be increasingly aware of some of the changing incentive structures for borrowers. A lowering of the social stigma against foreclosure and bankruptcy could be a harbinger of larger numbers of BK’s in your portfolio.
Not that that’s automatically bad. Bankruptcy postpones the completion of a foreclosure proceeding, when the Bankruptcy’s dismissed. And when it’s approved and discharged, it creates a set of cash flows that can be much steadier than a typical performing loan.
So follow the masses here – stay ahead of the curve ball – and think about taking advantage of the borrower BK note buying opportunity.
You have mentioned buying Notes in Bankruptcy a few times in your presentations. Someone who does blasts at 55% and someone else who specializes in what I think was Chapter 13 seconds. I would like to hear more about business models that people have set up to run their business. With emphasis on what would be a good business model for beginners. I have a particular interest in the Bankruptcy blasts.
I would suspect that there is not a whole lot of lenders who would have pools that would fit my profile of having $75K to flip over 3 to 4 times a year. Right now I am struggling with the best way to get involved in buying notes. I would feel uncomfortable raising money from others unless I had several completed deals worth of experience.
Rick
North Georgia
Experience is key to both beefing up your confidence in what you can do, as well as in having something to show for – even if it’s a single-note track record – with your investors.
In terms of lenders selling singles that would mean your capital available – yes, they exist. All you need is a single one that has non-performing paper they want to sell and you could put your $75K to use and cycle it through the year. The key is obviously in finding the ones that won’t require you to buy an entire pool.
As to the BK blast – I never like the blast approach myself – it takes too much time and it’s got a low hit rate overall. My suggestion would be to use the top-down approach and go straight to the heads of the BK department, as I know you’re already doing.
You never know when you’ll be able to get a lead from a rep or from the head of the BK department, on a BK note that’s available for sale.
The other option is to only request notes in BK from the lenders you end up developing relationships with. You may find that you’re in a smaller group of buyers for that kind of paper.
I’ll keep in mind your request to share more about business plans and business models for people starting out in the business.