I am sure that no matter what field you are in there are times when you feel like the only way you learn things is the hard way. In the seller finance industry, there is a monthly newsletter publication known as Noteworthy. It has been around for over nineteen years. In January of this year, a good friend of mine purchased the newsletter from the family of the man who started it years ago. My friend had been the editor of Noteworthy since the middle of 2008 and when he took over he started a column called “Hard Knocks U”.
This is a forum for him and others in the industry with years of experience (known as “old-timers”) to share war stories with the readers using real life examples of things we learned the hard way, with the intention of keeping others from having to experience these themselves. I was asked to write a column for the March issue of Noteworthy. Following is my story titled “Why There’s a Thing Called Up – Front Due Diligence”:
Believe it or not, note-holders do not always tell the truth. Now, “most” of them do not lie straight to you but they do tend to “omit” information. It is sort of like how the pastor of my church explains the different kinds of sin. There is the sin of “commission” (no not huge broker fees) which refers to knowing something is wrong but doing it anyway, whereas the sin of “omission” is failing to do something you can and ought to do. Investors rely on note-holders or brokers to provide accurate, detailed information on each transaction.
It is imperative that brokers ask ALL of the necessary questions to get the details needed. There is a reason why all investors want the original note and a “certified” pay history. Let me tell you a story of a situation I was faced with due to the note-holder “omitting” a key piece of information.
I was presented with what appeared, at least on the surface, as a quality note to purchase. The note was secured by an owner-occupied single family residence in Houston, Texas. The borrower put down a strong down payment of over 20% and had a credit score of over 700. The bpo came back supporting the sales price as the current market value. So far, so good – right?
When the broker, with whom I had done many deals throughout the years, submitted the loan file, there was a pay history included. I am sure most of you have seen the standard pay history form the broker used. It is a template where the payment amount, date received and new balance are filled in by hand and then signed by the note-holder “certifying” the unpaid balance is correct. Now our first clue should have been the cookie-cutter format in which the form was completed. Basically it looked like all the broker (or note-holder) did was copy the information right off an amortization schedule. All payments were for the exact amount, all paid on the first of each month (even if the 1st was a holiday or a Sunday) and the unpaid balance amortized down to the penny.
Of course this was the typical pay history brokers provided to investors, so nothing appeared to be out of the ordinary. The deal funded, we wired the money, the broker got their fee and we booked the loan and set-up servicing. Little did we know at that time the fun was just beginning. Shortly after the borrower received his welcome letter from us, he immediately called to let us know the information on the letter was incorrect.
“There’s no way I owe $118,000 on my loan” he said. We tried to explain to him that when we bought the loan we received a pay history showing his balance and when his next payment was due. “Well what about the $25,000 I paid on my mortgage when I got my bonus last December (now 7 months ago)?” “Excuse me” was the only thing our representative could muster at first.
The borrower went on to explain that when he received his annual bonus he sent the note-holder a lump sum payment of $25,000 to reduce his balance. Upon further investigation, and numerous phone calls to the broker and seller we were able to determine that the borrower did indeed make the lump sum payment as stated.
So instead of buying a loan with an $118,000 balance, we really bought a loan with an unpaid balance of $93,000. The problem we had is we paid $108,000 for the loan. The broker made a $10,800 commission and the seller netted $97,200. Talk about being upside down.
The situation escalated to where legal proceedings were threatened on both the broker and the seller in order for us to re-coup the difference in the loan balance we purchased. The good news is after several months we did indeed get the money due to us from the seller and the borrower paid on his loan as agreed eventually paying us off. The bad news is we spent a lot of time, money and energy resolving an issue that should have been avoidable. Not to mention the relationship between the broker and our company was strained for many months and never really got back to normal.
I can not stress enough the importance of doing a good job on the front-end by getting all the correct information and asking direct questions when verifying information.
The Buyline 