Last week I talked about how you can increase the ROI on your note deals by decreasing borrower confusion, and gave some examples. This week I have some additional examples.
Borrower has no idea how to resolve delinquency
This is probably the most common example of confusion. The borrower is behind and may be receiving letters from their servicer. But they are confused (and often scared) because there may be a large reinstatement amount that they are unable to pay. They sometimes go into “ostrich mode” and ignore it, but often when they try to call the servicer they can’t reach the right person on the phone. Or if they do speak to someone that person doesn’t have the authority to help resolve the issue and come up with potential solutions. While I don’t contact borrowers directly, I do send them a letter with my contact information, which they can also get from the servicer. If they call me I have 2 key advantages over many large lenders.
1) Because I most likely bought the loan for a large discount I have a lot of leeway to make a deal with the borrower that can get them paying and allow them to stay in the home.
2) I have the authority to make whatever kind of deal I think makes sense, and don’t have to wait on authorization from someone else. If it is a note where I have a joint venture partner I will give them the opportunity to review any forbearance / trial payment plan / loan mod agreement before it is implemented. But so far I haven’t had any of them object to these plans. In a future newsletter I can discuss more on how to put these plans together.
Not understanding the value of their home
Borrower’s often have no idea what the value of their home is. I’ve seen cases where it was greatly increased in value since they bought their home in the 2010 time frame. I have also run into other borrowers who have a very inflated idea of what their home is worth.
In the case of the former I had a borrower who stopped paying and went through the forfeiture process, and they lost a large amount of equity. If this borrower was willing to be evicted instead of making the payments, she could have sold the home on her own, paid off the loan, and walked away with a decent chunk of change. This particular person seemed to have a lot of issues in general…. but it was clear she didn’t understand the value of her home and it led her to make some very poor decisions.
The flip side of this is when borrowers think their home is worth more than it really is. An example of this was a time when I was negotiating a cash for keys, and the borrower wanted more than I was willing to pay because he thought the home was worth about double what it actually was. I ended up just waiting him out a little and in the end he accepted my offer. Sometimes a smaller amount of cash in hand is better than no cash.
Confusion about escrow
My last example is confusion about escrow. Borrowers often have no idea how much their property taxes are. They often don’t understand that their needs to be an insurance policy in place, or what force placed insurance is. This gets compounded by servicers who can sometimes set up the escrow incorrectly and collect the wrong amount. One example is a loan where the servicer was collecting way too much in escrow, and it began to affect the borrower’s ability to make payments. You can prevent these issues by double checking the tax and insurance amounts and verifying that the escrow amounts collected are correct.
There are many ways that borrowers can become confused through no fault of their own. If you can watch out for these sources of confusion and work to mitigate them, you will see better returns in your portfolio.