Diversified Investment Services

Helping investors and brokers succeed in the cash flow business using real estate notes and invoice factoring!

You are here: Home / Archives for buying notes

buying notes

Mastering Partials for Maximum Profits When Buying Notes

By

It is time to set those all too familiar New Year’s resolutions. I challenge all cash flow professionals to participate in one of my favorite wealth building strategies in the upcoming year. In the stock market wealth is built on the age old investment strategy of “Buy Low – Sell High.” While this investment strategy sounds simple in theory the practical application can be challenging. Fortunately, we have an equivalent wealth building strategy in the cash flow business with a much simpler and reliable execution plan “Buy Full – Sell Short.”

This strategy is relatively simple. You purchase the full payment stream available on a cash flow product from the holder/seller and sell a shorter payment stream to an investor. This enables a cash flow professional to earn a commission on the initial sale of the partial payment stream to the investor AND keep the future payment stream or remaining payments as a personal wealth building vehicle. This can be accomplished with only an investment of time and without the investment of personal capital.

At Diversified Investment Services we utilize a variety of methods to purchase private mortgages including credit lines, private funds, IRA’s, and institutional funds. We are constantly on the look out for opportunities to purchase the full payment stream from a note holder and sell a shorter payment stream or partial to an institutional investor. To illustrate the power of “Buying Full and Selling Short” I would like to share just two of the real-life transactions completed last year.

The Church Note

We were approached with a well-seasoned note secured by five retail strip mall commercial units purchased by a religious organization for utilization as meeting facilities. The particulars looked like this:

Sale Date 11/10/95
Sale Price $135,000
Down Payment $10,000
Original Balance     $125,000
Terms 10% interest payable in 360 payments of $1,096.96 per month
Balance $121,248.52
Remaining Term 306 months

 

We negotiated to pay $92,804 for the full purchase of the remaining 306 monthly payments. We took a full assignment and purchased the entire note payment stream from the seller. We subsequently negotiated to sell a partial of 186 monthly payments for a purchase price of $95,046. We realized an immediate profit of $2,242 on the sell of the note AND retained the right to receive 120 monthly installments of $1,096.96 each commencing in 15 ½ years.

(Author’s Update:  Wondering what happens when a note pays off early? Well that is what happened on this deal and you can read all about it at: http://noteinvestor.com/note-brokers/buying-brokering-notes-residual-income/.)

The Mobile Home Note

A large percentage of our product involves seller financed notes purchased at the time of their creation though the use of a simultaneous closing. There are frequently investment limitations on a newly created note as simultaneous closings frequently involve a purchaser or property that do not qualify for traditional bank financing, making them a prime candidate for this strategy. In this instance the seller financed note was secured by a double wide mobile home permanently attached to a one acre lot as follows:

Sale Date 10/3/00
Sale Price $85,000
Down Payment $9,000 (5% cash plus a 5.6% second)
Original Balance     $76,000
Terms 12% interest payable in 360 payments of $781.74 per month
Balance $76,000
Remaining Term 360 months

 

We negotiated to pay $63,858 for the full purchase of the remaining 306 monthly payments. We took a full assignment and purchased the entire note payment stream from the seller. We subsequently negotiated to sell a partial of 240 monthly payments for a purchase price of $66,027. We realized an immediate profit of $2,169 on the sell of the note AND retained the right to receive 120 monthly installments of $781.74 each commencing in 20 years.

(Author’s Update: This note went into default and the investor had to foreclose.  We did not receive our remainder interest but we were happy with the referral fee made at closing when selling the mortgage note.)

While we utilized personal credit lines to fund the seller and subsequently sold the partial to an investor, a cash flow professional could easily set-up a double closing with an investor enabling them to utilize the investor’s funds to pay the seller. The purchase agreement between the seller and the broker would be for a full purchase while the purchase agreement between the broker and the investor would be for the partial purchase. An assignment and note endorsement are executed from the seller to the broker and then from the broker to the investor to complete the chain of title. At Diversified, we frequently prepare this documentation for brokers desiring to use our company as the investment vehicle.

It is easy to see the long-term benefits you can realize by applying the “Buy Full – Sell Short” investment strategy. While a future income stream is the intended goal, the benefits are amplified in the event of an early payoff. As you set your goals for 2001 consider applying this strategy at least 4 times during the upcoming year. It is just one of the many tools available to cash flow professionals that enable you to secure your financial independence.

The 10 Commandments of Note Negotiations

By

Negotiation is one of the hardest areas in any industry. It can reduce a top-level executive into a sputtering seven-year-old. Negotiation doesn’t need to be a mysterious intangible entity. The information on negotiation is out there, it is just not as easy to put on paper as sample letters or how to use a calculator. Negotiation is about people and the ability to fill their needs. These are my “Cash Flow Note Negotiation Commandments” if you will.

I have condensed these into smaller bite sized pieces that can be used now.  Your ability to negotiate will be determined by your capability to excel in the following areas that are explored in this two-part article series on negotiation.

1. Never Negotiate – What? I am going to give you a two-part article dealing with negotiation and the first thing I tell you is not to negotiate? Well, in a word, yes. The word “negotiation” needs to be re-invented. If you tell two people to “negotiate” over the price of a used auto, the seller may say “$4,500”. The buyer then says “$4,000”. The seller then counters with “$4,300”. Then the buyer says “$4,150”, etc, etc. This isn’t negotiation; it is a bidding circle. The price becomes some intangible object that the buyer and seller will stumble on at some point in time. That is not what you want. Your buy price is not necessarily up for negotiation. It may be up for discussion, but not negotiation. If you are buying a note, your price should be what the note is worth (I tend to like “market value of your note”). Make no mistake, the seller does not want to have a bidding war either. They just need to know that they are getting a fair price for their note and not getting ripped off. In other words, they do not want to sell their note for $40,000 and find out that they could have got $50,000 for it. One of the hottest marketing ideas to alleviate this problem came from the Saturn Car Company. Saturn came out with set (non-negotiable) prices on their cars. Whatever the price posted was how much you paid whether you lived in Milwaukee, WI or Wells, NV. You were not going to go back and forth on a price with some mysterious man behind the curtain and you will have paid the same as the next guy three towns over. They sold a ton of cars not because people necessarily loved Saturns but they knew they were getting the correct (fair market) price.

2. It Has Nothing To Do With The Note – The sooner you understand this point, the better. This is the essence of all negotiation. In the case of a note holder, the note is just a piece of paper. It is the proof or legal document that entitles them to receive a certain cash flow. Selling the note is not the issue. Giving up that piece of paper is no different than handing you a discarded piece of Kleenex. The issue is what does that paper represent or what does that piece of paper enable them to get? Of course the seller wants money, but money (in its paper form) is not the need. The need is what that money gets them. A new home? A college education for their child? A trip around the world? A way out of that sticky IRS lien? Pay medical bills? Whatever the need is…that is what the real issue is. The issue is, can you fill that need by accepting their note as a trade?

3. If The Deal Is Good…Tell Them – Remember that the seller may not know you from Adam. When they talk to you for the first time they are nervous and possibly afraid. They need to sell what may be their only asset. They have all seen 60 Minutes and know that there are a lot of scams out there and they need to know if they can trust you. Building a relationship will be key in your success and nothing will build or destroy it faster than your level of honesty. I am thrilled when I quickly learn that the seller has a good note (ie: good seasoning, down payment, credit, interest rate, whatever) and I TELL THEM! When you tell a seller it sounds as though they have a great note, they are more apt to believe that you are being fair and honest with them. I always point out the good things in the note (first) before mentioning the bad things. You don’t want your seller under the impression that you are just trying to belittle their note to get it at a huge discount. As a side note, this is one of the best times to get an understanding of “why” they are selling the note. “This seems like a great note Mr. Jones, why would you want to sell it?” You will be amazed how many times the seller just comes right out and tells you their need.

4. If possible…Agree – This one is simple. If you have an opportunity, agree with the seller. If the seller says it is lousy that they need to sell the note at a discount, agree. If the seller wishes that the transaction could close faster, agree. The more you can agree with your seller and what they are going through, the more they will believe that you are on their side. This “positioning” will be invaluable when it comes time to mention something they may not agree with. Not to mention they may be more willing to agree with you if they feel as though all along you are on the same page and you haven’t placed yourself in an adversarial role.

5. When To Be The Decision Maker – It is easy to want to be the top dog when you are buying a deal. You may want your seller to think he/she is dealing with someone who can make all decisions on their file including the price. Certainly, that is the only way to handle some sellers. However, I have found for the most part, it is better to have someone else making the final decision. You need to position yourself to be on the seller’s side. That you are trying to get them every penny you can for their note. The perception should be that you are taking their deal to some “investment committee” that will make the final decision and that you will get them (the seller) as much as possible. I used to tell sellers that it wasn’t my money (which back then, it wasn’t). That my job was to spend (invest) the investors’ money. So, short of going to Nordstrom, I needed to get that investor’s money out and I will get them every penny I can. This “positioning” will also work well when you need to rebid due to a poor appraisal or credit. You can go back and sympathize with the seller that the value came in low and that the “investment committee” needs to cut the deal. You can even say that the committee didn’t want the deal at all but you did get them to invest XXXX dollars. Sometimes you need to be the great “decision maker” but for the most part, it is just more important that the seller feels you are fighting for them.

6. Know your seller – Sounds pretty basic doesn’t it? Understand that for the most part, a seller will not deal with someone they dislike or don’t trust. Short of the seller needing money for a heart transplant on Monday, you won’t get the deal unless you have some relationship or trust with the seller. When I say, “know your seller,” I mean that the more personal your deal becomes the better chance you have of it succeeding. Some of the best brokers spend a considerable amount of time on the phone never talking about the deal (or note). They talk about the weather. They talk about the kids. They talk about what selling the note will buy them. All this small talk helps you form some connection with the seller that is imperative especially if you need to go back and restructure the deal for one reason or another. I always kept all my seller’s names in a database. When I purchased deals direct, I would speak with 30-50 sellers per week. The odds of me remembering a person right away when they called three weeks later was pretty tough. Perhaps Mrs. Jones was going on a camping trip for couple weeks. I simply wrote in my notes “went camping / she will call in 2 weeks”. Now, two weeks and 100 calls later Mrs. Jones calls in. If my assistant tells me Mrs. Jones is on the phone I punch in Mrs. Jones on the computer and pick up the phone. “Hi Mrs. Jones, how was the camping trip?”. For that one moment, Mrs. Jones is the only person in my world (not to mention she is somewhat impressed). I would put the smallest notes down if I thought they were important to the seller. Hates Cats. Likes Fishing. Loves the Green Bay Packers (did they win last week?). Loves to Golf. Whatever. One last note. This is not some fancy form of manipulation. You need to honestly care about these people, you are just using technology to help you remember and “know” your seller.

7. Price – I mentioned in last month’s article about how NOT to negotiate. So, let me say that round numbers (such as $45,000) scream that this deal is up for negotiation and no seller will believe that you “rounded” the number in their favor. I always, always, break the offer down to the penny. Some brokers break it down to an odd dollar amount and that is OK too. For example, $45,127.00 sounds like a real thought out number. $45,127.39 sounds like you got them every penny possible. I have had numerous sellers joke about the pennies. I simply say that “Hey, it’s your .39, I would be glad to round the number for you…say $45,000?” They usually laugh and we all understand that I have put as much money on the table as possible. Which, and I believe I mentioned this last month, leads them to believe they are getting a fair, well-calculated, offer.

8. Are you the only game in town? – Is your seller shopping? Are you up against several other brokers on this deal? This is something you must know. If there is competition involved you may wish to focus on your ability to close faster or your experience in the industry or your being “local”. You are not always able to ascertain whether you are “in competition” for a deal but there are ways to try and find out. Certainly, if a seller calls you and rattles off all the parameters of their note, tells you they are not interested in a “partial” and wants to be sure that you pay title and appraisal fees you can bet that most likely they have already talked to another broker. How would they know about “partials”? Most sellers are not ready to rattle off all the note parameters unless they just had to on the last phone call. Just because you are in competition with someone for the deal does not mean that you have to run and hide (provided your bid is competitive) …just be aware. Spend more time trying to build a relationship of trust with the seller. I have made plenty of deals where I was not the highest dollar bid, but did sound like the most capable of getting the job done quickly and professionally.

9. Be willing to walk away – Although this leans more towards an article regarding tactics, I thought I had better mention it here. You have to be willing to let a deal go. When I first started I wanted very much to make every deal. I needed to make the deal and pay bills. I will tell you right now that sellers can sense this. Sometimes, oddly enough, the best defense is a good offense. Occasionally I have held firm on an offer to a seller. If I know my offer to be fair and competitive, I may not budge even faced with the fact that I may lose the deal. More often than not, the very nature of my holding firm has lead potential sellers to believe that I must really be offering what the note is worth and that the transaction is truly not up for “negotiation”. In the same vein, if you can’t do the deal, or it just doesn’t make financial sense to the seller, tell them. “If you don’t need the money right now, I wouldn’t sell and take this kind of a discount”. Many sellers have replied “But I do need the money right now”. You now have a motivated seller.

10. A confused mind says “no” – Regardless of whatever field you are in, there is extreme danger in presenting too many options. We have all been there, wanting to show someone just how much we know. I have seen many brokers run out and want to dazzle their client with their amazing calculator skills. They present the seller with anywhere from 5-9 options of how they can buy their note. It is much like walking into the Food Court in one of these Super Malls nowadays. Too many choices. I can’t decide what to eat with all those choices so I just go home and make a sandwich. Your seller is not much different. By showing them too many ways to sell their note, they just get confused (or think you are trying to confuse them) and they go home to make a sandwich. You want to keep things simple. If you are talking about notes, I give the seller a full sale option and two partials if possible. That’s it. I am available to tweak those options if they don’t exactly meet the sellers needs, but I did not confuse them out of the gate. Too much information will just confuse people. The same is true with your initial “agreements”. If your agreement to do the deal with the seller is 45 pages long with legal information that only a staff of professionals understands, then you need to revise it. The agreement should be one, unintimidating, page if possible and if you can not explain it to someone in plain English; try another version.

Widely recognized for his negotiation and deal structuring skills, Fred Rewey has worked with the most successful brokers in the industry today. From start-up home based broker to Assistant Vice President of Metropolitan Mortgage, Fred has seen the industry from all perspectives. Currently Fred provides valuable training to cash flow brokers through FindingCashFlowNotesTraining.com.

Taking a Look at RESPA and Private Mortgages

By

(This is a three part series on The Real Estate Settlement Procedures Act (RESPA) reprinted from the January – March 1999 issues of The Cash Flow Connection Newsletter.  RESPA has changed quite a bit since that time so please visit www.hud.gov for updated information.)

The Real Estate Settlement Procedures Act (RESPA) is a consumer protection statute which has drastically changed the sale, closing, and lending practices relating to residential real estate transactions since it’s enactment in 1974. If you have bought a home or obtained a loan in the past 25 years you have undoubtedly signed one of the numerous disclosures required under this federal regulation. But how does it affect the cash flow professional working with private mortgages? A general overview of this far reaching law will assist in this determination.

The primary purpose of RESPA was to effect certain changes in the settlement process of residential real estate transactions to assist consumers in becoming better shoppers for settlement services. It also intended to eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services. Additionally, RESPA requires that borrowers receive disclosures at various times. Some disclosures spell out the costs associated with the settlement, outline lender servicing and escrow account practices and describe business relationships between settlement service providers.

RESPA also prohibits certain practices that increase the cost of settlement services. Section 8 of RESPA prohibits a person from giving or accepting any thing of value for referrals of settlement service business involving a federally related mortgage loan. It also prohibits fee splitting and/or any person from giving or accepting any part of a charge for services that are not actually performed. An example of fee splitting would be a lender charging the borrower $250 for an appraisal with an actual cost of $200. Section 9 of RESPA prohibits home sellers from requiring home buyers to purchase title insurance from a particular company as a condition of sale. Section 10 of RESPA sets limits on the amounts that a lender may require a borrower to put into an escrow account for purposes of paying taxes, hazard insurance and other charges related to the property. Section 6 provides borrowers with important consumer protections relating to the servicing of their loans.

DISCLOSURES: AT THE TIME OF LOAN APPLICATION

When borrowers apply for a mortgage loan, mortgage brokers and/or lenders must give the borrowers the following at the time of application or by mail within three business days of receiving the application:

  • A Special Information Booklet, which contains consumer information regarding various real estate settlement services. (Required for purchase transactions only).
  • A Good Faith Estimate (GFE) of settlement costs, which lists the charges the buyer is likely to pay at settlement. This is only an estimate and the actual charges may differ. If a lender requires the borrower to use of a particular settlement provider, then the lender must disclose this requirement on the GFE.
  • A Mortgage Servicing Disclosure Statement, which discloses to the borrower whether the lender intends to service the loan or transfer it to another lender. It also provides information about complaint resolution.

DISCLOSURES BEFORE SETTLEMENT (CLOSING) OCCURS

An Affiliated Business Arrangement (AfBA) Disclosure is required whenever a settlement service provider involved in a RESPA covered transaction refers the consumer to a provider with whom the referring party has an ownership or other beneficial interest.

The referring party must give the AfBA disclosure to the consumer at or prior to the time of referral. The disclosure must describe the business arrangement that exists between the two providers and give the borrower an estimate of the second provider’s charges. Except in cases where a lender refers a borrower to an attorney, credit reporting agency or real estate appraiser to represent the lender’s interest in the transaction, the referring party may not require the consumer to use the particular provider being referred.

The HUD-1 Settlement Statement is a standard form that clearly shows all charges imposed on borrowers and sellers in connection with the settlement. RESPA allows the borrower to request to see the HUD-1 Settlement Statement one day before the actual settlement. The settlement agent must then provide the borrowers with a completed HUD-1 Settlement Statement based on information known to the agent at that time.

DISCLOSURES AT SETTLEMENT

The HUD-1 Settlement statement shows the actual settlement costs of the loan transaction. Separate forms may be prepared for the borrower and the seller. Where it is not the practice that the borrower and seller attend settlement, the HUD-1 should be mailed or delivered as soon as practical after settlement.

The Initial Escrow Statement itemizes the estimated taxes, insurance premiums and other charges, if any, anticipated to be paid from the escrow account during the first twelve months of the loan. It lists the escrow payment amount and any required cushion. Although the statement is usually given at settlement, the lender has 45 days from settlement to deliver it.

DISCLOSURES AFTER SETTLEMENT

Loan servicers must deliver to borrowers an Annual Escrow Statement once a year. The annual escrow account statement summarizes all escrow account deposits and payments during the servicer’s twelve month computation year. It also notifies the borrower of any shortages or surpluses in the account and advises the borrower about the course of action being taken.

A Servicing Transfer Statement is required if the loan servicer sells or assigns the servicing rights to a borrower’s loan to another loan servicer. Generally, the loan servicer must notify the borrower 15 days before the effective date of the loan transfer. As long the borrower makes a timely payment to the old servicer within 60 days of the loan transfer, the borrower cannot be penalized. The notice must include the name and address of the new servicer, toll-free telephone numbers, and the date the new servicer will begin accepting payments.

APPLICATION OF RESPA

Generally, RESPA covers transactions involving a federally related mortgage loan (first or subordinate position) placed on a one-to-four family residential real estate property (including condos, co-ops, mobile homes sold with real property, and certain time shares). A federally related mortgage loan includes most conventional and/or government sponsored loans (FHA, VA, etc) involving home purchase loans, assumptions, refinances, property improvement loans, equity lines of credit, and reverse mortgages.

RESPA does not typically apply to an all cash sale, temporary construction financing, a sale where the individual home seller takes back the mortgage, a rental property transaction, or any other business purpose transaction. However, it is important to note that RESPA may apply to certain individual home sellers that take back a mortgage should they exceed a specified number of transactions and/or an aggregate dollar amount during any given year.

Since most private mortgage purchases involve an individual seller that has provided owner financing on a one-time basis, a cash flow professional may wonder why they should familiarize themselves with the RESPA statute. The reasons are plentiful:

  • Maintain RESPA compliance by knowing when the statute is applicable or a non-issue
  • Become aware of important RESPA elements that could potentially become a template for future regulation in related industries.
  • Enhance professionalism by gaining awareness of laws that affect other real estate professionals with whom you may conduct business.
  • Develop a system which models certain requirements relating to escrow account servicing and the transfer of servicing rights when purchasing accounts to hold for interim or long term investment.

This final point will serve as a basis for the next two articles in our three part series on the Real Estate Settlement Procedures Act. For more information on RESPA you can review the actual statute on the internet at www.hud.gov

RESPA and Escrow Accounts

 (Reprinted from the February 1999 issue of The Cash Flow Connection Newsletter)

The Real Estate Settlement Procedures Act (RESPA) of 1974 enacted significant reforms in the settlement process involving federally related mortgage loans (see the January 1999 issue of CFC for a detailed definition). This article will further explore the specific requirements pertaining to escrow accounts, also known as reserves or impounds. While owner-financed private mortgages are generally precluded from RESPA, many investors and servicers of these notes wisely model their escrow procedures after RESPA requirements to maintain fair and sound business practices.

Section 10 of the Real Estate Settlement Procedures Act (RESPA) limits the amount of money a lender may require the borrower to hold in an escrow account for payment of taxes, insurance, etc. RESPA also requires the lender to provide initial and annual escrow account statements. The Department published escrow account regulations in October 1994, with an effective date of May 1995. The regulations required lenders to adopt the aggregate accounting method for newly established accounts. Lenders have until October 1997, for previously established accounts.
Section 10 of RESPA limits the amount of money that a lender may require a borrower to put into an escrow account for purposes of paying taxes, hazard insurance and other charges related to the property. RESPA also requires the lender to provide initial and annual escrow account statements. The Department of housing and urban Development (HUD) published escrow account regulations in October 1994 with an effective date of May 1995. The regulations required lenders to adopt the aggregate accounting method for newly established accounts, with an extension until October 1997 for previously established accounts.

During the course of the loan, RESPA prohibits a lender from charging excessive amounts for the escrow account. Each month the lender may require a borrower to pay into the escrow account no more than 1/12 of the total of all disbursements payable during the year, plus an amount necessary to pay for any shortage in the account. In addition, the lender may require a cushion, not to exceed an amount equal to 1/6 of the total disbursements for the year.

The lender must perform an escrow account analysis once during the year and notify borrowers of any shortage. Any excess of $50 or more must be returned to the borrower.

FREQUENTLY ASKED QUESTIONS ABOUT ESCROW ACCOUNTS
Did the new accounting method require increases to escrow payments? NO
The new accounting method generally requires borrowers to maintain a lesser amount in the account than the single-item method predominately used by lenders. However, many lenders chose to increase the escrow account cushion to the maximum allowed by law.

Did the regulations establish a new escrow account cushion? NO
Since 1976 the RESPA statute has allowed lenders to maintain a cushion equal to one-sixth of the total amount of items paid out of the account, or approximately two months of escrow payments. If state law or mortgage documents allow for a lessor amount, the lessor amount prevails.

Does RESPA require lenders to maintain an escrow account and/or cushion? NO
It is the lender’s decision whether the borrower must maintain an escrow account for the purpose of paying taxes and other items. Furthermore, neither the RESPA statute nor regulations require the lender to maintain a cushion.T

Can HUD require lenders to pay interest on escrow accounts? NO
In past years, legislation was introduced in Congress that would have required lenders to pay interest on escrow account balances, but it never passed. Some states do require interest to be paid on escrow account funds, but many do not.

Are lenders required to pay taxes on an annual basis if a discount is offered to the consumer? NO
Some lender have interpreted the regulations to require that taxes should be paid on an annual basis rather than a semi-annual basis, when a discount is available to the consumer. The Department clarified by comment in the Federal Register on May 9, 1995, that lenders were permitted (but not required) to make disbursements on an annual basis if a discount was available.

What is the disbursement date for paying escrow account items?
The rule states that the disbursement date for an escrow account item is a date on or before the earlier of either a deadline to take advantage of discounts, if available, or the deadline to avoid a penalty. The consumer and servicer in some cases may agree to an even earlier date than would normally be necessary to deliver the payment on time, if there are good reasons, such as letting the consumer get a federal income tax deduction.

How should the maximum amount allowed in an escrow account be calculated?
The following steps and example should help estimate the amount of money that may be required to put into either a new or existing account under aggregate accounting:

List all the payment amounts for items that will be paid out of the escrow account, and when they must be paid for the next 12 months (e.g., taxes- $1200 — $500 paid July 25 and $700 paid December 10; hazard insurance — $360 paid September 20).

If there is a payment like flood insurance, which is paid every 3 years, use a projected trial balance over that three-year period.

Divide this total amount by 12 monthly payments ($1560 divided by 12 = $130).

Create a trial running balance for the next 12 months listing all payments to the escrow account and all payments out of the account according to when these items are paid.

Increase all the monthly balances to bring the lowest point in the account (December -$780) up to 0.

          pmt    dis      3)  bal        4)  bal
Jun                             0            780
Jul       130    500         -370            410
Aug       130      0         -240            540
Sep       130    360         -470            310
Oct       130      0         -340            440
Nov       130      0         -210            570
Dec       130    700         -780 *            0 *
Jan       130      0         -650            130
Feb       130      0         -520            260
Mar       130      0         -390            390
Apr       130      0         -260            520
May       130      0         -130            650
Jun       130      0            0            780

Add any cushion your lender requires to the monthly balances. The cushion may be a maximum of 1/6 of the total escrow charges (1/6 of $1560 = $260).

                    pmt    dis     bal

Jun                               1040
Jul                 130    500     670
Aug                 130      0     800
Sep                 130    360     570
Oct                 130      0     700
Nov                 130      0     830
Dec                 130    700     260 *
Jan                 130      0     390
Feb                 130      0     520
Mar                 130      0     650
Apr                 130    300     780
May                 130      0     910
Jun                 130      0    1040

 

In this example, $1040 is the maximum amount the lender should require in the account. The account should fall to the cushion at least once during the year. In this example, it is in December ($260).

New Accounts — In this example, if the settlement date was May 15 and the first payment was due in July, $1040 would be the maximum amount that could be required to place in an escrow account. If your lender requires less than the maximum cushion, the amount would be less.

Existing Aggregate Accounts — In this example, during escrow analysis, the lender would compare the required amount of $1040 to the actual balance in the account in June. For example:

If the balance is $1076, there is a surplus of $36. The lender may choose to apply any surplus less than $50 to future payments, reducing the monthly escrow payment to $127, or may choose to return the surplus to the payor.

If the balance is $1090, there is a surplus of $50. The lender must return any surplus of $50 or more to payor within 30 days of the analysis.

If the balance was $940, there is a shortage of $100. This amount is less than one month’s escrow payment and the lender may ask the payor to pay this amount within 30 day or may spread it out over a year.

If the balance was $800, there is a shortage of $240. The lender must spread the collection over at least 12 months. If the lender spreads the shortage over 12 months, the monthly escrow payment would increase to $150.

If there is a deficiency in the account (where the lender has to use his own funds to pay a bill), the payor may have to reimburse the lender sooner than over 12 months. If the deficiency is less than one monthly escrow payment, the lender may require the payor to repay the lender in 30 days. If the deficiency is more than or equal to one monthly escrow payment, the lender may require the payor to repay the amount over 2-12 months.

For more information on RESPA you can review the actual statute on the Internet at www.hud.gov

RESPA AND THE TRANSFER OF SERVICING RIGHTS

(Reprinted from the March 1999 issue of The Cash Flow Connection Newsletter)

The Real Estate Settlement Procedures Act (RESPA) of 1974 enacted significant reforms in the settlement process involving federally related mortgage loans (see the January 1999 issue for a detailed definition). This article will further explore the specific requirements pertaining to the transfer of servicing rights. While owner financed private mortgages are generally precluded from RESPA, many investors and servicers of these notes wisely model their servicing procedures after RESPA requirements to maintain fair and sound business practices.

Section 2605 sets forth requirements pertaining to the servicing of federally related mortgage loans. Generally, a servicer is defined as the entity responsible for servicing the mortgage (i.e. collecting payments and applying to principal, interest, and escrows pursuant to the terms of the mortgage). The servicer can be the holder or owner of the mortgage or a third independent servicing company. Servicing rights can be sold or transferred which is usually the case when the mortgage itself is sold. While RESPA does not require the borrower’s permission to sell or transfer servicing, it does require notification to the borrower by the old and new servicer with specific requirements regarding the content of the notification.

Notice by Transferor

The existing servicer must notify the borrower in writing of any assignment, sale, or transfer of the servicing. This notice, commonly referred to as a good-bye letter, must be provided within 15 days prior to the effective date. The effective date is the date on which the mortgage payment of a borrower is first due to the new servicer.

The new servicer must also send written notification of the transfer to the borrower. Commonly referred to as a hello letter, this notice must be made to the borrower not more than 15 days after the effective date.

The time requirement for both the “good-bye” and “hello” notification is extended to 30 days after the effective date when the transfer is preceded by:

A) termination of the servicing contract for cause

B) commencement of proceedings for bankruptcy of the servicer; or

C) commencement of proceeding by the FDIC or RTC for receivership of the servicer.

 

Contents of Servicing Transfer Notices

The separate notice sent by the existing and new servicer must both contain the following:

(A) The effective date of transfer of the servicing.

(B) The name, address, and toll-free or collect call telephone number of the transferee (new) servicer.

(C) A toll-free or collect call telephone number for (i) an individual employed by the transferor (existing) servicer, or (ii) the department of the transferor servicer, that can be contacted by the borrower to answer inquiries relating to the transfer of servicing.

(D) The name and toll-free or collect call telephone number for (i) an individual employed by the transferee servicer, or (ii) the department of the transferee servicer, that can be contacted by the borrower to answer inquiries relating to the transfer of servicing.

(E) The date on which the transferor servicer who is servicing the mortgage loan before the assignment, sale, or transfer will cease to accept payments relating to the loan and the date on which the transferee servicer will begin to accept such payments.

(F) Any information concerning the effect the transfer may have, if any, on the terms of or the continued availability of mortgage life or disability insurance or any other type of optional insurance and what action, if any, the borrower must take to maintain coverage.

(G) A statement that the assignment, sale, or transfer of the servicing of the mortgage loan does not affect any term or condition of the security instruments other than terms directly related to the servicing of such loan.

Treatment of Payments During Transfer Period

During a 60-day period, beginning on the effective date of transfer of the servicing, a late fee may not be imposed on the borrower with respect to any payment and no such payment may be treated as late for any other purposes, if the payment is received by the transferor servicer (rather than the new servicer who should properly receive payment) before the due date of that payment.

Duty of Servicer to Respond to Inquiries

If any servicer receives a qualified written request from the borrower for information relating to the servicing of such loan, the servicer is required to provide a written response acknowledging receipt of the correspondence within 20 business days. Within 60 business days, the servicer must resolve the complaint by correcting the account or giving a statement of the reasons for its position. During this 60 day period, a servicer may not provide information regarding any overdue payment that is in dispute, to any consumer reporting agency.

This completes our three part series on the Real Estate Settlement Procedures Act based on information in 1999. Nothing in this article is intended to be legal, financial or tax advice. Please seek the counsel of qualified legal, financial, or tax advisors. For more information and updates you can review the actual statue on the Internet at www.hud.gov

Want To Talk To Real People? Contact Us Here