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The Rise of Non-Performing Loans and Opportunity for Investors

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By Edward Brown

It is no surprise that mortgage rates have dramatically increased over the past year. In July 2022, 30-year fixed rates for both conforming and high-balance loans had reached 5.375%, according to sources such as Guaranteed Rate. This is up from the low 2% range in early 2021. Obviously, such an increase in rates can have a dramatic effect on house prices as would-be buyers try to buy a house they can afford.

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However, the rise in interest rates goes far beyond just what buyers can afford for a new purchase. First, adjustable-rate mortgages will climb dramatically, which will impact homeowners trying to make sure they keep up with their mortgages by not going into default. Next, the whole reason the Fed increased rates was to stave off even more inflation than the country had been experiencing since the change in presidency. Here is where we might see a rise in non-performing loans [NPLs], as homeowners fight to keep up with inflation as well as rising interest rates that impact mortgages and other borrowings [credit cards, auto loans, etc.].

During The Great Recession, the U.S. saw a huge wave of defaults with mortgages; primarily, this was due to a credit bubble, as lenders were too eager to make loans. Very little oversight was seen regarding these loans, and borrowers who should not have been granted loans still qualified. Fast forward 15 years, real estate prices have increased substantially to overcome the devastation of the previous drop.

Banks, thanks to Dodd-Frank, are now only allowed to make loans to borrowers who can demonstrate an ability to repay. All of this makes for a strong real estate market, and we should not experience the wave of foreclosures we previously saw; however, that does not mean we will not see them.

As noted above, when there is a spike in interest rates [and inflation] as we have recently experienced [and potentially more increases to come], homeowners can get behind in their mortgages, and without the government moratoriums that were in place during Covid, banks will have to start foreclosing, or sell off mortgages to keep within Federal guidelines of Reserve Requirements. The banks may try and work modifications or other remedies to assist homeowners, but there are times when there is not much the bank can do except file notices of default and start the foreclosure proceedings.

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One major difference in today’s real estate world as compared to The Great Recession is that, today, many homeowners have ample equity in their houses. This gives the homeowner the possibility of preserving some equity by selling their house rather than get foreclosed on. However, many homeowners around the country, mostly in the lower end market, will still lose their house in foreclosure. One reason is that the homeowner has not researched the value of their house; they just assume that if they cannot pay, they lose the house. Another is that some homeowners are headstrong about staying in their house and trying to fight a legal battle only to be on the wrong end and, by that time, it is too late to try and save their equity. These situations are unfortunate, as, even when the lender points these things out, many borrowers stick their head in the sand and let the chips fall where they may.

Investors have been clamoring for yield. So much so that even NPLs were commanding unheard of prices [as much as 85% of face value]. As the economy was doing well [pre-Covid], real estate prices were steadily increasing and there was confidence in the marketplace. However, in “normal” times, one might offer 50% +/- of the face of the NPL note, as there is a fair amount of work that goes into managing a NPL regarding foreclosure, forbearance, modifications, bankruptcies, and possible lawsuits by the borrowers. As interest rates rise and the supply of NPLs is sure to increase, one should expect the prices of the NPLs to decrease – – allowing investors to potentially pick up handsome profits.

In the early 1990s, the S&L crisis provided such opportunities to investors swooping up “bad loans”, as the S&Ls were directed to unload these mortgages into the market very quickly. As the dust settled, as it usually does after wide pendulum swings, these investors profited, as they picked up loans [or property if the foreclosure had already been completed, and the bank held the asset as an REO] at discounts that were previously only imaginable. Discounts of more than 60% were not uncommon. At such a discounted price, the investor appeared to not take any undue risk. There was so much room for error, almost any loan to be purchased was worth it.

We may not be in that same situation now due to restrictive banking regulations that have been imposed on banks for years, prohibiting them from making unreasonably risky loans and the fact that real estate has held its own since The Great Recession, but there should be plenty of opportunity for investors to pick up discounted loans with fairly large margins built in; however, the average investor is prohibited from participating in buying these loans due to the relatively large amount of capital needed to enter this space. For example, a large bank or hedge fund willing to unload NPLs may require a buyer to invest a minimum of $1,000,000 or more. If there is a bidding situation [auction], a refundable deposit is usually required, so the bank/hedge fund knows they are dealing with serious, wealthy buyers.

For those investors who have the wherewithal to participate in purchasing NPLs, they should have a sophisticated team to assist them, as there will be a need for analysts to do a deep dive in the values of the property to which the loans are secured, contractors to help facilitate potential rehabbing of the property if/when the property reverts to the investor, legal analysts dealing with the various foreclosure laws in the states where the properties are located, and good real estate sales people to not only give BPOs — but also help facilitate the eventual sale of the property or assist with the possible rental of the same [or find a good management company].

One strategy to consider is to approach the NPL borrower and try to re-write or modify the loan [of course, before doing so, consult with competent legal counsel to make sure that there are no legal issues that would compromise the collateral]. There are a few benefits to this strategy; first, turning a NPL into a performing loan brings immediate cash flow. Because of the discount that is obtained in the purchase, the new note holder has the flexibility of making the note more attractive for the borrower. For instance, if a note [that has a face value of $100,000] has 20 years to go and has a note rate of 6% was purchased for 60 cents on the dollar from the bank, the new note holder could offer to lower the balance to $90,000 and reduce the interest rate to 5% and have a great asset that can either be held for cash flow or sold in the secondary market.

One additional factor that may help in modifying the NPL’s notes is the fact that, according to Bank of America’s internal data, rents continue to rise. July 2022 year over year showed an increase in rents of 7.4%. Most people want to keep their home. If the lender can give them advantages to saving it, most homeowners will jump at the chance, especially when their alternative is to be thrown into a rising rent market. A question the lender has to contemplate is whether the strategy of keeping a homeowner in their home makes economic sense [ignoring the moral issue of eviction]. In some cases, evicting a homeowner and immediately selling the house may make sense.

In some cases, the lender may choose to invest money in rehabbing the property in hopes of additional gain, but there is uncertainty with this strategy; the time it takes to rehab, the expense, and the value of the house after rehab and time to sell [with expenses associated with the sale]. When a homeowner is going to get foreclosed on, there are avenues that can be taken to delay the inevitable, including filing bankruptcy. Due to court budgets, this delay may be prolonged more than the lender originally anticipated, especially in judicial-only states.

The time and expense for entering into foreclosure for the lender may not be worth the anticipated profit; however, the strategy of keeping the homeowner in place and working out a new deal can produce immediate cash flow, as the borrower will start making payments right away. In addition, the costs to modify a note are substantially less than what foreclosure costs would normally be.

The good news from the lender’s point of view is that, due to the purchase of these loans at steep discounts, rates of returns in excess of 15% are not uncommon. After the note is modified, the lender has the option to flip the note to a note buyer as a performing note [which will command a higher price than an NPL], or the lender may choose to keep the note for the cash flow. In the case of choosing to sell the note, the lender may be wise in waiting to experience six months of performance by the borrower, as most note holders desire to see notes that have at least six months’ seasoning; otherwise, they may discount the note for uncertainty reasons [lack of history] more than the lender desires.

MEET EDWARD BROWN

Edward Brown currently hosts two radio shows, The Best of Investing and Sports Econ 101. He is also in the Investor Relations department for Pacific Private Money, a private real estate lending company. Edward has published many articles in various financial magazines as well as been an expert on CNN, in addition to appearing as an expert witness and consultant in cases involving investments and analysis of financial statements and tax returns.

Edward Brown, Host
The Best of Investing on KDOW AM1220 on Saturdays at noon.

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What Lies Ahead for Real Estate and the Lending Market in the Coming Months

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By Edward Brown

Many fear a recession looming in the coming months that will negatively affect real estate prices. In a typical recession, house prices usually drop. According to the Joint Center for Housing Studies at Harvard University, housing prices dropped in four out of five recessions that have occurred since 1980. During those recessions, house prices dipped on average about 5% for each year the economy remained down; However, in the Great Recession in 2008, the average price dropped by nearly 13%.

During the recession of 1980, inflation started to skyrocket, much like we have been experiencing in this past 12 months. However, there are vast differences between the recession of 1980 and the possible one to come. First, the population in the United States in 1980 was just over 226.5 million people. Today, there are over 333 million people according to the US Census Bureau. Everybody needs a place to live, and supply has not kept up with demand. Many cities have dissuaded builders by imposing large fees as well as taking too long to issue permits. This could be due to downsizing of government staff, but another phenomenon that was not as prevalent in 1980 as compared to today is that neighbors have a lot more say in what goes in their neighborhood. When there are too many roadblocks, many builders shift to fix and flip.

In addition, there is still a large supply chain issue left over from Covid. Also, costs of materials and labor has substantially increased. Lastly, finding qualified trade workers has been quite a challenge for builders.

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One of the major differences in the early 1980s as compared to today is the interest rate on mortgages. By 1981, mortgage rates were as high as 19%. Although current rates at 6% seem incredibly high [since they bottomed out in the 2+% range during Covid], they are still less than a third of what they were in 1981. It is true that house prices have substantially increased since 1981, but so have wages.

Some factors that affect the demand side of home purchases are that millennials are coming into the market in droves. These same millennials
witnessed their parents’ difficulties during the Great Recession, but enough time has passed, and millennials are now in positions of starting families as well as becoming a strong impact in the workforce.

Probably one of the most overlooked area of why demand should at least come close to supply [to keep residential real estate prices relatively stable] is that there were millions of homeowners who refinanced when rates were very low. These homeowners will not be able to replace their current mortgage rate for the foreseeable future.

Thus, there has to be a compelling reason for these people to sell their house. Currently, the Fed is trying to tame inflation by raising interest rates. This has started to work, albeit slow and not strong enough. Anyone buying groceries will say that true inflation is closer to 15% rather than the 6% the government is touting.

Raising the interest rates usually causes a recession, as costs of production are impacted. If a recession then causes interest rates to decline [due to lack of demand and falling inflation], we may see the refinance market pick up again and more mobility of home buyers driving up demand again. So far, there has been a slowdown in sales volume. This, in combination with slower refinances, has caused many mortgage companies to lay off workers. For the private lending industry, this should cause volume to move in their direction.

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Private lending use to be the last resort for many borrowers, as the costs were higher for these borrowers; however, with the smaller pool of lenders due to the layoffs as well as mainstream banks making it harder for borrowers to qualify due to the uncertainty of the economy, private lenders have moved up the chain with regard to the choice of lenders for those needing to borrow. In addition, we may likely see more bank regulations due to the downfall of Silicon Valley Bank and Signature Bank.

The Fed wants to exude stability in the market, so they will probably clamp down on what banks are allowed to lend on as we saw the Great Recession produce new regulations via Dodd-Frank.

There may be a drop in real estate prices over the coming months, but it most likely will not be what we saw in the Great Recession, as that was a credit issue, where the banks were too lax in giving loans to borrowers who may not have had the income to repay. Current regulations make lending much stricter, so borrowers have to show the ability to repay the loan. Thus, even a coming recession should not see a tremendous drop in real estate prices.

ABOUT EDWARD BROWN

Edward Brown currently hosts two radio shows, The Best of Investing and Sports Econ 101. He is also in the Investor Relations department for Pacific Private Money, a private real estate lending company.

Additionally, Edward has published many articles in various financial magazines as well as been an expert on CNN, in addition to appearing as an expert witness and consultant in cases involving investments and analysis of financial statements and tax returns.

Edward Brown, Host
The Best of Investing on KTRB 860AM
The Answer on Saturdays at 8pm
and Sports Econ 101 on Saturdays
at 1pm on SiriusXM channel 217
21 Pepper Way
San Rafael, CA 94901
[email protected]

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411Expo.com or our Eventbrite landing page, CLICK HERE.

The Reality of SB-1079 Foreclosures

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By Edward Brown

Attempting to curtail foreclosed houses being turned into rentals, California passed SB-1079 in 2021. This law effectively, for 45 days, suspended any activity after the foreclosure. Prior to this law, houses that were foreclosed on could be purchased at the foreclosure sale by investors and immediately turned into rental property. When this happened, houses were taken off the inventory for home ownership.

California was desiring to promote homeownership, and reduced inventory pushed prices higher as well as increased renters vs homeowners. The theory behind SB-1079 was that it would discourage investors from bidding at the foreclosure because, for the next 45 days, an “eligible bidder” could match the winning bid. The effect of this would be that the investor would tie up his money for 45 days and not know if he would end up with the property. Thus, investors would most likely not show up and bid at the foreclosure and wait out the 45 days to see if any eligible bidders came forward. If nobody outbid the lender at the foreclosure sale, the investor
could approach the lender to purchase the property. With SB-1079 in place, there is no incentive for an investor to outbid at the auction.

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One of the main problems with this law is that the party being foreclosed on has almost no chance of any over-bidding at the foreclosure. Prior to SB-1079, it was possible for the borrower who was being foreclosed on to potentially recoup some equity in the property if the house was bid up. For example, if the 1st mortgage was owed $100,000 and was the foreclosing party, and the house was worth $300,000, the lender would most likely credit bid their entire $100,000 loan. If another party bid $140,000, the lender would get paid their $100,000 and the owner of the house who was getting foreclosed on would walk away with $40,000. SB-1079 effectively shuts the door on that scenario, as the chances of someone outbidding the lender at the foreclosure are slim due to the uncertainty of the bidder acquiring the property at the sale. For the following 45 days, an “eligible bidder” has the opportunity to bid the same $100,000 as the lender and end up with the property. Although there are eight definitions of an eligible bidder, the primary ones include an occupant of the property as his primary residence [not the borrower or a family member of the borrower, however], effectively, a rental, a prospective owner-occupant, and a California nonprofit whose primary activity is the development of affordable housing. If the house is owner occupied, that eliminates the potential tenant purchase option.

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The main problem is that the homeowner will almost certainly lose 100% of any potential equity due to nobody outbidding at the foreclosure auction. At this writing, there are not many non-profits who are set up for development of affordable housing; thus, the only realistic way for the lender to be taken out after 45 days [after the foreclosure] will be those houses that were rented out to tenants or those who desire to own and occupy the house as their primary residence. This last potential is slim, as most buyers want to make offers on houses they can inspect and not wait 45 days to find out whether or not they will be allowed to buy the house.

Due to these new foreclosure laws in California, lenders will have to factor into their underwriting the potential added costs of holding a [potential] foreclosed property at the time they make their loan to the borrower, as the lender is precluded from selling or renting out the property for 45 days after the foreclosure. The lender may have additional costs during this period, such as securing the property against vandalism, vagrants, weed abatement, and the like.

It is still too early to tell if the statistics show if tenants come up with the needed funding options in order to secure the house for their own benefit, as the program is still in its infancy. Only time will tell if this experiment works out for potential would-be homeowners or if it was just a sure-fire way to make sure foreclosed homeowners recoup nothing.

ABOUT EDWARD BROWN

Edward Brown currently hosts two radio shows, The Best of Investing and Sports Econ 101. He is also in the Investor Relations department for Pacific Private Money, a private real estate lending company.

Additionally, Edward has published many articles in various financial magazines as well as been an expert on CNN, in addition to appearing as an expert witness and consultant in cases involving investments and analysis of financial statements and tax returns.

Edward Brown, Host
The Best of Investing on KTRB 860AM
The Answer on Saturdays at 8pm
and Sports Econ 101 on Saturdays
at 1pm on SiriusXM channel 217
21 Pepper Way
San Rafael, CA 94901
[email protected]

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411Expo.com or our Eventbrite landing page, CLICK HERE.

How the Opening Back up of the Economy should affect Private Lending

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Image by Gerd Altmann from Pixabay

By Edward Brown

When the COVID-19 pandemic first hit the United States in March 2020, it was anybody’s guess as to how the private lending market would be affected. At first glance, one would presume that loan demand would have been negatively affected due to the expectation that borrowers were going to “hunker down” and not ask for, nor spend money, as we, as a nation, even the world, had not experienced a shutdown of this magnitude since the pandemic during WWI.

In the early stages of this effectual shutdown of most of the economy, this was the case. Borrowers were reluctant to take on debt, as the future was uncertain as to how they expected to pay back loans. However, as time went on, even though most businesses saw a large decrease in revenue, the lockdown/shelter in place, had another affect; many people were frustrated, feeling cramped where they lived, as a large part of the workforce had to work at home, and many households were not prepared to be at home 24/7. This put an undue hardship, emotionally, on people, as they tried to balance work with home life; especially if they had younger children who were not able to go to school.
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Image by Alexandra_Koch from Pixabay

Since many businesses were closed, people were able to save money, as they had no place to spend it, so to speak. This lent itself to the thinking that this was the new norm – working from home. This thinking made people start to ponder the future regarding the work/home life balance, and many chose to increase their living space. This, culminating with the fact of no commute for most workers, produced increased prices of homes in the suburbs where one could buy a larger house than in metropolitan cities. The frenzy that ensued for house purchases was a boon for private lending, as, not only were banks a bit gun shy due to the pandemic, but buyers were facing competition from other buyers and needed a competitive edge – quick closing offers. These two factors [banks slowing down on lending and the ability to provide capital very quickly], saw many private lenders having their best deal flow, by volume, in decades.
The question, for private lenders, is what happens after the economy eventually loosens up restrictions for most businesses, so they can get back to a somewhat normal cycle? There are those who believe that working from home will be the new norm for many workers.
The thought process is that companies that have been use to having workers work from home have proven that they can be productive over this past year. These same companies looking to cut costs will point to believing that they can shave off a lot of fat off of their income statement by lowering a large part of their expenses – rent. Since workers do not need to come into the office, and, with the technology of Zoom, rent expense can be significantly eliminated.
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Image by Joshua Miranda from Pixabay

Case in point; SF Gate reported that Sales Force cut back 325,000 square feet of space it was planning on occupying in San Francisco after adopting a permanent remote work policy. Many companies have followed such as Drobox, Twitter, and Facebook. Rents in the surrounding areas have decreased as much as 20%; however, prices for homes have not seen such a decrease, and, homes that have more square footage command a premium.
However, there is the possibility that, once a vaccine is widespread and we have moved on from the pandemic, many companies will start to require workers report back to the office. Some companies are already requiring employees go back to working in the office, as they believe productivity will increase compared to at home workers. This may start to force a shift of people moving back to the city from the suburbs.
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Image by hakan german from Pixabay

Interest rates are still relatively low, but they are starting to creep up. Many home buyers believe they should find something soon before the rates for mortgages go higher. The demand for capital is still strong and it does not appear that it will taper off anytime soon. Banks still have strict criteria regarding lending standards, and recent changes in the Dodd Frank rules did not dimmish these standards. In addition, borrowers who requested deferments from their lender may not have had their credit scores lowered due to these requests, but a memo recorded in the credit report has effectively prohibited conventional financing for them; at least, for a while. Other reasons many believe demand for housing will continue is due to a housing shortage. Too many restrictions by city or county officials hamper housing starts, and costs of both material and labor have dramatically increased. This put an undue burden on builders, as their profit margin gets squeezed; thus, the law of supply and demand as well as low interest rates [that appear to be relatively stable] should keep housing prices strong. During the Great Recession, many homeowners lost their houses to foreclosure. Many Millennials remember how their parents lost their home, and this lent itself to many people choosing to rent instead of purchase. Over time, however, these [now grownups] are starting their own families and have healed from the wounds of the Great Recession to where they are deciding it is better to buy rather than rent. This, too, is expected to fuel higher housing prices.

money-2724245_1280Image by Nattanan Kanchanaprat from Pixabay

Many housing sectors are still seeing multiple offers or houses that are being sold in less than a week. This phenomenon puts the would-be buyers in a predicament as to how to put in an offer that will be accepted to a seller. This is where private capital is a huge asset to potential buyers, as they can use private capital to make their offer much more attractive to the seller in that they can close the transaction very quickly without contingencies. Mark Hanf, president of Pacific Private Money has seen these buyers come to him in droves for capital and reports that his company had its best quarter in the last quarter of 2020.
One of the main advantages to private capital markets is that they do not have to rely on asking for new appraisals in every situation. Each case is different, and, many times, a recent appraisal that the borrower provides to the lender or a broker price opinion might suffice. Banks need to follow FIREA guidelines where the appraisal process is much longer, and this lends itself to a lengthy process to which the borrower may not have the luxury of waiting.
How long will the demand for private capital last? As long as banks continue to drag out the lending process, demand for housing stays consistent, and borrowers desire to purchase before interest rates and housing prices increase beyond where the borrowers feel comfortable, there should be a steady flow of requests for the foreseeable future.

ABOUT EDWARD BROWN

edward-photo-from-2006-2-200x300
Edward Brown currently hosts two radio shows, The Best of Investing and Sports Econ 101. He is also in the Investor Relations department for Pacific Private Money, a private real estate lending company. Additionally, Edward has published many articles in various financial magazines as well as been an expert on CNN, in addition to appearing as an expert witness and consultant in cases involving investments and analysis of financial statements and tax returns. Edward Brown, Host The Best of Investing on KTRB 860AM The Answer on Saturdays at 8pm and Sports Econ 101 on Saturdays at 1pm on SiriusXM channel 217 21 Pepper Way San Rafael, CA 94901 [email protected]

The Pitfalls of Fractionalized Deeds of Trust

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Image by Pete Linforth from Pixabay

By Edward Brown

Many investors like the alternative lending space where they can invest in mortgages, otherwise known as, Trust Deed investing, whereby they become the lender on real estate. The two major ways to invest in these mortgages is either in some kind of pooled investment [a Fund], similar to a mutual fund or owning the deed of trust on a specific piece of real estate, similar to owning an individual stock.

In the case of investing in a Fund, the investor invests in the Fund, and the manager chooses which loans to make to borrowers. In the situation of owning an individual deed of trust, the investor chooses which specific loan to invest in and is recorded on title. It is the latter that is the focus of this article, and specifically fractionalized deeds of trust where the investor shares ownership in the investment with on or more other parties.
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Image by Free-Photos from Pixabay

Most note brokers [in California; other states may vary] are licensed to fractionalize a deed of trust [notes] with up to 10 owners [beneficiaries]. Other brokers have licenses from the Department of Corporations to have more than 10 beneficiaries. The reason brokers fractionalize notes is usually because they are too big for one investor. A $40,000 note may be able to find a home with one investor, but a $700,000 note may need more than one investor in order to be funded. Each investor receives a recorded deed of trust [for their protection as evidence for their loan]. When the borrower pays the loan off, each investor is required to reconvey their interest in the loan [notarized signature] in a timely manner [California requires this be done within 21 days of the request]. The reconveyances are deposited in escrow, and each lender is paid off in escrow as well.
If everything goes smoothly, no one complains; however, what happens if things don’t go according to plan? What if a lender is unavailable to sign off in a timely manner? What if a lender refuses to sign? What happens if the borrower defaults on a fractionalized loan? What happens if you have a minority interest [less than 50% ownership] in a fractionalized loan? These are just a few instances where a fractionalized lender faces challenges, and these challenges can be monumental.
First, let’s look at a simple situation where a $900,000 loan has been fractionalized into 9 different lenders [each having $100,000 ownership in the loan] and 8 of the 9 lenders signs the reconveyance paperwork in a timely manner but one chooses not to sign [in time, or not at all]. Why would the lone lender choose not sign? What if the loan was very well secured and the note was yielding a higher than market rate of interest? A naïve lender may think that they can enjoy the higher interest for longer than allowed [not signing in a timely manner]. This situation is not as far fetched as one might think. In the 1990s, first deed of trust notes yielding 12% were not uncommon. When rates dropped dramatically, borrowers were quick to refinance. One investor tells the story of how a 12%, $1.2M loan was trying to be refinanced by the borrower at 9% with a new lender. The fractionalized note had 5 owners. Four of the 5 had their reconveyances notarized and delivered to the escrow company in a timely manner. The last investor had $500,000 in the note and did not want to lose his 12% rate; he was under the misconception that he could just keep coming up with excuses as to why he was not able to get to a notary [he was a busy surgeon]. After more than a month went by, the borrower sued all of the lenders for the difference in the rates [3%] plus attorney fees. Although the lone holdout was ultimately responsible, all of the other lenders had to defend themselves, which put undue burdens upon the innocent 4 lenders.
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Image by Alexander Stein from Pixabay

Next, let’s look at a situation where a majority [over 50%] lender chooses to extend a loan when it matures, and a minority lender does not. Unless the minority lender requests a partition action so as to separate himself from the majority lender, the majority lender is in control of the fate of that loan. Dealing with foreclosures by the lenders introduces an entirely new set of challenges; first, who is going to front the money to pay the trustee fees for the filing and publishing of the foreclosure notices? What if there are no majority owners of the note? Even where there is a majority owner, most title companies are not only requiring every beneficiary to sign; powers of attorneys [POAs] may not be useful, as many title companies are stating that POAs are not valid unless they are signed within a small window of time that the reconveyance is to be signed [you might as well have the beneficiary sign the reconveyances in front of a notary if you can get them to sign a POA in front of a notary]. In fact, many title companies are not accepting service agreements that were set up at the time of issuing the note and deed of trust. Too many title companies have been sued by beneficiaries and, the only way to protect themselves, in their opinion, is to have beneficiaries sign their reconveyances; even to the extent that the title companies will choose which notaries are acceptable for signatory verification. Thus, foreclosing may not even be possible if the note holders cannot agree to their destiny or come up with the funds needed to file the paperwork to foreclose [which can be many thousands, depending on the size of the loan].
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Image by Pete Linforth from Pixabay

Other issues arise even if foreclosure has been started; one lender tells the story of how the borrower stopped making payments to both the 1st and 2nd mortgage. This particular lender was one of many in the 2nd mortgage. The 1st started the foreclosure process. Nobody in the 2nd mortgage wanted to cure the 1st. There was an offer by an independent 3rd party to purchase the property for the $100,000 over the1st mortgage, which would have been given to the 2nd [which would have paid its loan down but not off]. There were 25 beneficiaries on the 2nd DOT.  Twenty-four of them chose to allow the sale and take the $100,000, which would have amounted to a short sale; however, the one lone holdout, who represented only 4% of the 2nd, refused to sign off on the sale. His reasoning? He stated that he believed that, at the foreclosure sale, someone would bid the property up more than $100,000 over the 1st. Not only was this illogical [based upon the value of the property], but it went against his previously signed documents stating that he would go along with the majority, opening himself up to a lawsuit by the other lenders. The title company refused to give title insurance to the potential buyer, and the sale never went through. At the trustee sale, one bidder bid just over the 1st’s credit bid, and the 2nd walked away with zero.
Many individual trust deed investors believe they are protected from many perils if they own over 50% of the note, as most states have a rule that the majority holder makes the rules; however, title companies are not bound by such laws. If they refuse to give title insurance, any prudent would be buyer of the property will walk away.
Another issue is that an investor in a note does not have to come up with his fair share of the money it takes to file foreclosure, and there is no provision that states that other investors who come up with more money get a preference, so it is difficult to maneuver a foreclosure unless each person comes up with his percentage required.
Other not infrequent situations come up where the borrower wants to do a loan workout or re-write the note. Unless all parties agree, everything is at a standstill. Some unethical fractionalize note holders with sometimes hold this over on the rest of the note holders by demanding a larger share than they are entitled to or demand that the other investors buy them out.
fund manager

Image by Gerd Altmann from Pixabay

For these reasons, many investors have turned to Funds where the Fund manager handles the foreclosure paperwork, pays the fees, and sees the entire process through. The takeaway here is that one needs to be extremely careful if one wants to invest in a fractionalized note – not only do you want to own more than 50% of the note, but make sure you know every other owner and have like minds, which, in today’s world, is more than a daunting task.
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Edward Brown currently hosts two radio shows, The Best of Investing and Sports Econ 101. He is also in the Investor Relations department for Pacific Private Money, a private real estate lending company. Edward has published many articles in various financial magazines as well as been an expert on CNN, in addition to appearing as an expert witness and consultant in cases involving investments and analysis of financial statements and tax returns. Edward Brown, Host The Best of Investing on KTRB 860AM The Answer on Saturdays at 8pm and Sports Econ 101 on Saturdays at 1pm on SiriusXM channel 217 21 Pepper Way San Rafael, CA 94901 [email protected]