TriMark Capital Funding, Inc.

“Most of us have seen and heard a lot about the problems in the sub-prime mortgage market. It appears now that the credit and default issues are also causing tremors in the Alt-A and prime markets. I have spoken with a number of brokers who want to better understand how these issues in the “conventional” market are affecting those of us working with “private” notes. After all, we are dealing with seller financed transactions that have no connection to the broader market….right?

While seller financing is a different animal than a conventional “bank” type loan, it is important to understand that we are not insulated from the current storm. Keep in mind that mortgage loans, no matter what type, are the byproduct of the purchase or refinance of real property. Whether the loan is made by a bank or an individual, the final result is a mortgage loan. As we have all seen, mortgage loans rarely stay in one place very long.

Right when you get comfortable making your mortgage payment to one institution you find out that your loan is on the move. You may go through two or three different “servicers” before your loan reaches its final destination. This may be a bit unnerving, but the buying and selling of mortgage loans is an important part of an economy with a lot of moving parts. When one of those parts breaks or malfunctions, the whole thing can come to a grinding halt. This is not to suggest that the problems in the mortgage market are going to shut down an otherwise solid economy but we should certainly expect a bumpy ride.

Many mortgage loans, whether institutional or private, end up as part of a “security”. For example, a bond being sold on Wall Street may well be comprised of a large bundle of residential mortgage loans, hence the term “mortgage backed bond”. These bonds are bought and sold (traded) as part of the complex machinations of what we call the “market”. The market includes the trading of equities, commodities, currencies, etc. Our concern here is the bond market and, specifically, the market for mortgage backed bonds.

To make a long story short, the market for mortgage backed bonds is currently almost non-existent. The widespread defaults in the sub-prime loan pools started a wave of panic in the mortgage markets that has made “mortgage” a dirty word on Wall Street. So how does a storm on Wall Street cause problems for a note broker on Main Street? The simple answer is a theory taught in economics 101….supply and demand.

When Wall Street loses its appetite for mortgages the whole system becomes “clogged”. Mortgages that were being sold or securitized into bonds are now “stuck” in a system that is backing up like a clogged drain. The number of willing buyers for mortgage loans is decreasing [dramatically] while the number of [performing AND non-performing] loans on the market is increasing [dramatically]. When our drain is clogged and begins to overflow our natural reaction is to bail water. The mortgage sellers are doing the same by dropping their prices in an effort to prevent the overflow.

Eventually, the clog will clear up on its own as Wall Street regains its appetite and recovers from this case of sub-prime indigestion.

What do we do in the meantime? Our only choice is to adjust to the market fluctuations and ride out the storm. To make it through to the calm waters we [need to better educate potential note sellers]. Sellers have tunnel vision and often ignore what is going on around them. All we can do is provide an honest assessment of their note or their property [based on current market supply, demand and valuation] and move on to the next one. I have already been laughed at, cursed and hung up on by people who have no idea what is happening in the broader market and really don’t care [to hear about it or how it affects the selling price of their note]. They want what they want for their loan and think they will get it if they keep calling other [mortgage note buyers].

I think it is clear that high LTV’s are to be avoided as that is one of the primary reasons we are in this mess. Buying a home is a commitment and part of that commitment is a down payment. A down payment is money that has either been saved by the buyer for this purpose or it may be a gift from a parent or friend to help fulfill the dream of home ownership.” ** [Blog author comments have been added in brackets].

Let’s consider some short term guidelines for the current seller financed real estate market. If you are considering carrying back a seller financed mortgage in order to sell your property, these general guidelines will help you create a note that will require the least amount of discount when you sell it:

• Avoid high LTV – get a minimum of 10% CASH down payment. You can reduce LTV further by carrying back a 2nd mortgage for an additional 10%.

• Understand LTV – We calculate Loan to Value by using the most recent selling price of the property – NOT THE APPRAISED VALUE.

• Buyer Credit Is IMPORTANT – get a tri-merged credit report for buyer and spouse so you have a good idea of their tendency to pay their bills on time. FICO mid-score should be 625 or higher. Anything below 600 in this market will be difficult, or impossible, to sell and will require a larger discount.

• Interest Rate Is KEY – We currently recommend a MINIMUM of 9.5% to offset the risks of seller financing in this market and absorb the bulk of the discount when you sell your note. Lower interest rates will require a larger discount to make the note attractive to investors and that translates into less money in your pocket.

• Financing Term Is Important – We currently recommend interest-only with a 5 to 7 year balloon. This will provide sufficient time for the buyer to repair their credit if necessary and should be sufficient to weather the current mortgage crisis and put them in position to refinance out of the loan. Exit strategy is important and giving a 30 year term will require a larger discount.

• Pay Attention To Underlying Obligations – If you have an underlying mortgage that you intend to continue making payments on (a wraparound mortgage or all-inclusive wrap), be sure that the underlying balance is less than 75% of the current value (selling price) of the property or the note may be difficult or impossible to sell. This can be mitigated by getting more cash down payment from the buyer and doing a principle reduction on the underlying mortgage.

The bottom line is that the mortgage industry and the seller finance industry are not dead.

For more information about selling your owner-financed real estate note or mortgage note or to get a free, no-obligation quote click here: Sell Real Estate Note.

** Excerpt Noteworthy Newsletter 12/2007 www.noteworthyusa.com. Travis Creed of Avalar LLC 800-361-7992 Fax 501-907-1595.

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