“When a securitized Note is foreclosed & sold at auction, & the court approves the sale back the bank, does the Note now become a non-securitized Note? Thanks, Steve”

Great question – and it made me immediately think of John Cleese and Monty Python.

Why?

Well, a note is a note is a note, but

A mortgage is a mortgage until a foreclosure sale, after which it “is no longer” and “becomes one” with the property.

The mortgage is the parrot…

Watch this – it’ll all become crystal clear to you!


[See post to watch Flash video]

The mortgage is the parrot in the famous Monty Python Dead Parrot sketch taken from Monty Python’s Flying Circus. Let me explain:

If an investor forecloses on a mortgage (remember you technically foreclose on a mortgage or a deed of trust, not on a note), they are exercising their right to claim the “collateral” (e.g. the property) that “secures” the Note.

Why the word “secure”? Because that’s what a mortgage or a deed of trust does: it secures the Note – or the borrower’s obligation to repay a loan, to the collateral – the property. And it also gives the lender the right to reclaim that collateral if the borrower stops making payments on the Note.

So, to clarify terms here:

1. a Note doesn’t get foreclosed on, a Mortgage does

2. a Note doesn’t get sold at auction, a property does

3. a Note doesn’t disappear at auction, though you may not be able to collect on it after a foreclosure sale (details, details!)

4. a Mortgage or Deed of Trust DOES disappear at auction, regardless of whether the property reverts back to the bank or whether it is sold to a 3rd party

5. since there is no longer a Mortgage or Deed of Trust after a sale, there’s no longer any relevance to whether a Note and Mortgage was in a security or whether it’s taken out of a security.

Make sense? If not, I’ll have to get John Cleese to do a nice little skit with me. (I saw him a few years ago when I was living in London – he drove up to the little corner market in a huge yellow Bentley, walked in, got a bag of carrots, paid and walked out without saying a word to anyone. Ah well, fame extracts a price I suppose.)

I recently received the following:

“… If a had a list of banks that sold notes to individual investors I would just concentrate on them!

It is one thing to ask for someones private contacts but I don’t see any reason that you cannot say X Bank sells, Y Bank does not. I have invested a tremendous amount of time going up dead ends for the pleasure getting the “We are sick of your faxes and phone calls, We don’t sell notes, do a short sale and quit bothering us.” response. How can I success in how to buy defaulted loans?”

Here is my reply:

“…, I hear your frustration in terms of “just get me the list, dammit!”

Here’s why I don’t do that. I received an email yesterday from a broker I’m working with. It was from a senior manager at Nat City Mortgage, saying they’re selling in $100-200M pools.

Up until yesterday, I didn’t think Nat City Mortgage is selling notes, but I couldn’t be certain, only because the last time I’d contacted them was at least 8 months ago.

That’s why, when you mentioned you were chasing a note held by Nat City Mortgage, I didn’t tell you that they didn’t sell. I honestly wasn’t sure if their policies had changed.

Times change. Nat City was written up in the NYT the other day in an insightful article titled: “Regional Banks are Rocked”. And now they’re selling large pools of defaulted loans.

You’re good at the direct sell – go ahead and call this senior manager up directly and maybe you’ll be able to buy that Nat City loan regardless of what your own rep told you. (See the Hector story below)

My list of banks that sell defaulted loans (which I’ve confirmed) might be only 20 banks long. Does that mean that I know that only 20 sell notes? Obviously not. It merely means that I’ve spent time developing only those 20. And I know of another … probably 20 … that don’t sell defaulted loans.

But here’s the catch that I want you to understand. They’ve said “No” to me.

As my mentor taught me: No means “No” today. This goes for BUYING DEFAULTED LOANS as well!

Other challenge I see: Someone like you reads a list I put together and thinks: “so I won’t try X or Y or Z because Dean doesn’t have it on his list.” And you miss a perfectly good opportunity to buy defaulted loans right there in your backyard.

I’ll teach you and everyone else everything I know. Getting a RELATIONSHIP to buy defaulted loans from, however, is something I want YOU to do.

It’s when people like you take the initiative to break through to new banks that you actually progress. I know you’re frustrated and tired. I can’t help that.

I can only defend my actions as justified given the strategy I pursue with banks, and that I share with you and with everyone.

No means “No” today. Remember that. It’s like the highschool hotties you chased after. You didn’t turn around after getting turned down just once, did you?

Another example – I thought Chase didn’t sell to small guys. In fact, I worked at Chase and spoke with the SVP Legal Counsel in 2004 re: getting approved to buy from Chase. He told me there were 12 approved buyers. All of them big boys. I found out three weeks ago that there’s a small potato named Hector cherry-picking single loans from Chase out of Florida. A buddy of mine tells me that he sends gifts to this one collector he works with, and somehow gets all his single loan purchases approved.

The rule is simply that … there are no rules when Buying Defaulted Loans

That’s the simple explanation. Selling notes isn’t exactly a regulated activity – it’s not like originating, and it’s certainly not regulated the same way.

Probably not the answer you were looking for, but an explanation of the way I operate on this very specific point of giving out any kind of a “definitive list of banks that sell defaulted loans”.

There are many many more notes around than you will know what to do with.

Dean

I get asked all the time ‘But, Dean, how do I find non-performing notes?? Do banks really sell notes to individuals?”

One person just told me “hey, I walked into my local bank branch and asked if they had non-performing notes for sale and they told me “no, we don’t sell notes.”

Well, if you want to get serious about figuring this out – AND shortcut your learning curve dramatically: it’s all in my ‘How to Find Non-performing Notes Course (4 hours+ jam-packed information on exactly the subject of ‘how to find non-performing notes’).
You can watch the first 2 HOURS for absolutely FREE. Take a peek:

If the bank doesn’t have either of the first two departments, then make sure that you aim straight for the top of their loss mitigation department – you don’t want to get stuck in mid-level manager hell.

And then once you get that person on the phone – tell them that you buy non-performing notes, anything 90 days or more delinquent, tell them where you typically buy notes, and if they ask you for what your typical pricing is, tell them you can price up to, say, 85% of UPB (unpaid principal balance). (You don’t want to kick yourself out of contention for buying notes when you haven’t even gotten a foot in the door, and if the bank’s asking about price, make sure that you convey that you don’t skimp!)

As to the secret of how to get through to the right person – and what it REALLY takes to break through to that bank representative: it’s covered in detail starting at minute 11 of Part 3 (the third hour) of my ‘How to Find Non-performing Notes‘ Course.

I bid a pool of non-performing notes held by a trustee for a bankrupt mortgage company. Two loans were missing collateral files. One is a loan on a Florida property. Ouch – Florida judges are increasingly strict on lost note affidavits and missing notes in general. In some cases, they’ll throw out the foreclosure proceeding if you don’t have the original note, or appropriate documentation. 

Scurrying as fast as I could, I was able to track down a copy of the note that was in storage at the title company office that insured the note (this was a 2006 loan).  (One of the things that you’ll learn more and more about me is that I like to get my hands dirty on as many note buying deals as I can – it allows me to learn more and more about everything that can happen in our world of non-performing notes – I’m not a “hands-off” trainer in any way).

Fingers crossed … we’ll be able to sail through a foreclosure with a lost note affidavit, but without the original note.

How did I price? I took an extra 15% off my bid due to the missing note issue. Why 15% and not more? I needed to play it safe on the bid. But the home’s value supports a higher bid. I feel we have a better than even chance of being able to foreclose, and then use the foreclosure to help us negotiate a refi or a deed-in-lieu with the borrower.

If you want to learn more about the science part of pricing notes, take a look at our ‘Determining Price’ Note Buying Course. 4 hours+ just on this topic alone. And you get to watch the first hour for free…

[To put in perspective how this fits into the overall note buying game plan, check out this Mind Map.]

As usual, watch the first part for FREE… (In this case one hour & 40 minutes!)
Take a look:

-> Learn the 3 steps to nailing a property’s price

-> The difference between AVM’s, BPO’s and comps, and what to look for with each

-> Go on a trial run on property values with me (literally watching over my shoulder) on a nonperforming note in Naples, FL – and follow the loan that went from $520,000 to $250,000!

-> Title – the ins and outs, and who to use to pull title reports

-> Learn what to look for when it comes to understanding your borrower

It’s all in the course. So take a look, and learn how to really price nonperforming notes – without ever leaving your office (living room?).

Again, just check out the first hour and 40 minutes for FREE and get more details over at NoteBuyingProfits.com.

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.

Defaulted paper gets charged off in all states, though, so don’t just assume that because a state is holding steady in terms of pricing, that it wouldn’t present a note buying opportunity.

See the map below or click on it to be taken to Freddie Mac’s page.

Jared Lanning, struggling to pay a home loan on which he owed more than his house was worth, was thinking he might just let the lender take back the property. Then he got a call one evening from an Orange County investor who had bought his mortgage.

“I want out of your loan,” said the investor, Evan Gentry, chief executive of G8 Capital of Ladera Ranch, who offered to lower the balance and the interest rate.

Lanning, a crane operator in Englewood, Colo., was skeptical. A phone pitch, after all, had led to his getting the unaffordable loan in the first place. But Gentry was legit: He helped Lanning get a new Federal Housing Administration-insured mortgage — with a $12,000 lower balance. Gentry also paid $5,000 in closing costs for the new loan. Lanning’s new monthly payment is $200 less than before.

Investors — including big fish like former Countrywide Financial Corp. President Stanford Kurland as well as smaller fry like Gentry — are buying loans on the cheap from lenders who want them off their books. By paying less than face value for the mortgages, the new holders can modify loan terms, including shrinking the amount owed, and still make money.

Partner up with a good mortgage broker who can refi you (as the nonperforming note holder) out, and buy as much defaulted paper as you can right now. NoteBuyingProfits.com will give you the tools how to. Speaking of which, make sure you read this update, courtesy of Barney Frank.

Many note investors were slightly subdued – sellers are still expecting more than note buyers are looking to pay – pools of notes don’t seem to be trading as quickly as they were in the 1st Quarter. One rep from GMAC indicated to me that he thinks a lot of banks are “on the sidelines” waiting to see what Congress has in store in terms of a bailout.

But this is only half the non-performing note picture. I spoke to several banks that are looking to sell of their non-performing notes now and into next quarter.

Note Buying Lessons learned? There is no common approach that everyone takes.

Which is what makes this note buying business so interesting – it’s up to you and I to find the banks that are looking to sell nonperforming notes at those heavily discounted prices that we know we can find.

The Secondary Market Conference the MBA hosts is a great place to build relationships. With over 900 attendees, all players (e.g. vendors, investors, servicers, Banks, etc.) in the secondary marketplace) it’s a very good conference to go to.

Let me know if you’re planning to attend and we can meet for coffee.