Keyhole Financial

LEADERS IN THE DISTRESSED MORTGAGE MARKET

Every Loan Tells a Story


In my many years of buying and selling loans, I have found that the due diligence process is like opening a new book to reveal the story and it’s many chapters.


Let me explain...after I’ve completed my due diligence, where I have eliminated the loans that don’t fit my criteria, I then decide which of the remaining loans I want to purchase and at what price.


I start at the very beginning of each row and move across the spreadsheet telling myself a story as I hit certain fields. By the end of the row, based on the story I have told myself, I usually have a better idea if I want to buy the loan. At this point, I’m able to develop short and long-term strategies for each loan.


Below are the fields I stop upon and examples of the stories I tell:

FICO (Credit Score)

I love the FICO score as it gives you an overall picture of how the borrower is doing financially. Even more, is the ability to compare a FICO score from six months to a year ago to a current one. This way, I can see if their financial health is improving or declining. Besides the status of the senior lien, it’s the next most important factor.


State

I personally don’t put that much thought into what state the loan is in. Some investors care whether it’s a “Judicial” or “Non-Judicial” State. For me, this is less important because I don’t usually take my loans to the foreclosure stage. If you are a “foreclosurer” then I would think it does matter where the loan is located.


Interest Rate

If I see a loan that has a high interest rate, I’m thinking in the back of my mind that this would be a good “refi” or “loan-mod” candidate. Conversely, if they have a low interest rate, there’s not much strategy we can implement.


Note Date

From the Note Date, which is when the note was originated, I’m able to surmise how long the borrower has lived in (or owned) the property. Granted, it’s based on the second mortgage and not the first mortgage, which would give me a more accurate idea, but beggars can’t be choosers. Either way, this helps with my decision making because someone who’s lived in the property for a while has “emotional equity” and will work hard to stay in the home versus someone who’s only been in the house for a short period of time.


Last Pay Date

From the Last Pay Date and Note Date I can determine how many years the borrower has made payments. The longer the period, the more confident I am in the borrower.


Maturity Date

This date tells me how much longer I would have this loan assuming I can get the borrower paying.


Original UPB & Current UPB

From these two figures, I can tell how much of the original UPB was paid off. In most cases, not much, if any, is paid off. I also have a personal “sweet spot” of where I usually like my loans to be which. is between $25,000 to $40,000.


Monthly & Adjusted Monthly Mortgage

If the borrower’s monthly mortgage is over $300, you’ll probably never get that amount. You’ll end up having to negotiate and be happy with a $300 per month payment. It’s important to be realistic with these numbers otherwise you’ll pay too much for a loan and expect to be paid pre-maturely.


Bankruptcies

Aside from Chapter 7’s and Chapter 13’s that have been “Dismissed”, in general, I try to stay away from Chapter 13’s. With 13’s, they’re allowed to turn your “secured” loan into an “unsecured” loan if there’s no equity. It’s a sad, but true story. The only somewhat saving grace is that about half of the borrowers who file for Chapter 13 never end up completing their plan and so your “unsecured” loan magically turns back into a “secured” loan again.


Senior Lien Amount “(UPB) & Senior Lien Status

These bits of data are by far the most crucial when telling the borrower’s story. Regardless of if the borrower has equity, if they are current and have been current steadily with their first mortgage, this information is pivotal to your decision to buy this loan.


Fair Market Value (FMV)

Make sure you have enough information regarding the value of the borrower’s home. Just because the seller has provided you with their numbers doesn’t mean it’s gospel. Use another online real estate company, e.g., Zillow, to compare the two numbers and make sure they’re close enough. Being more accurate is going to help with your CLTV and overall impression of the loan.


CLTV (Combined Loan-To-Value Ratio)

Even though we’re going to find that most of our second mortgage loans are “under-water”, we want to be able to perhaps eliminate those loans that are beyond hope. I usually eliminate loans where the CLTV is greater than 140%-150%.


However, in telling the borrower’s story, I do look “peripherally” at all the other fields to see if I absolutely should delete the loan based on CLTV. Let’s say the borrower has a high CLTV, but also has a high FICO score and is current with their first mortgage. However, sometimes it’s just a gut call.


Break Even Point (BEP)

The BEP is just one indicator that tells you based on how much you’re paying for the loan divided by the Adjusted Monthly Mortgage, how many months it will take to get your initial capital back. If it’s too many months (usually over 40), the odds may be that the borrower has lost his/her job, or there’s a financial setback and they can’t afford to pay their second mortgage. It’s a good indicator, but it’s only one aspect of your decision-making process.


Here’s an example of a loan and the story I’d be telling myself:


Borrower: Gomez, Lilian

City, State: Doral, FL

Birthday: 6-10-1951

FICO: 773

Note Date: 6-1-2007

Last Pay Date: 5-1-2015

Next Pay Date: 6-1-2015

Original UPB: $52,628

Current UPB: $51,899

Monthly: $660.19

Adj Monthly: $300.00

Interest Rate: 14.88%

Current BK: 7 Discharged

Sr. Name: SPC

Sr. UPB: $199,808