For Beyond 50's "Finance" talks, listen to an interview with Ricky Brava, a senior partner with the Apollo Financial Group on Wall Street in New York. He specializes in purchasing non-performing mortgages (also known as investing in distressed mortgage notes) and turning them around for a profit, while also keeping homeowners in their homes. He would like to talk about how this is a profitable industry and one that helps homeowners save their American Dream. You'll learn about what makes the distressed debt business fascinating. Most people are familiar with mortgages only from the consumer side as the borrower. Find out banks operate on the back end, including how mortgage paper gets traded out to investment firms. He also explains how buying this paper outperforms any other common investment vehicle.
The downfall of the American economy in 2008 left many on the brink of foreclosure. As people stopped paying their mortgage, they became owners of non-performing notes.
Investors can "pick up" these distressed mortgage notes through the banks selling them at a steep discount of 10 - 50% because they're "toxic" (for being a bad deal). This is also a way to acquire the home for low cost, about 10 - 50 cents on the dollar, because the house involved is the collateral attached to the mortgage note.
a business, purchasing distressed mortgage notes can be more stable
than stock portfolios and returns greater. Profit returns can be 20%
and higher. There's also a lot more volume in terms of homes out there.
Overall, it's a win-win vehicle for an
investor, he expressed, to purchase mortgage loans at a discount and
help with the homeowner stay in their home by giving better loan terms
for them, thus great returns on your investment capital.
There are two kinds of investors of non-performing notes: aggressive ones who want to take over the home and those, like himself, who have a moral obligation to help the borrower keep their home.
"Either way, you profit," says Brava.
Once an investor purchases the distressed mortgage note, he becomes the banker and the debt is secured by the real estate (home), making it an appealing purchase.
As the new lender, you can help the struggling homeowner(s) by offering more flexible terms on a payment plan to make good on their debt and stay on the property and rebuild to a good financial standing. The new arrangement with the homeowner can earn you a monthly cash flow. This is a far better alternative, compared to losing their home through foreclosure.
Brava, he often purchases first position distressed mortgage notes,
rather than the riskier 2nd position notes. On average, 30 - 40% of the
homeowners default on their new mortgage terms with the
lender-investor. And, 3 out of 10, he ends up with the property.
for the aggressive investors of distressed mortgage notes who prefer to
not work with the homeowners, they can resell, rent or whatever must be
done to recoup their investment costs on their newly acquired property.
Brava stresses that you have to do your due diligence when it comes to being an investor in non-performing mortgage notes, from learning the foreclosure laws that apply in the area of the home to assessing the home's value properly, including the right way to deal with the banks to obtain the distressed mortgage note.
There are frustrations to the business, like homeowners who won't talk with you or won't communicate with attorneys. Unfortunately, people do not reach back and end up losing their homes because they don't have the dialogue.
"This kind of business will not go away, but as the economy improves, the profit margins will be a little smaller," he added.