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Probably just about everyone reading this knows about the high yield opportunities available from investing in mortgages and trust deeds. However, a couple of recent events gave me some new insights into this business that I would like to share.
First, we are not naïve. We realize there are some investors who buy these notes in the hope and anticipation that the homeowner will fail to make payments and the home can be foreclosed thereby providing the investor with a windfall profit. I was, however a little shocked at how far some will go to make that profit.
A servicing client owns a note that had been performing until the husband of the family died. The surviving spouse missed a couple of payments and the asset manager worked with her to set up a payment schedule that could get her back on track. After reviewing her financial position the asset manager and homeowner agreed that she could afford a monthly payment of $450 per month down from $600 until she could get back on her feet.
The homeowner had equity. This plan was submitted to the investor who flatly refused to accept this payment and reported that he expected the homeowner to sell the home since she could not afford the $600. Is this why we are in this business?
The very reason this investor was able to buy this note at a discount is because that was the very attitude the bank took when the homeowner got behind with them. No alternatives, either pay the loan balance or sell the house. (Perhaps because of the homeowners hardship, even the bank would have been more understanding than this investor)
In my opinion, a number of alternatives exist that would benefit the homeowner and the investor alike. Here would be my offer as the investor. I would accept the $450 as an interest only payment for 12 months at the end of which time we would review her financial situation and adjust her payments upward, hopefully back to the $600. This $600 payment would be made for the next 12 months after which the payment would rise to $625 per month. This would in the long term increase the investors return and keep the homeowner in the home, which should be a goal.
I recently attended an IRA workshop where an IRA expert was teaching on self-directed IRAs, hence my second revelation. I was shock at how many were in attendance who had all their IRA money in CDs earning less than 2%. I showed a couple in the back of the room a technique we showed one of our clients who is using the technique to increase her yield significantly.
Here is the technique. Mary (fictitious name) purchased a repreforming 2nd loan yielding 15%. The loan has 260 months left and he she paid $69,151. Mary has a friend who she offered a 9% return. Isaac thought that was a great return, so Mary sold him one-half of each monthly payment ($450) a month for $51,401.
Mary now has $17,750 $(69,151 minus$51,401) invested in a note returning $450 per month for 260 months. Mary’s yield- 30.38%. When you have the opportunity to earn yields like this, why do you need to take advantage of a homeowner already having problems? Can you think of another investment that offers such creativity potential?