H OUSING N EWS R EPORT
February 2016
The second position loans that Silver purchases are more deeply discounted because they are subordinate to the first position loan and therefore more likely to never yield a return. But because of the discount, the second loans that do yield a return often yield a very high return, according to Silver. “When you are dealing with seconds, it is high risk and high reward,” said Silver, adding that the truest test of the quality of a second position loan is whether the first position loan is current or not. “You are either going to get a home run or a strike out.” Silver’s primary strategy with the second position loans is to negotiate a modified, lower payment with the borrower so that the borrower starts paying again and Silver can collect the monthly cash flow from that performing loan. To accomplish that strategy, however, his first step upon buying the loanmay seemcounterintuitive: starting the foreclosure process to get the borrower’s attention so that they will talk to him. “Because a lot of these borrowers have not been paying for years and years … I figure the best way is to get their attention with the demand letter and start the foreclosure
someone who is saying ‘you’re one my foreclosure this month.’” Thompson jumped into the world of NPLs in 2014 after he was laid off from his day job as a mortgage banker. “I had gotten involved in real estate investing while I was working, and the world of notes was the least populated,” he said, explaining his real estate investing strategy was to “go where there is less fish.” Less competition fromother investors translates into bigger discounts compared to other real estate investing strategies such as buying properties at foreclosure auction, according to Thompson. “Inherently you tend to buy at a decreased discount because you’ve had (fewer) hands touch it by the time you get it. When you buy at a foreclosure auction, there are other things that would have happened along the way that would have decreased the spread,” he said, noting that he sources loans directly from banks and hedge funds rather than going through third-party brokers. “If you are buying just off a website then you are probably going to lose a little bit of money. But you are also taking on less risk.”
Phillip Silver NPL Buyer Orange County, California
“ Because a lot of these borrowers have not been paying for years and years … I figure the best way is to get their attention with the demand letter and start the foreclosure process. Our ultimate goal is to work something out, but the toughest thing is to get the borrower to contact you to work something out. ”
High Risk, High Reward Second Loans
process,” he said. “Our ultimate goal is to work something out, but the toughest thing is to get the borrower to contact you to work something out. Our intent is not to foreclose; our intent is to get the borrower to call us. … We go down that path to get their attention.” Silver said sometimes the borrower will hold out until the last minute before agreeing to a loan modification. “Sometimes they’ll wait until the day before the foreclosure sale to work something out,” he said, noting that is usually too late to stop the actual foreclosure sale. “Typically you’ll still go through with the foreclosure process and then try to work something out after foreclosure and possibly unwind the foreclosure depending on the state.”
Phillip Silver buys non-performing loans from a third-party broker website, but he buys second position loans, which are inherently more risky and therefore come with a bigger built- in discount. Silver said he started buying NPLs three years ago after he was priced out of buying residential properties in Southern California, where he lives. He said that properties in the “Inland Empire’s” Riverside County that he previously was able to purchase for $100,000 had risen to the $150,000 price point. “The yields on it just weren’t making sense to me, at the price point,” said Silver, whose day job is in commercial real estate. “With $150,000 you can buy 10 to 15 second notes, and those are going to be all over the country.”
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