Today, it can be hard to look for clients in the real estate or note investing space. However, Cody Cox from Funding Factors puts a brighter perspective and bigger hope for the industry despite the economic crisis due to the COVID-19 crisis. Dan Deppen talks to Cody about his 37-year journey in the mortgage and real estate industry. Cody explains the challenges of mortgage lenders today and offers some tips on how to keep the boat floating. Join Dan and Cody as they discuss some of the ups and downs the industry has seen, including interest rate fluctuations, the S&L crisis, the financial crisis of 2009+, and the current COVID crisis.
—
Watch the episode here:
Listen to the podcast here:
37 Years In The Mortgage Industry With Cody Cox
I’m joined by Cody Cox. How are you doing?
I’m doing great, Dan. Thanks for giving me an opportunity to come in and chat with you.
It’s overdue because we’ve known each other for quite a while. I’ve been meaning to have you on. Maybe we can start by telling everybody a little bit about your background and what you do in the mortgage industry.
I’ve been in the mortgage industry for many years. I affectionately call myself a humble mortgage guy from Eastern Oregon. I started with a regional mortgage loan servicer in Walla Walla, Washington a long time ago. When you called the 800 number to talk to your mortgage company, I was the guy that answered the phone. I spent two years in that position learning all the various issues that a home loan borrower could come up with and how to try and work out with them and make sense with them, whether it be insurance, taxes or payment issues in the single point of contact. My loan numbers ended in 86 to 99.
Those were the ones that I had. Anybody that had a loan number ended in those digits was mine. In 1984, we moved to Portland, Oregon and I started working for the largest savings and loan on the Northwest and became a commissioned loan officer. I was with them for a whole lot of years as a loan officer. I made a transition over to another. At that point in time, it became the largest savings and loan in the Northwest. After the first one went out of business, I worked for Washington Mutual for 7 or 8, 9 years. I was a loan officer with them. I turned into management. I was a sales manager for them for a number of years and like a lot of the savings and loans, they went out of business as well.
I started working as a wholesale account executive for a national mortgage company as a broker. I was one of the guys that when a broker would say, “I have 100 lenders I can choose from,” I was one of those lenders. They went out of business. I worked on my own for a while. I flipped the house in 2009 and walked away with under six digits of profit on that. It worked out well. I started working for the state. Hopefully, the state doesn’t go out of business. That’s where I’m at. I manage a home loan program, both the origination and the service inside of a home loan program for the Department of Veterans Affairs in Oregon.
It is a major mortgage company. It is a program that is distinctly different from the Federal VA program. It’s our little niche. I get to manage that as well. We’ve got about $375 million under assets. We’re originating between $70 million to $100 million in new loans every year. Sometime back in about 2013, ‘14, ‘15, I started buying notes for my portfolio. I asked a guy that’s pretty well-known in the note industry, “What’s the best way for me to get involved in this and start working with other investors to assist me in funding my deals?”
He said that the best thing you can do is show the results of using your own money. I stood up a couple of self-directed IRAs. I started buying some notes. I had a couple in the Oregon area. I used one of my IRAs. We ended up doing a deed in lieu. I had to chase the homeowner through Southern California. I finally caught up with that person and signed a deed in lieu. Within ten days, we had it on the market and closed it. I walked away with a 103% return on investment in my IRA. When you do something like that, it gets you motivated to do it again. We took the next step and started working with joint venture investors.
I stood up a company then called Trinity National Holdings. We are in the process of liquidating all the assets in that particular program in favor of a new model. Trinity got in a little bit of a dilemma. I don’t mind sharing this story with you because it could be benefiting other people who are looking to do joint venture investors. There’s something called the Howey Test. Howey Test deals with securities. If you are going to bring in investors and if those investors’ sole purpose is simply to fund your transaction with an expectation of a return and if you’re the lead note purchaser on that and you’re going to do all the work, the government, the SEC and a lot of state regulators consider that as security.
You either have to have your security registered or you have to have it online with them that shows that you are meeting the requirements to issue securities. I see a lot of people out there that are still using joint venture funding and doing all the work. Technically, that’s a violation of the security law. I had somebody here local that was not one of my investors. All my investors were happy for the most part of what we were doing. That particular person here locally who I was trying to help, trying to mentor, trying to get them started in the note business, decided to call the Oregon Securities Office.
They are required that once somebody calls in, even though I wasn’t doing anything technically wrong, I had to go through an investigation procedure with him. One of the things that we know as note investors are we try and understand the law. If we understand how the law comes into play, at least on the state level, is they start what’s called a legislative concept. Somebody gets an idea that we need a law about a particular subject. They write up a legislative concept submitted into the legislative, who turns it into a bill.
Provided that the bill goes through all the scrutiny they go through, all the committees being voted on in the open house, goes over to the Senate and it gets signed by the governor of the state. It then becomes law. It gets added into what’s called the statutes or revised statutes. We all know what the laws are and are able to research the various laws of a particular state. The thing that happens that we very frequently, forget to do, or maybe we don’t know what to do, is when that law becomes law and it gets submitted to a specific agency to administer that law, that agency writes out rules on how to administer that law.
Oftentimes, we know what the law is, but we fail to dive into what the rules are that administer that law. At the end of this investigation by the state, there was one little rule that I missed. We negotiated with the state. They find me a little bit, not very much. We decided after some advice is basically to rebrand. We are in the process of liquidating Trinity National Holdings and all the assets on that. I’ve got 5 or 6 notes left that we’re working through and stood up a new model. Part of it involves being what I call my media magazine.
I’m an online media magazine, which is where my banner of Funding Factors comes in. That’s what I have online with Facebook, LinkedIn and a number of other places. I have an emailer that I started gearing up again. It’s all under the banner of Funding Factors. That’s a magazine that’s all things related to note investing and mortgages for that matter. We also stood up a fund. I can’t speak too much about the fund, but we have that going. That’s what my model is. The model’s changed over from dealing a lot with nonperforming notes to establishing cashflow and dealing with performing notes. We’re in the process of building that up. We are into it. It’s working well. We’re getting close to deploying on that. That’s where I’ve been in the last few months. I’ve been trying to build my databases. I’m trying to get ahold and make contact with a lot of asset managers to look for a product. Where we’re going into the next few years is working this fund. I’m excited we’re going to work with that.
When you started in the loan business many years ago, was that when interest rates were super sky-high or was that after that?
They were still in double digits at that time, but I was on the servicing side of it. All those loans that I dealt with were from a servicing perspective. There were a lot of different kinds of loans, debt payment loans, FHA type things that I had to learn how to deal with. When I made the switch over to the origination side of things, the first week that I was a commissioned loan officer is when the loan rates went into 9.9%. They went to single digits for the first time.
Liquidity is key to make acquisitions. Click To TweetThat was in March of 1986. I became a commissioned loan officer then. That first week I took eighteen loan applications. If I took a loan application, if somebody wasn’t already ready for me to sit at my desk, I turned around because that’s where my old IBM Selectric was on the back. I started typing out verifications of deposits, verifications of employment. That was the time when we all huddled around the credit machine and waited for that stuff to type off on Tuesdays of each week. There’s a little history there. I’ve seen a few things. It’s like I tell my kids, “I was born at night but not last night.”
It would have been a lot harder to work from home like everybody’s doing now with COVID and everything.
There were no laptops. There was no internet. There was no wider type of thing. It was IBM that came out with old Lotus 1, 2, 3. You might remember that.
I do because my dad used that up until the 2000s. He had used it for so long and only used it for certain things, so that worked. That was the first spreadsheet program that I learned when I was like ten. Where do you see things going over the next a couple of years or what are your plans for note buying as we go ahead? There’s a lot of uncertainty and a lot of things are up in the air right at this particular moment.
The key that’s going on now is liquidity. On our side as note purchasers, hopefully, we have the liquidity or access to it to make acquisitions when that time comes right. On the servicing company side of things or maybe the note sellers, there’s a lot of conversation about lack of liquidity. When a mortgage servicer in the big boy era, I call it the big boy type of things because it’s a little different than the servicers you and I might be used to. They signed servicing agreements that they have to use their capital to advance out funds. They have to use their capital to make sure that investors still get paid.
There’s a squeeze of liquidity on that. They expected to get worse as more and more borrowers are failing to make their payment. The liquidity is a requirement by the feds that they have a certain amount in backup so they can make sure they can continue servicing. Oftentimes what I’m seeing, and my email is simply flooded with a lot of tapes coming through from a variety of different sources. The non-QM agency, a lot of scratch and dents are coming out because that’s secondary market in a lot of ways, which is essentially closed. They’re looking for a place to sell these notes, these tapes. Hopefully, guys like you and I are in a position that we can take advantage of that.
I like to think of it as another opportunity to help homeowners too. We’re in it for investors, but we’re also in it for the homeowners. One of the things I’ve said in the past is I spent the last many years putting people into houses. I want to finish my career keeping people in their houses. It’s a nice opportunity to live forward and say, “This is something that we can take advantage at our level because the big servicers, they’re more concerned about their liquidity, spreads and servicing value. They’re not apt to help that loan-level borrower.”
Here’s another thing to think about. The government came out with an announcement about forbearance plans. The CFPB has some stuff out, but none of these servicers have staff to deal with the forbearance requests that are coming through. That’s more of an incentive on their sides to try and sell some paper
It’s to reduce their workload if nothing else.
There is a number of different reasons they would want to do that, but having a trained staff because what’s the curve on that is going to be the training curve on that. There are a lot of things happening in that realm that I found very interesting. Guys like you and I are pretty well-positioned to help out to release some of that burden and make a win-win for everybody.
I’m thinking if I was a big loan servicer, even if you knew you needed staff, it would be hard to staff up when everybody’s working from home. You can’t do it, but it seems like it’s going to be a bigger challenge. It’s going to be a slower input.
In my day job, I’m trying to hire somebody. I’ve got a position that we’ve made a decision on. A number of different things that we’re trying to do there, but how do I fill that position? I could still probably do recruitment, but how do I interview that person? I suppose I can interview it over Zoom or whatever type of thing is, but how do you train them? How do you get them in the office? Those are all the challenges that a lot of companies that are hiring are having.
I know from my project management days as an engineer, if you needed staff on a project and you had to bring people on, you often had to train them up on that project. It would slow down the people who were already on it. If you wanted to bring people on, you were going to have to pay a price in productivity before you started gaining again. That’s got to be brutal on these servicers that are already neck-deep in paperwork and emails. To your point, it’s probably easier to start selling some of those loans.
For myself, I thoroughly enjoy teleworking. I like it a lot. I’ve got my work system set up here. We’ve got a VPN that we go in. Fortunately, I’ve got an excellent staff that is very creative and intuitive. They take care of things, for the most part with minimal involvement by me. Plus, on those downtimes, when I’m not dealing with that during the course of the day, there’s other stuff that I can take care of. I thoroughly enjoy that. The part of it is oftentimes being a note investor requires you to be out in the field as you’re working with other various investors or other contacts and socializing and things like that.
I used to go to the local Portland area Real Estate Investor Association meetings. Those are all not happening anymore. There are a lot of things on both sides that are a whole new way of life. The thing is we don’t know how long it’s going to last. It could be sooner. I know at least in the State of Oregon, we’re basically at the stay home, stay safe until the end of April. I know there are other states, like Virginia and Florida all the way into Maine. I don’t know where you’re at as far as Colorado.
We’re on full lockdown. It changes all the time. I can’t remember the exact date they’ve said before. It’s at least through April. I assume whatever it is, it’ll probably slide out a little bit before it’s all said and done. I’m not even trying to predict when it’s over. I’m doing my thing.
That’s what I’m doing, trying to keep my head down. I have a manager that said, “Keep your head down. You’re willing to ditch and keep doing what you do best.”
How are you adjusting your pricing? Are you baiting any of the tapes that you’re getting?
I’m playing and role-playing more than anything else because I’m not quite in a position to submit an active bid. Our efforts are trying to develop a little marketing plan. I’ve spent a lot of time during this downtime and even prior when the previous issue that I referred to concluded that is developing a better and bigger database that I can search for note sellers. It’s ballooned up to almost 4,400 names. I’ll be pairing some of those back. Those are asset managers or people that look like they have access to notes. We’re trying to find a way to get that out in segments. That’s where we’re at on that side. I’m trying to make the conversation to build up my investor base as well.
The answer to your question, Dan, is I’m not quite in the position to make bids yet. I’m practicing my bids and paying attention to a lot of you people out there and what you’re doing, the comments, reading the newsletters. I’ve got newsletters coming in from a number of different people and a lot of different financial gurus. They are trying to find out if we were going to make a bid 70 basis points, are we’re going to back off the 62 or 60 basis point? There are some sellers out there that are probably willing to take that haircut because of their need for liquidity. It’s a grand opportunity, but again, you got to be careful because even though you may be able to get into a little better discount than you did a few months ago, there’s also the thing where you have to be careful about what that value is, the asset value or the value of the property itself may have a decline as well. It’s a little bit of a juggling act. You hope you get it right.
In a joint venture, you're looking at one asset supplied, secured by one set of dollars. Click To TweetIt’s been a tough one because there’s so much uncertainty. I’ve been operating on the theory that at some point we’ll have a pretty big wave of non-performers in the market. I don’t know if that might take a while to filter through the system. Some of that may take twelve months.
I have a theory about those non-performers you refer to because they’re probably ones that you can get back performing quickly and easily. A small percentage of all go all the way through the foreclosure. These are people that they were hung up. They went non-performing because of this Coronavirus situation. Assuming that passes within a relatively quick time and hopefully, the forbearance that went on with some of the other major servicers before they sold these outs. There may be a better opportunity to get those re-performing than they were back in 2010, 2015 timeframe.
Hopefully, this is more transient. If someone is employed at a place that’s shut down for a few months, hopefully once that gets back open again, there’ll be working and it’ll be a transient. I don’t know how much underlying damage will get done to the economy when you shut a major portion of it down for that long. That’s new territory. I don’t know if there’s ever been a time in history where anything like this has quite happened. We’ll be in touch afterward too. One of the things I’ve been doing when I’ve had some time is doing a lot of research on sellers. I’ve been building a map of the market. I haven’t started reaching out to them yet because I’m waiting to see how things settle out a little bit. Depending on what I lay into and what I find, I may need help to take it down. You mentioned the big boy world of loan trading. They’re usually trading in relatively larger amounts that are hard for an individual.
You make a good point there that it is an opportunity for guys like yourself and some of the other people that we do know to join forces to agree. If somebody wants to sell out at $25 million tape, that we can’t take it down by ourselves. It’s an all or nothing situation that the group of us could probably take that down jointly and make that happen. That’s the way to do it. One of the things I wanted to make sure I talk about in my model change, going away from the non-performing joint venture type of things over to performing fund type base is spreading the risk.
That’s an important thing for us to look at is that typically in a joint venture you’re looking at one asset supply secured by one set of dollars. All the risk is focused on that one particular asset. Whereas in the fund model, that risk gets spread over all the other assets in the fund. That’s an important thing to think about when we’re going into whatever is supposed to happen or whatever’s going to happen here in the next 6, 12 to 18 months. I’m trying to mitigate that risk and spread it over your entire holdings is an important part of what I’m trying to do.
I agree because I’ve had that happen before non-performers where I’ve run into a couple of bad surprises on the inside but you couldn’t have known about before. People get upset when it’s one note, but if that was 1 of 100 across the fund, it all washes out and doesn’t matter. How are you going to approach performing notes in this environment? I’ve been trying to think about how to model those and I’m not quite sure. Some of them will flip non-performing. I’m guessing some percentage are going to miss payments and then hopefully come back. I haven’t been able to wrap my head around, is this going to be 10% of loans or going to be more?
A statistic I saw that came out from a hedge fund was that in the height of the economic recession that we had here in 2010, 2011, and 2012 that the Fannie Mae delinquency rate was 5.6%. Is this something that’s going to be more than that? It’s hard to tell at this particular point in time. I’ve also seen some charts that talk about that show the unemployment claims that occur during that time. All of a sudden, the spike that went straight up here. How are you going to deal with that? There’s got to be a way to mitigate it. You have to be smart about your analysis and be a little bit conservative right now. Know that their opportunities are there. If you spread the risk over a number of different notes over the fund model. If 7% to 8% of those go non-performing, the other ones are still performing. That’s 93% that are still are performing. I know that oftentimes when we look at the worst-case scenario, but I don’t want to lose sight of the best-case scenario.
If you price for the worst-case scenario, you’ll never buy anything or close on anything. That fund model does make it a lot easier when you can spread it across several bets. I’m pretty close to wrapping it up. Anything else you wanted to cover while we were here?
It’s going to be a fun ride. For me at least, it’s been a pretty interesting ride. I feel I’ve recovered from it pretty well. I’ve kept my half and we’re about ready to do something that is going to be pretty phenomenal. One of my goals is to do what you did and that’s to do this full-time. There is an opportunity for that to happen. I feel very blessed that I still have the day job that I have. I also see awesome things coming out on road and I look forward to that. That’s more my thought is. I keep plugging away to the prize of that high calling that I know is right outside there.
As terrible as this whole crisis is, at some point for note investors, it will create some opportunities. Some silver lining to all the bad stuff.
As I said, as we get the opportunity to help more homeowners, more borrowers stay in their house and that’s one of the things we have to keep in mind as well is that we’re here and providing a positive service to everybody else. That’s what makes it a win-win for everybody involved.
I’ve got an email from a servicer where a borrower said they lost their job and asked to move two payments to the back of the loan. What was nice was they had a signed letter from their manager at the restaurant. I responded and said, “Yes, I approve.” I had spoken with the borrower previously so I sent her a text and said, “I got this. No problem.” Cody, thank you very much.
You’re welcome. Thank you again.
I appreciate it.
I’ll talk to you soon.
Important Links:
- Cody Cox
- Trinity National Holdings
- Funding Factors
- https://www.Facebook.com/fundingfactors/
- https://www.LinkedIn.com/in/codylcox/
- https://Anchor.fm/cody-cox1
About Cody Cox
Cody Cox is the Executive Officer of Funding Factors, LLC a Note Investing media company. Mr. Cox has 37 years of experience in the mortgage industry. From a humble start as a Customer Service representative with a regional mortgage servicing company in Walla Walla, WA, he has held positions in many different aspects of mortgage lending. He has been a mortgage loan originator, experience in FNMA underwriting, a Wholesale Account Executive for a national mortgage company, a Vice President, Sales Manager for a national mortgage lending company, to his current position as the Principal Executive Manager for the Oregon Department of Veterans’ Affairs OrVet Home Loan Program, overseeing an annual new loan production of $100 million and a loan servicing portfolio of $375 million. He has also served as a volunteer President of Northwest Real Estate Investors Association, the Portland, OR area investment association.
Cody has been investing in notes for his own portfolio since 2015. He is well-known in the note investing community and has garnered many influential relationships. Cody consistently contributes to the note community by authoring articles, videos, participating in webinars and conferences.
Cody L Cox
Funding Factors, LLC
503-784-1417
Love the show? Subscribe, rate, review, and share!
