Week 6: Servicing, REOs and BankruptcyThe 8 – Week Roadmap to Launching into Notes

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AgendaAgenda

Following the Roadmap Step by Step:Following the Roadmap Step-by-Step:

• REOs what happens if I take a property back?

• Servicing – what is it & what does it mean?

• REOs – what happens if I take a property back?

• A Note on Servicing – transparency & fundraising

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REO – “Taking it Back”

• Real-Estate Owned (bank – owned)Real Estate Owned (bank owned)

• Can be its own strategy• Choice of last resort BUT• Can be its own strategy

• Borrower isn’t as “efficient” as you• Existing equityExisting equity• Capture improvement value• Juniors

• Key: plan ahead & be flexible

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REO After a Foreclosure (CA Example)REO After a Foreclosure (CA Example)

3rd PartySaleDelinquent NOD NTS

y

REOREO

30+ 90+

3 months 1 monthThe Sale

1 month30-day Notice

(ab 1137)

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REO after Deed in Lieu (CA Example)REO after Deed-in-Lieu (CA Example)

Delinquent NOD Sale3rd Party

NTSy

REOREO

30+ 90+

3 months 1 month1 monthThe Sale

“Deed-in-Lieu”

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(DIL)

REO as a Strategy – Example

• Can be its own strategyCan be its own strategyBorrower isn’t as “efficient” as you

• Motivation• Speed• Action

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1994 Indianapolis SFH

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REO #1 – Indianapolis, IN

• Property: 4/2, 2,937 sq ft, 1994

• BPO - $263 000BPO $263,000

• 1st - $177,800

• Bought - $72,500 - ~50% of UPB

• No Juniorso Ju o s

• Taxes – County=$0. Federal=$43,584+

• Liens - $12,877+

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$

The Situation

• Listed @ $375,000• “Finished basement”• “Larger than comps”• “Comps too low”• Not selling – and we just own the note

• Because of IRS lien we foreclosed• Because of IRS lien, we foreclosed

• Listed at $274,900, after spending $2,000 in rehab gcosts

• Just dropped price to $259,000 after 30-days of not

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pp p $ , yselling

REOs a word on valuationsREOs – a word on valuations

1stsTtl BPO Value @ Purchase $5,914,800Ttl PT Value @ Purchase $5,203,900PT V l % f BPO 88%PT Value as % of BPO 88%

My estimation of value isMy estimation of value is just below that of a BPO

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Back to our exampleBack to our example

• Currently listed at $259 000$259,000

• 88% of BPO value =BPO was 88% of BPO value $231,000$263K

• Will probably go into contract at that price

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A N t V l i T d ’ M k tA Note on Value in Today’s MarketLet’s assume you’re buying – at roughly 50% of “value”

Loan Purchased @ @Significant Discount

$180,000 (Loan Value) $75,000

(Loan Purchase)

$150,000 (Current House

Value) (Loan Purchase)Value)

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Home Value Declines & Their ImpactHome Value Declines & Their Impact

Home Price Appreciation (HPA) declines do not automatically put aninvestment at riskinvestment at risk

$160,000

$130 000

$140,000

$150,000 7% Monthly Decline = 55% annual

decline

$110,000

$120,000

$130,000

$150,000 (House Value @ Acquisition)

$80,000

$90,000

$100,000

$75,000 (Loan Purchase @ Acquisition)

Acquisition)

$60,000

$70,000

1 2 3 4 5 6 7 8 9 10 11 12

q )

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House value needs to drop by 7%/month for 12 straight months fromtoday in order to put principal investment at risk by month 12

Market Forecasts (HPA)Market Forecasts (HPA)The Case-Shiller Index is commonly used as a predictor of HPA

19% decline from peakfrom peak

30% total decline GS

Source: MarketOracle

predicted – GS just predicted 40% total

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Case-Shiller predicts a 13.6% further drop from mid-’08. GoldmanSachs predicts another 26% drop. Neither expects a 55% drop

Foreclosure REO: Aurora CO

Aurora, Colorado – 1st Lien

Foreclosure – REO: Aurora, CO

Foreclosure REO: Aurora COForeclosure – REO: Aurora, CO

City, State Zip Aurora, CO 80113Loan Position 1stLoan Rate 6.50%Loan Balance @ Purchase $257,150Loan Cost $116 625Loan Cost $116,625Property Value @ Purchase $221,000

Cost-to-Property Value 53%p yExpenses $3,445

Due Diligence $89F l $2 366Foreclosure $2,366Other $990

Income / Resale $204,500Income / Resale $204,500

Foreclosure REO: Aurora CO

DEAL SUMMARY

Foreclosure – REO: Aurora, CO

Exit Strategy Loan Sold to FC Auction BuyerDays Held 52

Date Bought 5/27/2008Date Bought 5/27/2008Date Sold 7/18/2008

RETURNSRETURNSIncome $204,500Total Expenses $120,070p $ ,Gross Profit $84,430Cash - on - Cash Return 70.3%IRR 3890 3%IRR 3890.3%

Observations: Not all foreclosure plays lead to REO’s. Auctionscan be used to find investor buyers quickly.

A Quick ReviewA Quick Review

• We’ve closed on a note• We ve closed on a note

• RESPA

• Servicer

• Borrower contactBorrower contact

• We’re now “servicing” the loan• To make dollars and cents!

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ServicingServicing

Licensing both Servicing and PurchasingLicensing – both Servicing and Purchasing

Purchasing:

• 15 of 51 states require license to buy 1sts• Difference between 1sts and 2nds

g

• 15 of 51 states require license to buy 1sts• (California is not one of those)

R f t th t f “ i i ” i lServicing:

• Refers to the act of “servicing”, or managing a loan as a lender (sending out coupons, calculating payments etc )

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payments, etc.)

A Note on Servicing GuidelinesA Note on Servicing Guidelines

• California, for example, requires a Mortgage Lenders’ , p , q g glicense in order to service a loan

• California Residential Mortgage Lending Act (1994):• The California Residential Mortgage Lending Act (CRMLA) is

contained in Division 20 of the California Financial Code, commencing with Section 50000.

• The regulations are contained in Subchapter 11.5 of Chapter 3 of Title 10 of the California Code of Regulations, commencing with Section 1950.003 (10 C.C.R. §1950.003, et seq.).

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A Note on Servicing GuidelinesA Note on Servicing Guidelines

First 10 of 12 Exceptions:• First 10 of 12 Exceptions:• Banks, trust co’s, insurance companies & industrial loan co’s • Federally chartered S&Ls FSBs and FCUs• Federally chartered S&Ls, FSBs, and FCUs • S&Ls, savings banks, & CU’s authorized to conduct business in

CaliforniaPersons engaged solely in business commercial or agr lending• Persons engaged solely in business, commercial, or agr. lending

• Wholly owned service corps of S&Ls or savings banks• Federal, state and municipal governments

P i l ki id ti l t l t ti i t• Pension plans making residential mortgage loans to participants• Persons acting in a fiduciary capacity conferred by the authority

of a court• California finance lenders• Trustees in a foreclosure proceeding

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A Note on Servicing GuidelinesA Note on Servicing Guidelines

Final 2 Exceptions for California Servicing:

Licensed California real estate brokers;

• Persons making residential mortgage loans with

• Licensed California real estate brokers;

their own funds, for their own investment, and without intent to resell more than eight residential l i l dloans in any one calendar year;

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Choosing a ServicerChoosing a Servicer

• Ask where they’re licensed

• And what they’re licensed ford at t ey e ce sed o

• To look for:

• Pricing: what’s in the service contract? (monthly, boarding / de-boarding)

• Knowledge: do they know what they’re doing?

• Is it easy to use & to track your loans?• Is it easy to use & to track your loans?

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Choosing a Servicer (cont )Choosing a Servicer (cont.)

• Generic / large: Wells Fargo, Option One, SPS, SLS

• Marix, BSI, Prodovis, FCI

• Key: specialty (or default) servicing

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Data availability is key (FCI)Data availability is key (FCI)

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Data availability is key (FCI)

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On Servicing & Raising MoneyOn Servicing & Raising Money

• If you’re raising funds for your own note buying, transparency to your investors is key

• The ability to “show” your investors what you do, is very powerful and will help you raise moneyvery powerful, and will help you raise money

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Customized Loan ManagementCustomized Loan Management

C h i lComprehensive loan data for all loan servicing dataservicing data

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Customized Loan ManagementCustomized Loan Management

Easy click access to key researchy

Easy-to-see

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“summary” data on the deal

Key Financial Data Easily Laid OutKey Financial Data Easily Laid Out

P&L accessible to your investorsto your investors

24/7

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Key Financial Data Easily Laid OutKey Financial Data Easily Laid Out

Balance Sheet & P&L templates pspecifically for Note Investors

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Integration between Systems (Under Development)Integration between Systems (Under Development)

QB Online Salesforce

We have our customized

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loan “portal” for purchase

What We CoveredWhat We Covered

• REOs – the “final exit”

• Purchasing and Servicing guidelines

• Servicing & Investors options in using technology to• Servicing & Investors – options in using technology to raise money

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Next Tele seminar with an InvestorNext – Tele-seminar with an Investor

January 28: 6pm PT 9pm ETJanuary 28: 6pm PT, 9pm ET

“Newbie” investor who just bought his first 8 notes – tales of experience … and success.

February 4: Week 7 of the Roadmap Finding NotesFebruary 4: Week 7 of the Roadmap – Finding Notes –The 4 Sources

February 18:Week 8 of the Roadmap – Buying. Putting it all together!

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