January 13, 2012
Common Sense Assailed
As I've mentioned in prior blogs, we purchase non-performing notes in addition to performing ones. In many ways, our approach to due diligence is similar for both. The biggest difference is what part of the transaction becomes our focus; with performing notes, it's the borrower and with non-performing notes, it's the property.
Most of the non-performing notes we buy have been delinquent for a long time. The servicers tire of borrowers who are well-versed in the art of stalling and just want to be rid of the problem. The big banks are also weary of being portrayed as 'the bad guy' and would rather sell their non-performing notes for very little money (or simply write them off) than go through the foreclosure process for a $20,000 house.
When we do our due diligence on these kinds of note packages, the servicing (or collection) notes are vital to our decision. In essence, these comments are the 'story' of the note. We learn what circumstances led to the delinquency, whether the borrower wants to keep the property or has simply 'walked' from it, and whether there is any potential remedy besides foreclosure.
One particular deal stood out from the last group I reviewed. The borrower had lost her husband to a heart attack and was forced to go back to work to try and keep her house. She was unable to replace her husband's income and fell further and further behind on her payments. Several times she tried to work something out with the servicer (who represented one of the biggest banks in the country, by the way). Every time, she was declined for a modification or forbearance because she didn't make enough money.
With her back payments totaling more than $10,000, the borrower finally went to her father, who was willing to help her out financially. Although he didn't have enough to bring the loan current, he had $6,500 he was willing to put toward her delinquency. This is the part of the story where nonsense overruled common sense...
The servicer REFUSED to accept the $6,500, instead demanding the full amount of back payments owed. The borrower's father couldn't come up with the extra money, and all communication stopped there. Two months later, this loan was put into a non-performing loan sale.
Now, you may not believe what I'm about to write next, but I am telling you the truth, the whole truth, and nothing but the truth. First, the bank had done a recent valuation of the subject property and found it to be worth $8,000. In fact, it was such a low-dollar property they couldn't justify paying the cost to foreclose on the borrower. Second, they sold the loan to us for $1,500.
So...they refused $6,500 cash (and there would have no forgiveness of debt or anything...the borrower would still have been liable for payments going forward) on an asset they deemed essentially worthless. Then they sold the note for less than 1/4 of what they could have received from the borrower's father.
One guess as to our first action once we got the file in-house. Anyone? Anyone? Uhhhmmm, maybe to call the borrower's father and accept that $6,500? Then possibly work out a modification with the borrower to lower her balance and make her payments more affordable? (And why not? We've already got our money back four times over!)
The next time you see the slick ads on TV from the biggest banks in America, think about this blog entry. Common sense does not prevail in the servicing of these loans. In fact, were the banks to figure out the correct way to handle these loans, I wouldn't be able to write about our success because of their failures.
Never mind...I much prefer it this way. Make it a great day.
Our efforts stay focused on note holders. If you are a note finder, a note
broker, or anyone other than the actual note holder, please do not contact