I don’t understand the “yield” concept – can you help? We have developed the following spreadsheet to assist in the explanation. Please feel free to download and use. We call it Yield 101
Who lists loans for sale through Loan-Trader? Currently, the only loans for sale are those owned and controlled through Loan-Trader principals.
Where did you get them? We purchased them through pools, through properties we purchased, repaired and sold on owner-financing, and, some we purchased individually.
How are loans priced for sale? Offering prices are determined based on the value of underlying collateral, the debtor’s payment history and current payment status, the lien position, the number and timing of the payments remaining, and the note rate.
Why are the loans for sale? We sell these loans for liquidity to purchase other investment opportunities, arbitrage the interest rate, and/or, the amount we paid.
What do buyers do with the loans they purchase through Loan-Trader? Buyers have different objectives, many of which are tied to the status of the loan. Performing loans (loans on which the borrower’s payments are current and have been made on time) may be held to maturity or resold. Discounted or distressed loans, which are often non-performing, otherwise in default or subject to legal proceedings, might be purchased at a significant discount to the outstanding principal loan balance, which enables the buyer to modify the loan to bring it current. These loans almost always necessitate negotiation and additional documentation, often involve more risk than performing loans, and may require the assistance of experts in this field.
Are there any restrictions on who can buy loans through Loan-Trader? Yes, buyers must first be approved by Loan-Trader. This process primarily requires the buyer present proof of his financial ability to complete the purchase of loans, along with providing sufficient documentation that the buyer is sophisticated enough to understand the risks associated with note purchasing. Buyers can be foreign or out-of-state residents or entities. Buyers can also use self-directed IRA funds to purchase notes.
How sophisticated must a buyer be to make a successful investment by purchasing loans? Promissory notes and related security instruments are complex, may be difficult to understand, govern legal rights and duties of the parties, and involve investment risk. As a result, Loan-Trader requires buyers to demonstrate that they have access to appropriate legal, accounting and tax counsel before making an investment decision.
How are the transactions completed once an offer is accepted? Transactions are completed through the escrow process using the Loan-Trader and a title company to provide a streamlined process between the seller and buyer.
How do loan owners collect payments from the debtors? Loan-Trader highly recommends that note purchasers retain a licensed loan servicer to manage the collection process. While it is legal for note beneficiaries to collect on their own behalf (self servicing), there are many laws and regulations that must be followed regarding disclosure, reporting and notification that are best left to professional servicers to manage Loan-Trader has servicers it can recommend.
How much do the servicers charge loan owners? Servicers typically charge 3-50 basis points (0.03% to 0.5%) of the loan principal, but additional charges may apply if certain foreclosure or other collection services are rendered. Servicing prices are typically based on the number of loans being serviced for that owner and the status of those loans (i.e., performing vs. nonperforming).
Do new loan owners ever communicate directly with the borrowers or is all communication through the servicer? When the owner of the loan engages a loan servicer, all borrower communications are typically made through the servicer. This keeps confidential the identity of the note owner (note beneficiary) while also ensuring that there is no breach of the Fair Debt Collections Practices Act, which requires that only one entity can collect on a debt at one time (the servicer collects on behalf of the beneficiary as opposed to having the beneficiary make collection attempts concurrently with the servicer).
What can loan owners do if the homeowner doesn’t pay? Loan owners have several options. Hiring a specialized servicer is usually the first response of an inexperienced owner of a defaulted note. An attempt to modify the loan, by either lowering the interest rate or principal, is often tried to reduce payments to a manageable level and put the loan into a performing mode. In more extreme cases, and in cases where the underlying asset value exceeds the payment capabilities of the borrower, the loan owner can go through the foreclosure process.
Can loan owners modify the terms and conditions of loans? Yes, by negotiation with the borrower, an owner may alter the provisions of a loan, by (among other things) extending the maturity, changing the interest rate, and deferring interest and or principal payments. Because such modifications may affect the rights of other lien holders, owners without sufficient experience in these matters are advised to first consult with expert advisers. .
Why would investors want to buy a home loan in this economic market? Some commentators have described the current market as “unprecedented” (at least in recent times). In this market, notes are being offered at discounts and risk-adjusted yields on low loan-to-value properties. While there is no assurance with any investment, especially with the current inherent general and specific uncertainties that exist in the housing market and economic climate, attractive opportunities do exist to match a variety of investment criteria.
Isn’t this a very risky investment? The risk is dependent on the buyer’s situation, the note, and the underlying collateral. If a note buyer purchases a long-term note expecting to resell it quickly for a profit, that could be extremely risky. If the note buyer purchases a deeply discounted note with underlying collateral that far exceeds the value of the note, with a borrower who has historically made many payments and all on time, and the note buyer knows that he won’t need the cash used to purchase the note for a long time, perhaps it isn’t risky.
If someone wants real estate in their portfolio, is the purchase of real estate secured notes a prudent way to do it? Real estate secured promissory notes are not the same as real estate itself. The owner of a real estate secured note does not, unless the owner acquires the property on foreclosure, share in the value of the property itself or have the burdens associated with the ownership or management of real estate. However, it might be a way to diversify into an income source backed by real estate.
Where does Loan-Trader fit into the solution for the mortgage crisis? There is no central marketplace for individual loans. As a result of the resulting illiquidity of these critical instruments, lenders are currently unable to lend new money. In addition, some owners of distressed loans are not the best at managing these loans. There are, however, many entrepreneurs and businesses who are experts. LoanMarket facilitates the transfer of the problematic loans to the most efficient owners, including regional and “workout” specialists.
What kind of discounts can loans be bought for? Discounts change on a daily basis and are related to numerous factors, including but not limited to the amount of equity in the home, the status of payments, and the needs of the seller.
How does Loan-Trader make money? Loan-Trader earns nominal transactional fees from both the buyer and seller when a loan purchase is completed, or, from loans that it has purchased with the intent to resell.
What kind of information about the Notes is available? Loan-Trader provides comprehensive due diligence materials to Approved Buyers. The types of due diligence documentation vary depending on the individual characteristics of the particular note listed. In general, the following documents are provided in a listing: deed of trust, note, title policy, servicing/collection comments, payment history, loan origination file, current opinion of value (BPO). Each buyer must determine the information they require in evaluating the Note.
What kind of safeguards are in place to protect loan buyers? Loan sellers? Homeowners? Although title insurance covers a number of risks, the underlying investment risk rests entirely with the owner of the note. Accordingly, Loan-Trader recommends that every buyer scrutinize each loan before purchasing to determine if the investment is suitable for their short- and long-term objectives.