Charter Financials. Portfolio Profits. A Guide to working with Non Performing Loans

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1 Charter Financials Portfolio Profits A Guide to working with Non Performing Loans

2 How we got to where we are Today! In 2008 the banking and mortgage industry suffered an unprecedented collapse, one like we have never seen in the history of our country. The entire financial system was on the verge of going under and was ultimately bailed out by the U.S. government. What followed was the Great Recession and millions of individuals lost their jobs and thus their ability to pay their home mortgage loans. This downward cycle culminated with millions of homes being foreclosed on, property values around the country diminished, and with banks being stuck with literally hundreds of billions of dollars worth of loans on their books that were now delinquent or non performing. The definition for a Non Performing loan is a loan that has not been paid on for over 90 days, but has not yet been foreclosed on. With billions of dollars worth of Non Performing Loans (NPL) on their books, banks now had to make choices on how to deal with the problem. When a loan fails, the banks first option is to foreclose on the home owner and take the property back. When this happens, the property the bank takes back is now considered an REO Property, REO stands for Real Estate Owned. The next path the bank can pursue is to allow the home owner to sell the home for less than what is owed on the loan; this is known as a Short Sale. A third option for the bank is to try to work out new terms for the home owner, this rarely occurs because most banks do not have the capacity to do this on a large scale. The final option for the banks, and the one that we are working with, is the banks can bundle some or all of their non performing loans together into what is known as a pool and sell them off to investors. When the financial crisis originally took hold of our economy, most banks were reluctant to sell their non performing loans because many of them simply were not willing to let these assets go for the price investors were willing to pay (which hasn t changed and is still around.40 cents to.60 cents on the dollar). With an estimated $100 Billion plus in non performing loans still on the books of banks around the country, there is plenty of opportunity for investors and brokers to take advantage of what is really a once in a lifetime opportunity. BROKERING NON PERFORMING LOANS

3 Why would a bank want to sell their bad loans at such a discount? When a bank lends money to a home owner they are counting on regular monthly payments coming in on a continual basis, thus allowing for the bank to make a good return on their money. A bank never lends money with the hopes that a payer will stop making payments so they can take the home back, even if the home owner places a large down payment on the home. The last thing a bank wants to deal with is someone who doesn t pay their mortgage payments as agreed. As has always been the case with bank lending, a small percentage of loans will always go bad and banks have traditionally been able to handle these defaults with no problem. However, with the crash of 2008, banks started suffering defaulted loans at a pace never seen before and most simply were not able to cope with the staggering amount of loans that were not being paid on as agreed. With loses mounting for many banks and pressure from regulators to keep their capital reserves at a certain level, the best option for many banks was and still is to simply sell off some or all of their non performing loans. It is not only the banks with problem balance sheets that choose to sell of their bad assets, many banks are now becoming stronger and it makes more sense for them to once and for all put the past behind them and get rid of their toxic assets. How do I find Non Performing Loans Portfolios? There are a few good methods that you may use to locate pools of notes; the best is to start with your local bank, the one you bank with. If you have a relationship with your local bank then you have an automatic in with the person you need to speak with that makes the decisions on how the bank deals with their distressed assets. The next time you are at your bank just speak with your contact and ask him/her who it is that handles the banks distressed assets, also known as special assets or non performing loans. If your bank is a small bank and you happen to know the President, just visit with him directly. Start out with some small talk then let him know you are partnered with a company that purchases non performing loans and see if the bank is actively trying to sell their bad loans. If not, then give him your business card and tell him to contact you if/when the bank reconsiders. The next best method to use is to simply cold call banks. Remember, we are looking to purchase non performing loans from all over the country so you are literally free to call on any bank in the country, with the exception of: Bank of America, Wells Fargo, Citigroup and Chase (we already have established relationships with each).

4 The best banks to call on are the regional banks or smaller local banks. Chances are these banks do not get very many calls from people asking them if they want to sell their loans. All banks have bad loans but it is better to target your calls to banks that you know are in trouble and who are more likely to sell their bad loans. The best way to find these banks is to Google troubled banks. This will help you find sites that list or mention banks that are in trouble, here is an example: Another good way to find non performing loans is through LinkedIn. LinkedIn is the business worlds Facebook. Everyone that is working this business should create a free profile on LinkedIn, remember to be professional in all of the information you place in your profile. Once you have created a professional profile, then you can begin connecting with all types of other professionals, and this includes people who work at banks and handle their distressed assets. Once you login as a member of you will see that you can search for other individuals or you can type in keywords such as non performing loans, distressed asset manager, special asset manager, etc. and you will get a long list of people who handle these types of bad loans for their banks. You can then send them an invitation to connect with you. Once you are connected you can then them and let them know you are in the market to purchase non performing loans. Also while you are on LinkedIn, you can join groups that focus specifically on non performing loans and you will also want to join our group Note Brokering. Who do I ask to speak to at the bank? When you cold call the bank you should ask to speak with the person who handles the banks distressed assets or non performing loans. Using this method can be very lucrative but sometimes can be frustrating because you will get voice mails and will have to leave messages, with few people calling you back. This method is truly a numbers game, meaning you might have to make 5 or 10 calls just to get a dialogue going with one bank officer. What should I say to them? When you make contact with the correct person you will want them to know that you have partnered with a national purchaser of non performing loans and you would like the opportunity to bid on their non performing loans.

5 Sample Dialogue Good morning, my name is your name, I am a loan acquisition specialist for your company name and I am calling you this morning to see if your bank has interest in selling any of your non performing assets. What to do when they do have loans for sale? If the bank does have loans they have interest in selling then you have two options moving forward. Option #1: Just send us the name and contact information of the bank officer you spoke with and we will work the deal from that point forward. Option #2: Continue to work with the bank to request their list of loans (we refer to this list as a tape ). PLEASE NOTE: If you choose to obtain the list yourself, the bank might ask you for Proof of Funds (POF). This is simply a letter that shows you have the ability to purchase their loans. If the bank insists on having Proof of Funds, then you will have to turn them over to us so we can provide that information to them in order to obtain their list of loans. However, if the bank agrees to provide you with the information on their outstanding loans, then ask them for two things. 1. A Tape : This is an Excel Spreadsheet of all the loans they want to sale. The bank should have their loans in this format. If you need a blank tape then please use the one below Pricing Expectations: We always would like to know a ballpark amount the bank is looking for. This is because there is a lot of due diligence that must be done on these types of loans and we want to make sure we are able to offer what the bank is asking before we begin that process. What is the process once I submit a tape? Once you are in possession of a tape just submit it to us via (send to tape@charternotes.com), remember along with the tape we need to know the pricing expectations of the bank.

6 When we receive this information, we will then begin the process of analyzing the tape so that we can make an Indicative Bid for the loans. Indicative Bid: This is a bid that is an indication of what our offer will be. In laymen s terms you could say it is a ballpark of where our offer is, subject to due diligence. Indicative bids are always quoted in a percentage, for example: We might give an indicative bid of.50 cents - on the dollar. Let s say you submit a tape with a combined outstanding note balance of $10,000,000 then our offer, subject to due diligence, is $5,000,000 or.50 cents on the dollar. If our indicative bid is accepted by the bank then we begin the due diligence process to complete the transaction. This is an exhaustive process that requires the investor to look at each payer and property on an individual basis, with many factors considered. Since tapes can consist of 100 s of notes, this process can take anywhere from 2 4 weeks on average. Once this process is completed, the purchase is consummated and the loans are transferred to the investor and the broker is paid their finders fee. What happens to the home owner when we purchase the loan? Non Performing loans are purchased with the goal of working out the loan with the home owner. This could mean possibly reducing the principle amount that is owed and also reducing the interest rate. This can be used as a selling point to a banker, letting him know that not only will he get the bad loan off his books but that the home owner will not, in most cases, be foreclosed on. IMPORTANT POLICY ANNOUNEMENT Charter Financial will only consider these types of transactions when we are able to work directly with a bank. We will not consider any portfolio package when we are not allowed to speak directly with the banks staff.

7 Portfolio Parameters Minimum Portfolio Size = $5,000,000 This is the appraised property value amount Will consider smaller portfolios on a case by case basis Purchase Non Performing Loans in All 50 States Purchase both Residential and Commercial Portfolios Residential Appraised Property values should average at least $100,000+ Prefer Owner Occupied No Land Only First Position Notes Only Commercial Property values should average at least $500,000 First Position Notes Only WE DO NOT PURCHASE REO PROPERTIES Agent Referral Fees Fees vary from transaction to transaction, but generally we pay a referral fee of - one half of one percent (.5%) - for all loans purchased. This fee is a percentage of the dollar amount that is paid for the purchase of the loans. For example: If we purchase a portfolio for $10,000,000, then your fee is $50,000. You are also free to arrange payment from the bank in addition to our fee. If you are working with other brokers on a deal that we fund, then you and your co-brokers will have to work out how you split the fee from our company.

8 Common Abbreviations ARM Adjustable Rate Mortgage A loan that has a varying interest rate. BPO Brokers Price Opinion An educated evaluation of a properties value by a real estate broker or similar professional. CRE Commercial Real Estate CV or CVM Current Value or Current Market Value LTV Loan To Value A Percentage of the Loan Amount to the Value of the Property. Example: If a loan is for $80,000 and the value of the property is $100,000, then the LTV would be 80%. NDNC Non Disclosure Non Compete Agreement between buyers and sellers that ensures that brokers will not disclose proprietary information about the seller and also ensures that brokers will get paid. NPL Non Performing Loan A Loan that is at least 90 days late but not foreclosed on. POF Proof of Funds A request by a seller that proves a buyers ability to purchase. REO Real Estate Owned Refers to when a bank has to foreclose on a property and has taken back the property. UPB Underlying Principle Balance The payoff balance on a note at a given time.

9 Common Terms Amortization Term The length of time a note is paid on. Arrears When a note is not current, ie 90 days in arrears = 90 days late Daisy Chain - When there are multiple brokers involved in a transaction. Distressed Asset Another name for a non performing loan or note. Indicative Bid A bid that indicates an approximate offer for a loan portfolio, subject to due diligence. Maturity Date The day/date a loan is due. Non Circumvent Agreement An agreement usually signed by brokers that protects that each will get paid on a transaction and will not go around the other. Performing Loan A loan that is being paid on as agreed. Pool A group on notes owned by the same bank that are lumped together, usually with the intent of selling them. Short Sale When a bank agrees to accept an amount less than what is owed. Tape A name given to a spreadsheet containing information on a pool of notes