Week 6: Servicing, REOs and Bankruptcy
The 8 – Week Roadmap to Launching into Notes
1

Agenda
Following the Roadmap Step by Step:
Step-by-Step:
• REOs – what happens if I take a property back?
• Servicing – what is it & what does it mean?
• A Note on Servicing – transparency & fundraising
2

REO – “Taking it Back”
• Real-Estate Owned (bank – owned)
Real Estate
• Choice of last resort BUT
• Can be its own strategy
• Borrower isn’t as “efficient” as you
• Existing equity
• Capture improvement value
• Juniors
• Key: plan ahead & be flexible
3

REO After a Foreclosure (CA Example)
Delinquent NOD NTS Sale
3rd Party
y
REO
30+ 90+
3 months
1 month
30-day Notice The Sale
(ab 1137)
4

REO after Deed-in-Lieu (CA Example)
Deed in Lieu
Delinquent NOD NTS Sale
3rd Party
y
REO
30+ 90+
3 months
1 month
The Sale
“Deed-in-Lieu”
(DIL)
5

REO as a Strategy – Example
• Can be its own strategy
Borrower isn’t as “efficient” as you
• Motivation
• Speed
• Action
6

1994 Indianapolis SFH
7

REO #1 – Indianapolis, IN
• Property: 4/2, 2,937 sq ft, 1994
• BPO - $263 000
$263,000
• 1st - $177,800
• Bought - $72,500 - ~50% of UPB
• No Ju o s
o Juniors
• Taxes – County=$0. Federal=$43,584+
• Liens - $12,877+
8

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
lien
• Listed at $274,900, after spending $2,000 in rehab
g
costs
• Just dropped p
pp price to $
$259,000 after 30-days of not
, y
selling
9

REOs – a word on valuations
1sts
Ttl BPO Value @ Purchase $5,914,800
Ttl PT Value @ Purchase $5,203,900
PT V l as % of BPO
Value f 88%
My estimation of value is
just below that of a BPO
10

Back to our example
• Currently listed at
$259,000
$259 000
BPO was • 88% of BPO value =
$263K $231,000
• Will probably go into contract
at that price
11

A N t on V l i Today’s Market
Note Value in T d ’ M k t
Let’s assume you’re buying – at roughly 50% of “value”
Loan Purchased @
Significant Discount
$150,000 $180,000
$75,000
(Current House (Loan Value)
(Loan Purchase)
Value)
12

Home Value Declines & Their Impact
Home Price Appreciation (HPA) declines do not automatically put an
investment at risk
$160,000
7% Monthly Decline
$150,000
= 55% annual
$140,000
decline
$130,000
$130 000
$120,000
$150,000
$110,000
(House Value @
Acquisition)
$100,000
$75,000 $90,000
(Loan Purchase @
$80,000
Acquisition)
q )
$70,000
$60,000
1 2 3 4 5 6 7 8 9 10 11 12
House value needs to drop by 7%/month for 12 straight months from
today in order to put principal investment at risk by month 12 13

Market Forecasts (HPA)
The Case-Shiller Index is commonly used as a predictor of HPA
19% decline
from peak
30% total decline
predicted – GS just
predicted 40% total
Source: MarketOracle
Case-Shiller predicts a 13.6% further drop from mid-’08. Goldman
Sachs predicts another 26% drop. Neither expects a 55% drop 14

Foreclosure – REO: Aurora, CO
Aurora
Aurora, Colorado – 1st Lien

Foreclosure – REO: Aurora, CO
Aurora
City, State Zip Aurora, CO 80113
Loan Position 1st
Loan Rate 6.50%
Loan Balance @ Purchase $257,150
Loan Cost $116,625
$116 625
Property Value @ Purchase $221,000
Cost-to-Property Value
py 53%
Expenses $3,445
Due Diligence $89
Foreclosure
F l $2,366
$2 366
Other $990
Income / Resale $204,500

Foreclosure – REO: Aurora, CO
Aurora
DEAL SUMMARY
Exit Strategy Loan Sold to FC Auction Buyer
Days Held 52
Date Bought 5/27/2008
Date Sold 7/18/2008
RETURNS
Income $204,500
Total Expenses
p $
$120,070
,
Gross Profit $84,430
Cash - on - Cash Return 70.3%
IRR 3890.3%
3890 3%
Observations: Not all foreclosure plays lead to REO’s. Auctions
can be used to find investor buyers quickly.

A Quick Review
• We ve
We’ve closed on a note
• RESPA
• Servicer
• Borrower contact
• We’re now “servicing” the loan
• To make dollars and cents!
18

Servicing
Licensing – both Servicing and Purchasing
Purchasing:
g
• Difference between 1sts and 2nds
• 15 of 51 states require license to buy 1sts
• (California is not one of those)
Servicing:
• Refers to the act of “servicing”, or managing a loan
Rf t th t f“ ii ” i l
as a lender (sending out coupons, calculating
payments, etc.)
payments etc )
19

A Note on Servicing Guidelines
• California, for example, requires a Mortgage Lenders’
, p, q gg
license 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.).
20

A Note on Servicing Guidelines
• First 10 of 12 Exceptions:
• Banks, trust co’s, insurance companies & industrial loan co’s
• Federally chartered S&Ls, FSBs, and FCUs
S&Ls FSBs
• S&Ls, savings banks, & CU’s authorized to conduct business in
California
• Persons engaged solely in business commercial or agr lending
business, commercial, agr.
• Wholly owned service corps of S&Ls or savings banks
• Federal, state and municipal governments
• Pension plans making residential mortgage l
P i l ki id ti l t loans t participants
to ti i t
• Persons acting in a fiduciary capacity conferred by the authority
of a court
• California finance lenders
• Trustees in a foreclosure proceeding
21

A Note on Servicing Guidelines
Final 2 Exceptions for California Servicing:
• Licensed California real estate brokers;
• Persons making residential mortgage loans with
their own funds, for their own investment, and
without intent to resell more than eight residential
loans i any one calendar year;
l in ld
22

Choosing a Servicer
• Ask where they’re licensed
• And what t ey e licensed for
d at they’re 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?
23

Choosing a Servicer (cont.)
(cont )
• Generic / large: Wells Fargo, Option One, SPS, SLS
• Marix, BSI, Prodovis, FCI
• Key: specialty (or default) servicing
24

Data availability is key (FCI)
25

Data availability is key (FCI)
26

On 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 money
powerful,
27

Customized Loan Management
Comprehensive loan
C h il
data for all loan
servicing data
28

Customized Loan Management
Easy click access
to key research
y
Easy-to-see
“summary” data
on the deal 29

Key Financial Data Easily Laid Out
P&L accessible
to your investors
24/7
30

Key Financial Data Easily Laid Out
Balance Sheet &
P&L templates
p
specifically for
Note Investors
31

Integration between Systems (Under Development)
QB Online Salesforce
We have our customized
loan “portal” for purchase
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What We Covered
• REOs – the “final exit”
• Purchasing and Servicing guidelines
• Servicing & Investors – options in using technology to
raise money
33

Next – Tele seminar with an Investor
Tele-seminar
January 28: 6pm PT 9pm ET
PT,
“Newbie” investor who just bought his first 8 notes – tales
of experience … and success.
February 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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