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All notes are not made equal. In this note investing journey, investors will have to encounter good and bad notes from time to time. In this episode, Dan Deppen goes in-depth on two non-performing note case studies. The first one reperforms and turns out great. The second one not so much. If you are new to note investing, then keeping in mind these things may help you navigate the sometimes unpredictable waters of this space. Listen in to find out some of the unexpected problems you can run into so you can create a game plan to overcome them.

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Loss Mitigation Processes

What Is Loss Mitigation

I’m going to be talking about loss mitigation processes. This is a subject I don’t know that I’ve seen a lot of in-depth discussion about sometimes on some of the Facebook groups and other boards. You see little snippets about it here and there. In this episode, I’m going to talk about some of the different approaches you can take to loss mitigate, the different ways you can do it, and then get into some of the things you can do to try to automate some of these processes and create some standard operating procedures. I’ll start off by talking about what loss mitigation is. If you’re new to notes, you may not have even heard this term before. Loss mitigation is the steps that either the owner of a note or perhaps your loan servicer when they’re trying to work with the borrower to avoid foreclosure.

This means loss mitigation comes up when a loan isn’t performing, which means it either could be a missed payment or a couple of missed payments, or it could be completely nonperforming. This is where we’re trying to reach out to the borrower and work something out short of a foreclosure. This could involve a variety of different things. This could be used, could be the loan servicer. It could be calling the borrower, sending emails to the borrower, letters to the borrower or any outreach to try to come to some resolution that’s not a foreclosure. As a note owner, even if you’re buying nonperforming notes, most of the time you’re trying to avoid foreclosures. When you do end up taking a property back to your foreclosure, oftentimes it’s in rough shape. Values are often not what you want it to be or what you expected it to be.

Dealing with the various vendors when you’ve got to take care of an REO can be tough. Usually, we’re taking steps to try to not get there. If we want a perfect world, it usually is to get the loan reperforming so that we never have to take possession of the property and we can resell it. Now, mileage can vary a little bit. Some people have the strategy of buying a nonperforming note as a lower cost REO strategy. Sometimes people who are trying to get properties cheap to do rehabs and fix and flips might want the foreclosure, but most of the time, you’re not going to want the foreclosure. That’s where loss mitigation comes in.

There are three generic ways you can handle this. Number one is having your loan servicer take care of it. This is probably the most popular option, but as we get into this, there are some pros and cons to relying on the loan servicer. The second thing you can do is use a third-party to handle the loss mitigation. This is something that I used to do but don’t anymore because the vendor that I was using exited the business. You can go ahead and do it yourself. I use a mix of these things but as time goes on, I seem to do more and more of it myself. One word of caution. If you do plan on using a third-party or doing some of the work yourself, make sure you stay in sync with your loan servicer.

Some servicers out there, I don’t know what the official term is but I consider them “full-service” servicers where they want to do everything and don’t want the note holder to be involved. Those would be people like SN Servicing or Main Street. There are some others out there as well. Depending on the servicer you use. If you plan on using a third-party or do it yourself, make sure that you’re in sync with them and that everything you’re doing is in alignment with how the servicer does business. If the servicer is not compatible with the way that you want to do the loss mitigation, then you may need to consider using a servicer that it’s going to be more compatible with you.

Using A Loan Servicer

We’ll talk first about when we use a servicer for the loss mitigation. When they do their job the way they’re supposed to, it can be a beautiful thing because they can get the loan worked out. You don’t have to do too much. In theory, you’d have an asset manager at the servicer assigned to your note and they would reach out to the borrower and then keep a nice call log or email log of all their contacts. They would follow up on the regular basis. They would get it to either some kind of resolution or come back and say, “There’s nothing we can do with this borrower. You’re going to have to complete the foreclosure.”

That’s the perfect world that I don’t think I’ve ever quite had it happen like that. You have to stay on top of your servicers. Even if you’re letting the servicer take care of the loss mitigation, I highly recommend using a CRM and making notes for yourself and reminders to check on what they’re doing. Log in your servicing portal, see what they’ve done, see if they’ve called the borrower, see where things are at. If things aren’t progressing the way you want, then go ahead and follow up with them. Some of my experience with using servicers to do this work, I had some cases where the servicers did well when I was new with them and they were trying to win my business. We often fall into this mode where the servicer makes one phone call and leaves a message or sends an email once a month, and then doesn’t do anything until the next month. They then charge you a lot of money for that level of service.

When you do have the servicer doing this, you’re generally paying more per month than you would otherwise if it was a performing note. If you are going to use a servicer, definitely stay on top of them. This is one of these things that in theory sounds amazing. If they delivered the way the service is intended, it would be great. In practice, that hardly ever happens. At least it hasn’t with me. Maybe if you’re a larger fund and you have more pull with them, then you get a little higher level of service. I’ll counter that and say that for a newer note investor, this can be a good way to go. As we get into the other options, you probably want to have a little more experience before you delve into those.

I don’t mean to poo-poo using the loan servicer too much. Make sure you keep an eye on things and make sure they’re doing what they’re supposed to be doing and they’re pushing the deal forward. I’ve had issues where loan servicers have been slow and then all kinds of bad things happen. You’re not getting it to resolution, but now your timeline is dragging out. Those monthly servicing fees are adding up. If it’s a nonperforming note, the borrower is often not paying taxes and insurance. You’ve got all these carrying costs that are going along as well. If you use a servicer and they don’t do what they’re supposed to do, it can get expensive. It’s amazing how a couple of months can seem to slip by at a newer.

Using Third Parties

The second option is using third-parties for loss mitigation. If you are going to use a third-party, make sure you’re in sync with the servicer where your loan is at. If it doesn’t approve of this, they want to do everything themselves and you may need a different servicer. If nothing else, you want them to be in communication. A lot of times, even if you don’t have a servicer doing a full collection effort, they will still reach out to the borrower different things. You want to keep your servicer in the loop so you don’t have any communication gaps. There was a third-party that I used to use for loss mitigation a lot that I loved, and they were nonprofit credit counselors. They were not technically debt collectors. What’s great about them was they didn’t have to read them any Miranda.

They were true credit counselors. They were good at talking to the borrower and understanding their financial situation and understanding what they could afford and where they were at in life. They were good at putting together solutions like forbearance agreements, child payment plans and other things that not only were good for me as the lender, but that were good for the borrower that the borrower was going to be able to execute on. One of the big things as you talk to borrowers about potential agreements, there’s no point in getting an agreement in place even if it’s favorable for you if the borrower doesn’t have the ability to execute. I bought some loans before where they were forbearance agreements in place. What had happened was the previous lender asked for high payment levels during the forbearance agreement. The borrowers didn’t want to lose their home and they were scared so they just agreed.

They don’t have the ability to follow through and pay. That doesn’t help anyone out. You want to make sure whatever resolution you put in place of foreclosure is something that all the parties can execute on. Unfortunately, that particular third-party is no longer in the business because they went to focus on another startup completely in another round. They were good and cost-effective. They’re more expensive than the servicer but fast and got to a good resolution, so I liked them a lot. I had a borrower and I started a fair forbearance agreement in place. The borrower didn’t come through. I started the legal process and the borrower reached out to a nonprofit for help. In this case, it was a nonprofit called the Mississippi Center for Justice.

I got a call from an attorney from the Mississippi Center for Justice, which is a little concerning at first. First, they asked if I’m willing to work with the borrower. I said, “Yes, I always am.” What was good was they would be willing to work with the borrower as an accountability process and they serve the function that this other third-party I used to use had served and I didn’t have to pay them. They’re acting on behalf of the borrower. Nonprofits can be helpful in this situation. I have not looked around the country at other ones out there, but I’m willing to bet that there are other nonprofits out there that you can use to help with this.

Doing It Yourself

I believe there are some third-party debt collectors that you could hire. I’ve not hired any of these. I’ve seen people advertise their services before for this. I don’t have firsthand experience hiring a third-party debt collector. If you do, make sure they’re licensed because if you’re calling to collect a debt, I think it might be a nationwide at least in most areas. They need to have a debt collector license to do that. Make sure the person is authorized to do that, otherwise you could potentially get in some big trouble for doing that. Third-parties can be useful. The third one that I’ve been doing increasingly is doing the loss mitigation yourself. I’ll caution you, only do this if you know what you’re doing.

I’m not going to get into a real deep dive and all the ins and outs of how to do it yourself and how to be effective and comply with all the rules. Make sure you do know what you’re doing if you’re going to take this on. If you’re a beginning note investor, I do not recommend doing this. As you move along, what I’ve found out is I can get things resolved faster than about anyone else. I’ll give you one example. I talked about full-service servicers and how they don’t always do what they’re supposed to do. I had one a while back. The property was vacant. The borrower had moved out and I asked the servicer to contact the borrower and see if they’d be willing to sign a deed in lieu so I could move along.

For several months, they were trying to contact the borrower but couldn’t get ahold of them. They were doing the thing where they were basically making about one phone call a month and leaving a message and then trying it again the next month. They weren’t trying hard at all. In the meantime, I had started legal and I was paying legal bills to go through this process. I then found out the property had a flooded basement and had a lot of other problems. The servicer was also supposed to have the property secured. They were supposed to be doing quarterly inspections on the property, which it turned out they weren’t doing at all. When I found out all about this, I was very upset. Even though this particular servicer doesn’t like the note holder doing anything, I took it into my own hands.

The loan servicer had spent about five months and was unable to contact the borrower. I contacted the borrower right away and within 2 or 3 days, I had a signed cancellation of land contract. What took them five months to do, it took me about three days all in all. I find more and more that the fastest and easiest route is to do stuff on my own. A lot of times it’s reaching out on the phone and talking to the borrowers, sometimes emailing them. I’m at the point where I’m comfortable talking with borrowers. I’m not suggesting that you go out and do that because there are a lot of rules you’ve got to comply with. A lot of people either inadvertently or not are going to break those rules and get themselves into trouble.

The other thing a lot of new people can run into is they may not handle the negotiation well. At some point, I’m going to do some deep dives on negotiation in here. Most new note buyers go into the note world intending to work with borrowers and helping them, which I do all the time, but there are limits to that. The default mode of most people who are new to reach out to a borrower give too much too early and that can cause problems. It can give the borrower the impression they can get away with anything, so tread lightly if you start to do this. If you can do it yourself, it’s the fastest, cheapest and the most effective way to handle it.

The downside of this is it doesn’t scale well. One of the dirty secrets of nonperforming notes is they can be big time sucks. It’s all the little things, especially when you start getting involved directly with loss mitigation where the borrowers are calling you back at random times and things like that. It can take up a lot of your time, so it’s not free. It doesn’t scale that well altogether. If you’ve only got a couple of these, it’s not a big deal. If you’re trying to grow a large portfolio, you’re going to need to get some help with the loss mitigation. I’m going to talk about when we do the loss mitigation. The big push is after you buy the loan. Assuming you bought this loan as a nonperformer, you’re going to want to start your loss mitigation efforts as soon as possible. This is typically after you’ve bought the loan, the loan has been transferred to your servicer, and then after the hello and goodbye letters have gone out.

The previous servicer, they’ll do this to meet requirements. They’ll send out a goodbye letter. Your servicer will send out a hello letter. I like to wait until those go out before I begin contacting the borrower. You can do that right after you close, but it’s a little better to wait for the loan transfer and the hello and goodbye letters to go out, because then the borrower’s already been notified that, “Something changed with my loan.” That way when they get a call from either the new servicer or a third-party or from you, they’re already alert that something’s changed. If you call them the day you close out of the blue, they’re not going to know who you are. They’re not going to have any record of their loan being sold. Most people are suspicious and distrustful by nature. It’s better to wait a little bit, but you do want to get this started as soon as you can, and then of course, it happens on an ad hoc basis. Even if you have performing loans, sometimes if they miss a payment or I’ve had loans that were doing well and then drifted behind.

That’s all part of keeping an eye on your portfolio and making sure you know what’s going on and stepping in and trying to do loss mitigation as early as possible. To me, that’s the number one rule. Don’t let these things fester. If there’s a problem with the loan either at a pre-existing one, once you bought it or something new that’s developed, the sooner you can address that, the better. Part of that process which is an ongoing basis is every month I look through the portfolio and see what payments came in and which ones didn’t. Sometimes I have loans that were performing that missed the payments. Sometimes I have ones that were sub-performing that missed. I look at the whole portfolio at the beginning of the month. Usually, I do it a couple of days into the month at the point where if the borrower made a payment on the last day of their previous month, it gives a couple of business days to post in the loan service portal. Sometimes there’s a little bit of lag, but I always go through there and decide what action needs to be taken or not taken for every loan.

Any actions that do need to happen, I put those in my CRM. In my case, I use Pipedrive. That can remind me to do whatever it is I need to do. I’ll get into what some of those options are here coming up. This product, I already talked about a little bit. I could look through the portfolio. I add the activities to Pipedrive. A lot of times what I’m doing if something was missed, often if I can, I’m asking the servicer to ping the borrower. That’s usually the fastest thing. I will send a lot of my own letters to borrowers. I have a number of templates that’s ever growing for various scenarios. If a loan has been performing and the borrower out of the blue misses one, sending that letter as soon as possible is helpful. What my letter does is it says, “I noticed you missed this payment. If there’s a problem, please reach out and let us know. We’re willing to talk to you because if your loan gets X number of days behind, we may start the foreclosure process.” I hit him with that right away. I don’t know what the percentage is, but it’s high. That borrower, the following month, sends in two payments and gets caught up. Those letters are effective.

A lot of times too, it’s easier to have the servicer reach out to the borrower depending on who the servicer is. That can be the easiest way to get it taken care of. When I do send letters to the borrowers, I use Google Sheets add-in called the MergeFactory to create those letters. MergeFactory is a Google add-on, but it’s a mail merge. There are other ways to do mail merges. If it’s a spreadsheet, you have all of the data that may change from letter to letter like the borrower’s name, the address, the amount on the loan, and then you run MergeFactory and it spits out the letter per the template. Sometimes I have to make little adjustments based on the specific case. It’s good as you put down these processes for how you’re going to handle loss mitigation or write them down in some form. I happen to use Confluence, which is an online Wiki tool. I’ve got an assistant who helps me out with a lot of these things too as far as the processes to follow.

Some of these, I have short walkthrough videos and I use Movavi to do screen capture videos. We then use a combination of Trello and Pipedrive to keep track of all of the activities, when they’re due and notes, and what needs to happen. Once you get into a rhythm with some process, then a lot of these loss mitigation activities will try to take care of themselves overall. The tool for the online Wiki Confluence is from Atlassian. If there are any software engineers out there and you use a program called JIRA to manage requirements, Confluence is made by the same company. It’s used as like an online Wiki. What I like about it is I can link to Google Docs, videos and other things. We use Trello for managing our weekly tasks. I’ve got several Trello templates for the various things that we need to do. Every week I can load up what needs to be done for my assistant, and then we can track everything within Trello. It makes it simple.

In Pipedrive, one of the things I like about it is you cannot just create your activities for your follow-ups, and set due dates, you can also put in notes. I’ve got a little scheme in the notes where if I’m updating an activity, I put the date and then I put the notes because a lot of these activities may be ongoing. I might have a generic activity for loss mitigation, and then update that as I go and set the due date to when the next step in that process needs to happen. MergeFactory is a cool tool if you’re using Google docs. I can do things like put in the borrower name, the servicer, loan amounts, and then hit a button, then my borrower letters start getting created. I can quickly go through a portfolio, see what’s been missed, see what needs to happen, and start getting letters out to borrowers as needed or emails out to the loan servicer quickly.

Quick Overview

To sum this up, when you’re figuring out how to do your loss mitigation processes, you’ve got three options. You can use a loan servicer, a third-party, or you can do it yourself. You’ll need to decide what your specific processes are going to be and what tools you’re going to use to keep track of things. I shared some of the tools that I use. These are not the be all end all tools. They are the ones that I happen to use. Use whatever makes sense for you. These days it’s amazing the range of different software tools that are out there and available. There are much unlimited choices. I’m not fanatical about specific tools. If Pipedrive went away, I could find another CRM or if I couldn’t use Confluence for some reason, there would be some other Wiki tools.

Don’t get too caught up in using specific tools. Find something that works for you and then go with it. If you are using an assistant, once you get beyond a certain number of notes, it can help to scale your business, especially if you’re working part-time, which most people are. If you are using an assistant, get these processes written down because it’s going to make it much easier for them. If your assistant leaves and you have to bring someone else, having everything written down is going to save you from having to do a lot of training. It enforces a certain discipline when you have to write down your processes yourself. It often drives you to make them better. That’s always a good thing to do when you can. That’s it for this time. I hope you got something out of it. If you have any questions, you can drop me an email at Dan@FusionNotes.com or leave a comment on the YouTube channel. Until next time.

Important Links:

• Mississippi Center for Justice
• Pipedrive
• MergeFactory
• Confluence
• Movavi
• Trello
• Dan@FusionNotes.com
• YouTube – Fusion Notes
• www.SystematicDueDiligence.com

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