Investor says only one road to foreclosure profit
July 5th, 2008, 12:26 am · 33 Comments · posted by Mathew Padilla, Reporter
Robert Lee, a Huntington Beach-based investor in distressed home loans, says there is still plenty of pain ahead for the housing and mortgage markets.
Last year I shadowed Lee for a day and wrote a story about it. I had met him at a seminar and was impressed by his enthusiasm for investing in dud loans. Recently he and partner David Phelps have expanded their Web site foreclosuretrackers.com to cover all of Southern California as well as Clark County, Nevada. Last fall, the site just covered foreclosure filings in Orange County.
I quizzed Lee about the mortgage market, his business, and his prediction for a housing rebound. I have a feeling this interview will appeal more to housing bears than bulls.
Q. Foreclosures in Orange County have broken all the records set in the housing slump of the early 1990s. When is this bloodbath going to end?
A. I’m projecting that the market will start stabilizing in four to five years from now – 2012-2013. That’s not to say home prices will be back to their peak, which could take up to eight years. I base this opinion on proprietary information Foreclosure Trackers has at its disposal. Banks turn to Foreclosure Trackers as the first line of defense because we are defaulted mortgage experts and buyers. Banks send their portfolios to us for evaluation every week before anyone else in the nation. Our company is on the “inside track” with the banks and often times receives information first before the “outside” track – such as the government, title companies, investment firms, lawyers, real estate firms, and even competitor foreclosure sites.
Q. With so many foreclosures, how is an investor supposed to make money buying a property in some stage of foreclosure? As the housing bears like to say, isn’t buying a foreclosure now akin to catching a falling knife?
A. Precisely. There are really five main strategies for investing in foreclosures. But four of the five rely on equity, which doesn’t really exist in today’s market. An equity purchase, foreclosure auction, short sale or REO purchase can all be profitable, wise investment strategies – just not in today’s market. There is only one strategy that makes sense in this market and that’s defaulted and performing mortgage (notes) investing.
At Foreclosure Trackers free seminars, we teach investors how to “buy the loan, not the home” and “work out, not kick out” strategies for defaulted mortgages and note investing. As I said, there’s no equity in properties today. By buying the loan at a substantial discount, we create equity and we are able to turn a profit on the property while helping Americans to save their homes.
This is an example of how it works: a bank may hold a note for a defaulted 1st mortgage in the amount of $800,000. The Broker Price Opinion may state the value of the property is $600,000. This property is over-encumbered or upside down. Foreclosure Trackers buys the note for $325,000. We then deploy our “work out, not kick out” strategy of working with the homeowner and reduce the principal balance to $480,000. The homeowner gets a principal reduction of $320,000, and is able to handle their mortgage payments going forward.
We’re doing our best to get the word out so the movement will start to make a real difference, both to those looking to earn great profits and those who want to help save America one home at a time.
Q. When we last spoke, you were doing the same thing, buying up distressed mortgages and getting borrowers to start making their monthly payments. Is that a tougher business these days?
A. Business is good. Foreclosure Trackers is a resolution company created by investors for consumers and professionals alike.
Because Foreclosure Trackers has the direct relationship within the banks infrastructure, our knowledge is being relied upon by lenders, banks and servicing companies. Essentially, we are considered trusted advisers and work closely with the banks each week to review hundreds of millions of dollars in defaulted and performing mortgage portfolios.
In October of 2007, Aegis Mortgage Corporation, a mortgage lending giant out of Houston filed for bankruptcy. The courts deemed it to be in their best interest to sell all of their mortgages, performing and non-performing, before their bankruptcy could be confirmed. Two other companies had submitted bids for their entire portfolio and both waffled in the 11th hour. Foreclosure Trackers was called in and we struck a deal. Two days later, we flew to their corporate office with a due diligence team and abstracted their collateral files in depth right there in the bank’s vault. It was a portfolio of approximately $25 million. Two weeks later, the mortgages were funded.
Foreclosure Trackers isn’t always the first investor banks turn to because we really scrutinize the loan documentation and as a result pay less for the notes, but we are the one banks know they can turn to for results. Performance always outweighs pricing.
Q. Some big investors are now buying distressed mortgages. Will that help Orange County’s housing market find a bottom sooner?
A. Absolutely not, and for two reasons. First of all, those new to the business – unless they’re following our strategy – tend to pay too much for the notes they’re buying. When the dust settles, they often lose money. If they had their finger on the pulse they’d be buying at big enough discounts to earn the profits they seek and also do “work outs, not kick outs” with the borrowers. As it is, they’re only focusing on earning profits, and that approach won’t help distressed borrowers.
The second reason this won’t help Orange County hit bottom sooner is that bank portfolios aren’t typically segregated by county. They’re a mixed blend, covering regions all across the state or in some cases nationwide. The only way a specific county or city would see a major shift in the housing trend would be if mortgages within a specific region could be targeted for purchase in bulk.
Q. When is Orange County’s housing market going to bottom?
A. Orange County’s housing market is going to bottom in about five to six years. Today, the huge numbers of foreclosures are producing equally great numbers of real estate owned (REO) properties. When these REOs flood the market, they will bring house values of entire communities down. This won’t stop until the deluge of defaulted mortgages dries up and REOs slow dramatically. In the 1990s, people referred to distressed properties; today it’s the loans that are distressed. The term “distressed property” conjures images of an old dilapidated house … brand new properties with all of the best amenities are being foreclosed upon today. Until the foreclosures and REOs are under control, no housing market will hit bottom.
Q. Additional thoughts?
A. America is in a foreclosure crisis and we are offering a solution for everyone from the average Joe to rich and famous. You may see this in action soon if Foreclosure Trackers is successful in buying Ed McMahon’s loan. McMahon is an icon in America and a trusted name. If we can help him save his home it will be a great opportunity to show America how to “buy the loan, not the home” and execute the “work out, not kick out” strategy to keep homeowners in their residences.
July 5th, 2008 at 9:19 am
Great Service. Great Idea!!!!
July 5th, 2008 at 9:33 am
I wonder how the bulls spin this one.
No equity = no move up market = the whole world gets stuck in Santa Ana? Don’t think so.
We can always squat VOC, so long as you don’t touch the dirt or drink the water.
July 5th, 2008 at 10:42 am
If lenders are selling their notes at 60% discounts ($800K note sold for $325K, as this fellow claims in his spiel), then we’re going to see some really hot action in coming months.
Will there be real data on this stuff? Data that shows the discounts on notes, and data on mortgagees getting 30% or more of their debt written off? When that gets documented, the flood gates will collapse. Even the rumor of it is going to entice everyone underwater to call their lender and ask to have bad debt written off……………..
Something like that is what needs to happen. The questions are about how it is to happen - longer and slower and reltively orderly but with protracted pain for the economy? Or rapidly, with somewhat unpredictable potential for runs on banks and other financial institutions - better if it is done quickly to allow for a quicker recovery, unless it causes a financial panic.
While Mr. Lee’s take on the future of the housing market seems spot on to me, he is also a huckster touting his company. Data on loan sales would be interesting reading. Sometimes hucksters can be brilliant . . .
July 5th, 2008 at 10:55 am
The neat part of Mr. Lee’s strategy is that he’s accelerating the devaluation of real estate to more reasonable levels, which is great because any investor — regardless of what they’re investing in — knows that TIME is a vital factor in investment performance. Take the stock market for example. The Dow is in the same place today that it was a decade ago. If you’d invested in an index fund 10 years ago, you’d basically be at your cost basis. Factor in the effect of inflation, and your long term investment strategy has netted you an inflation-adjusted loss. It would have been much better to see the Dow (or the real estate market) take a much larger hit over a shorter period of time.
July 5th, 2008 at 11:00 am
Is that “lee from Irvine”??
July 5th, 2008 at 11:14 am
Lenders sell their notes for a 60% loss because the federal reserve has promised them your tax dollars, free of charge.
July 5th, 2008 at 11:37 am
Garbage reporting as usual Padilla.
This guy says banks are writing 60% off their loans, and you don’t even think to ask a challenging follow up question or ask for evidence of several examples?
This is absolutely not happening in OC. And if the lender is willing to take such a bath, they would kick out the borrower (foreclosure) and find a cash buyer for the property rather than deal with a borrower who had already defaulted once.
Sales pitch garbage.
July 5th, 2008 at 11:40 am
Matt,
I like your interviews, and I like the interview with Robert in the past, but my gawd was that a sales pitch for his services. Not that they are a bad thing, but he just could have said we need more capital to invest in distressed mortgages, would you like to invest in distressed mortgages?
And to say that the only way to make money in distressed mortgages is to invest in the notes is BS. There are plenty of homes sold at the foreclosure auction with equity. You just need cash, and there are investors there buying properties and making money. That part of his sales pitch bothered me the most. That line is unprofessional and in so many ways unethical.
July 5th, 2008 at 12:27 pm
It seems that rather than selling a note for $325K, the bank could find a buyer at $480. When there is sufficient information, there will be no more middlemen. Banks will have to come clean and mark to market.
July 5th, 2008 at 1:01 pm
So why don’t the Banks and lenders do this. Actually, I thought of this a while ago, but don’t have zillions of dollars to invest.
There will be no way to track this, unless there is a filed loan modification to find in the public records. The borrowers will prbably be too dumb to demand that this be filed, and I see lots of room for dishonesty here.
I assume that lenders don’t do this very sensible thing because this would be a mark to market and it would show them to be insolvent, which they are.
This is assuming that the fellow was telling the truth.
Is there a way to search the public records for Aegis Mtg to see if there are loan mods appearing? Surely not all Aegis’ loans were delinquent. Did they buy the whole schmiel?
July 5th, 2008 at 4:21 pm
An $800,000 mortgage, with a home value of $600,000? That is possible. A bank would sell the note for $325,000? That is absolute hogwash. The bank might sell the loan for $600,000 or a little less, but definitely not for $325,000.
July 5th, 2008 at 5:59 pm
If it was a “mortgage giant”, why was the entire portfolio only $25 million?
July 5th, 2008 at 7:02 pm
I am only in favor of any type of assistance for irresponsible homeowners if we also confiscate all cars, boats, and other expensive goodies that was purchased with Heloc dollars… sell them… and distribute the proceeds to the taxpayers.
July 5th, 2008 at 11:39 pm
I have been in the escrow business for over 20 years,,, and this is just another scam…. We are having a very hard time with the lenders NOW to reduce the payoff by $30,000.00 for a short sale, and he is leading us to believe the lenders are reducing the note by 60%???? I KNOW FOR A FACT THIS IS NOT TRUE. He sounds to be like a broker who comes in an pays the amount due to reinstate a loan ( the back house payments and late fees etc) that is going to sale, and then kicks out the homeowners. I think he is a little off when he states the market will bottom out in 5 or 6 years…The bottom for any neightborhood is a foreclosured home on your street. The value of your home will now be based upon the sale of the foreclosed home. We all know that in a normal housing market the value of your home is based upon supply and demand.
(Blogger Note: I published this comment but edited it slightly. It’s ok to argue with a person’s comments, naturally, and even some insults are permissible, but there is a line. It’s called libel. Also, in the day I shadowed Robert Lee I saw that when it comes to buying loans he submits low bids to banks and is sometimes, perhaps usually, rejected. His strategy is to submit as many bids as possible and always close the deal if accepted. No waffling. I have never heard from any consumer (homeowner) who said he or she was scammed. )
July 6th, 2008 at 7:54 am
This is horrific. So buyers who overpaid for properties now get huge equity build-up. So if a buyer did 100% financing on a property at $800K, they get a tax-free equity build-up by a write-down to $325K loan of $475K with no penalty, no nothing.
I could see buying the loan for $325K, keeping the loan to the borrower at $800K and charging them 2% for the first 5 years, and then going up 1% every 5 years. That way, at least they don’t get to walk scott free with free equity.
What a scam.
I can’t believe this guy is getting away with this. Where is the IRS in all of this?
July 6th, 2008 at 7:57 am
lawyerliz-
Banks holding current notes can’t do this. They have to book as non-performing and then start moving them off the books.
But you bring up a good point. Why can’t banks “swap” portfolios? That way they’d be able to write-off the bad stuff and replace it with “performing” assets; only I’d do it the way I was describing…go back to charging a low interest rate, and preserve the face value. That way you can “wait out” the down-turn without having horrific losses.
July 6th, 2008 at 9:08 am
This interview read like a TV interview / infomercial. This guy is one big sales pitch. Like his frequent statement
“We then deploy our “work out, not kick out”
One thing I do agree with.
“I’m projecting that the market will start stabilizing in four to five years from now – 2012-2013″.
This was more of a sales pitch than an interview.
July 6th, 2008 at 11:25 am
Great info for the uninitiated but nothing new and there are plenty of others doing the same. Trades are happening but at nowhere near the volume implied here because most banks won’t or can’t sell at 30%-40% of UPB . There is no public information to show trade levels, just a lot of rumor and false information if you are not in the business. Some paper trades in this area, some higher, some much lower so its difficult to generalize. There are also price differences between owner-occ and investor owned. You aren’t going to cut the deal mentioned above with an investor as they are likely long gone and you are headed for sheriff sale - good luck if you’re in one of the many markets where the courts are so jammed that it takes an extra 6-12 months to foreclose.
July 6th, 2008 at 12:43 pm
I agree the sales pitch here was too strong to call this an interview, and that no bank is going to sell its right to foreclose on a $600,000 property for $325,000. The example used was absurd.
Banks these days are reducing the value of mortgage balance in loan modifications all the time. I can see some banks outsourcing to third parties this work, but I think this is going to be limited to smaller banks without enough troubled loans to achieve economies of scale to do so in-house.
Downey, for example, has a huge portfolio of about $11 billion in risky loans, and about 4.5% of this portfolio is classified has having been modified. That’s about $500 million in modified loans or something like 2000 properties.
Short sales also represent banks semi-voluntarily writing down loan amounts outside of the foreclosure process.
July 6th, 2008 at 7:39 pm
I just checked out the Wall Street Journal article that John G is referring to and here’s they key paragraph:
“Banks with swelling portfolios of troubled loans tied to land and housing are struggling to unload some of their real-estate debt. IndyMac Bancorp Inc., a Pasadena, Calif., lender, is trying to sell $540 million in loans made to finance land purchases and housing construction projects. Winning bids on many of the loans were, on average, about 60 cents on the dollar, according to people familiar with the matter. But some winning bids were only about 20 cents on the dollar.”
July 7th, 2008 at 7:30 am
The article refers to winning bids placed before final due diligence. Reportedly, many, if not most bids faded after completing final due diligence.
July 7th, 2008 at 9:08 am
Matt, I guess you picked up on the “land purchases and housing construction projects” part. A little different than houses.
July 7th, 2008 at 4:22 pm
Matt - your example of Indymac selling notes at 20 cents on the dollar is completely different than what this clown is talking about. There are lenders like Indymac which have sold notes this low, but it would be on vacant land or construction loans, where they value of the property is only worth 20% of the loan amount. Big difference there.
If Indymac had a loan of $800,000 on a property, and the property was now worth only $600,000, they would definitely not sell that note for $325,000. Now if the property was only worth $350,000, then of course they might do that.
July 7th, 2008 at 9:20 pm
if i had a nickle for every call i got from a distressed debt investor…
they typically have absolutely no clue what they are doing or talking about, but happy to drop a rediculously low bid. then if they actually get hit, (due to their cluelessness) they typically fade in due dili.
i dont take their calls anymore
an 800k note, sold at 40? if it sounds too good to be true, it usually is. probably some details that are being left out of the story.
July 7th, 2008 at 10:35 pm
To clear the air why don’t all the so called pros show up to foreclosuretrackers and see them in action in Huntington Beach they open everyday at 5:00 am as they have between 10-40 people calling the east coast banks 5 days a week. These guys get approx 700 million a week to bid on I know my son calls banks for them full time.
Last year Robert Lee bought Mortgage Lenders Network- Irwin Mortgage-Dana Capital- First Indiana Bank- several loans from Wells - GMAC-B of A -Greentree- and several others. Robert Has never payed more than .50 of the BPO value since my son has worked there.
July 8th, 2008 at 4:38 am
Marcel, here from West Coast Capital inc. I’m the head trader on the perfoming and defaulted mortgage side. I will clear the air for everyone out there. Performing Scratch and dent 1st liens are selling between .58-.66 cents while non performing are selling between .39-.50 in the non judicial states and less in the judicial states. In the last 18 months the pricing has come down tremendously as there are over 300 lenders that have closed there doors and there in panic mode. If your lucky enough to have friends on the warehouse lines you’ll recive a discount of .05 more off the pricing. The warehouse lines are having margin calls and dumping there bad debt for cheap.
July 8th, 2008 at 6:10 am
People be very care with the words use choose they could cost you a heavy law suit. I’m a title rep at Land Am that has abstracted several collateral files for Foreclosuretrackers -(Robert E. Lee) . I cannot disclose the pricing they pay or the banks they buy from , but I will tell you I was in shock at the wires I was required to send out to the lenders -Servicers on his behalf. I have been in the title/escrow business my entire life and was shocked at what I learned about the defaulted mortgage arena over the last 19 months from Robert.
July 9th, 2008 at 12:40 am
Admittedly and luckily, scratch and dent, distressed debt etc isnt what i trade. i didnt even get past the guys initial comments. its a common response from myself when i have to listen to most distressed debt buyers when they call, after the first sentence it turns to a foggy hazy nightmare.
so against better judgment, i tried to read it again. It was painful, felt like i was reading a tommy vu infomercial where he got rich and hangs with babes on a yacht and so can you. but i found the part about the 800k note. Assuming it was initially an 80ltv loan makes initial value 1 million, and now bpo’s at 600k, you are buying a note on a property that has dropped 40% in maybe two years, and most likely 30% of that was in the last year. That is about as bad a market as you can buy a note, so that 600k bpo, was down to 550k by the time the author of this article finished his last sentence. Tommy vu makes it sound like you dance in there and the borrower is waiting with open arms, smile and paycheck to pay you on 480k. I dont think its that easy, and depending on the state the property is located in and a host of other factors, and costs and time involved if you cant work something out with the borrower, you may end up only getting your 40cents back 2 years from now (or less after legal and other costs). So while 40 cents is still cheap, it may be possible for these extremely risky notes on properties that are dropping in value at a 30% a year clip. The fact that the business plan is to workout a payment on a 480k loan and risk him/her defaulting a second time as opposed to just boot the borrower out and sell the property asap at even 500k (clipping a tidy little 175k instant profit) should tell the readers there is more going on here than tommy vu is leading us to believe.
Here is my takeaway from this whole greasy mess, while 40 cents in this case may be possible, it also comes with RISK if the workout fails, in the form of time, effort and costs on a property that is dropping in value 30% a year. In my opinion, its not a note I would advise a newbie distressed debt buyer to get their feet with.
feel like i need a shower after reading this article
July 9th, 2008 at 4:31 pm
You readers who doubt this article are stupid. You do want to believe to believe that your $850,00 you bought 2 years ago is now worth only $600,00 and in 1 year it will be worth mayboo $500,000 and even lower. Yes I know what im talking about I Owned 2 homes in hunt bch pais only $200,00 each 10 years ago sold both 3 years ago for over $700,00 each now I zillowed each one and they are worth high $400,000 to $520,00 and they are continuing to drop. You oc home owners are screwed I laugh at you all who dont believe the prices are still dropping they will for 2 more years how do I know Because I I do. HA HA OC HOME OWNERS YOU SHOULD OF CASHED OUT
July 16th, 2008 at 6:59 am
>is still plenty of pain ahead for the housing and mortgage markets.
Yeah, there is lots of pain ahead, brought on by a bubble where middlemen gamed things to best suck money out of real estate and real estate transactions just for the hard work of shuffling paper. More of the same is supposed to help somehow?
BTW, Sal, Marcel, and Ellen have identical awkward writing styles and crappy grammar. Sock puppets anyone?
July 25th, 2008 at 3:04 pm
This guy is a dream merchant (since I can’t really call him what he is)
He sells a very expensive seminar, he uses a Nouve Riche (sp??) clown as his front man is a complete hack.
I got suckered into his free afternoon seminar in Huntington Beach a few months back and walked out within an hour.
Complete hack, dream merchant and snake oil salesman and I can’t believe you gave him the time of day. Next you are going to have a Carleton Sheets interview and claim he is a legitimate real estate investor……