NPLA Meeting Recap: Managing Non-Performing Loans & Title Claims

Recap and Insights provided by Zach Wallin, Senior Director of Legal Operations at GoDocs

The panel discussion included: 

• • • Yonel Devico, Managing Partner, Crosby Capital 
    • Robert Talas, Co-founder, Flatiron Realty Capital and IronFund 
    • Jim Felouzis, Operations Manager, BCHH Title 
    • Jonathan Gearhart, Private Lender Title 
    • Jon Hornik, Private Lender Law 
    • Rick Pepsny, Private Lender Law 

The discussion focused on the aspects of business, title, and legal considerations affecting the ability to foreclose. 

Business

What factors do you look at when you’re entertaining an NPL to purchase for Flatiron or IronFund? 

For Robert Talas and the Flatiron team, the goal is to optimize the best rate of return and build a strategy for efficiency and longevity. The NPL trade, with the advanced rates they get from warehouse lines and repo facilities, may not be the best trade. Every deal is different, and the first step is to proceed with caution by implementing prudent business practices. 

Looking at the reason for delinquency is essential. By understanding the history of the loan, you can learn a lot from the note and see when the last payment was made. If it is a first payment default, there is a real issue, which could potentially point to fraud. Historically, you see this on a bridge refi and less so on a bridge origination. Recently, the NPL space has become more challenging, with sellers and loan brokers asking about the price you are willing to pay for the loan, which depends on the loan’s value. Today’s market is more difficult to transact, requiring a lot of diligence.

When you look at an NPL, are you looking to work out forbearance with the borrower, such as a payment plan to get you out, or are you looking to value the property and grab the real estate and make it an REO situation where you are going to reposition the property and sell it and is it different for each loan? 

For Flatiron Realty Capital, each loan is different, and they are not in the “loan to own” business; instead, they focus on buying specific assets and looking at specific NPLs. 

Yonel Devico explained that negotiating with the borrower for forbearance or a loan modification is much easier than going through the complicated foreclosure process involving foreclosure, bankruptcy, and eviction. It’s becoming more and more difficult to go through the process of bankruptcy court, landlord/tenant court, and evictions due to how busy the court system is. Crosby Capital has begun financing lenders of NPLs because it’s the same type of risk but with guaranteed payments. 

When you’re putting in an offer on an NPL, whether at 90% or 85% of the principal balance, what are you looking at for that value? Is it just the real estate value? Is it to get your hands on the property? Or is it a combination of everything? 

Every single borrower will be a fighter, according to Talas. They will dispute it in the form of a bankruptcy, an order to show cause, or by claiming the loan is a consumer loan instead of a business purpose loan. Talas advised that they always look at the loan documents, the default rate, the maturity penalty, and any remedies such as equity pledges so they can foreclose on the equity itself rather than take the property route. They also look at the property and order the title to see what type of outstanding tax and insurance issues there are. 

Once you are in the legal process and are looking at the collateral, you need to pull tax information to see when the last time property taxes were paid. While you own the property and there is a tenant there, you have the responsibility to pay taxes and insurance. There is an intricate underwriting process for these deals as you need to determine the interest you will pay on the loan if you own it with leverage, the taxes and insurance you will be paying, and when you expect to get the property back. 

Title

Can you get title insurance on NPL buys? Can you get some type of endorsement for the lender to be in the first lien position? And as a successor to the lender, do you have coverage under the policies? 

Jim Felouzis of BCHH Title answered that there are endorsements, but it’s different in every state. In most cases, the lender policy that was given at the time is still intact. A new policy is not needed as Title should step up for the new NPL buyer like they would for the original lender. Otherwise, you need to go to the underwriter who provided the commitment and the policy. 

I understand the exceptions and endorsements to title are different in each state. When dealing with NPLs, it becomes more important, can you touch on that? 

Jonathan Gearhart and the Private Lender Title team look at when the property was acquired and what was in play at the time. Was there some foreclosure activity, bankruptcy activity, and redemption period? These are the common things you are going to see that could cause a serious issue.

Legal

From a risk mitigation perspective for title claims, how often do you initiate title claims on NPLs you purchase as a way to recover? Do you see that a lot? 

Rick Pepsny noted that it’s a frequent occurrence at Private Lender Law. One of the things they do when originating a loan is to have a title file. When they run foreclosure searches, they find things that aren’t reflected as exceptions in the loan policy of title insurance but still need to be addressed. They will then go back to the settlement agent and ask how they omitted or cleared something. A separate title folder is used where they store all the proofs that were used to clear exceptions when the loan was originated, and that speeds things up when processing the default. 

With regards to the legal aspect of foreclosure, which states do you see as the worst, and which are the best? 

Rick Pepsny said, “Well, certainly, California is the worst and is very time-consuming,” he explained that on the other side, there are a lot of non-judicial foreclosure states that don’t require a lawsuit to foreclose. They are notice states, and they can be done in two to three months. In terms of the worst, you have California, New York, and New Jersey. 

Yonel Devico stated that at Crosby Capital, they purchase loans in thirty-nine states, noting that New York is the worst state to foreclose in, especially in Queens. Crosby Capital adjusts its pricing based on that because they don’t have visibility on the timeline. They must account for carrying costs (interest and taxes) and the money’s costs. He said that California is usually a 4–6-month process, but the foreclosure can be tied up in bankruptcy. 

Jon Hornik added that the problem with California is its judicial decisions are without reason, and it is reading in defenses for borrowers that don’t exist. The calculation of default interest, the in re Moon decision, which just got partially overturned, makes it very difficult to advise a client on what the outcome will be in California because there are judicial activist judges making outcomes uncertain. There are also statutes that provide for a redemption period of 15 days and then 45 days to come up with the money. There is a bidding process that everyone should understand with NPLs on foreclosures that a lender will credit bid up to a certain amount. They used to credit bid low so they wouldn’t have to pay transfer taxes and other sheriff’s fees, but now, in certain states, if you do that, someone can come in behind you and pay a little more and take the property. A lot of states are confused about what foreclosure is and what purpose it has. 

Noah Furie, who is an attorney practicing in California, explained that California realized that allowing a non-profit to come in and take the property after the foreclosure sale was not working, so now they require you to keep the property for a certain number of years. Now, most of the bidders aren’t excited about the bidding because holding onto the property for years does not meet their business needs. 

Robert Talas said that Flatiron Realty Capital fully factors in all these things into their pricing. They also factor in property taxes. The longer the duration of the loan that will be on your books, the longer you have to be careful because you’re outlaying that capital, and you have to factor that into your modeling. 

Other questions on the legal perspective of NPLs unearthed the need to get a sheriff’s deed insured with title in the state of New Jersey and trustee’s deeds in other states, as well as doing a search to make sure the title is clear. 

Is it a good idea to get a deed in lieu of foreclosure when you close your initial loan?  

All panelists agreed that this tool cannot be signed at the time of origination because courts will say you took it as additional collateral to the loan and you, therefore, must foreclose. For a deed in lieu of foreclosure to be legitimate, it must come after the initial loan documentation. If the borrower is not performing and is in default, then as consideration of the forbearance agreement, you can get a deed in lieu of foreclosure. Then, if the terms of the forbearance agreement are not kept, the lender can take back the property without the necessity of commencing a foreclosure action. 

As a percentage of all the NPLs you foreclose on, how many get worked out through foreclosure vs. how many get worked out through forbearance?  

Flatiron Realty Capital has adopted a cash-for-keys strategy. Explaining the benefits of this approach since many tenants or borrowers are willing to receive a sum of money and a release of further obligations with regard to the property in exchange for vacating the property in a timely manner and not damaging the property further. This has the potential to save the lender time and money and provide certainty to the conclusion of the process. 

From a business opportunity standpoint, are NPLs flowing right now, or is it painful to acquire them?  

The amount of NPLs has increased. The problem panelists see, however, is in the pricing, inflated appraisals at the origination, an unpaid principal balance that is higher than it should be, or the fact that sellers may not be willing to let go of the asset at their actual current value. 

From philosophy on defaulted loans, is it better to let it sit and work it out or is it better to put it right into foreclosure? 

Everyone agreed that it is better to initiate legal proceedings and speak to the borrower at the same time about potentially working something out. The legal clock takes time, no matter what state you’re in. So, it’s important to implement immediate pressure, send a default letter, and take steps so borrowers know you’re serious. 

Q&A

Jeff Tennyson: From a lender perspective, what is typically the mistake the lender made when they originated the loan that encouraged or accelerated it to an NPL? What can lenders learn from what you’ve seen on the NPL side? 

Robert Talas gave two key suggestions to avoid as many NPLs as possible. First, prove there is no correlation between a flipper and a buyer. Secondly, it is using third-party vendors for appraisals and valuation. He suggested zeroing in on who is doing the evaluations and determining if those match the comparable sales on record. Looking at valuations with a high level of scrutiny and even contacting local real estate agents to validate the value has proved very important. If the valuation is wrong and the borrower has low equity, there is a high risk of default. A combination of valuation, down payment, skin in the game, and borrower history is a good indicator of whether or not a loan will be non-performing. 

The discussion on non-performing loans (“NPL”), title claims, and foreclosures related to those NPLs was extremely informative. The business, title, and legal aspects of NPLs were explored in detail by true experts in the industry. In an environment where every single foreclosed-on borrower or tenant will be a fighter, the business practices, tips, and real-world examples shared will be invaluable to each member of the NPLA as they work through the complicated decisions and processes of foreclosures nationwide. 

Author Bio:

GoDocs is an innovative leader in automated loan document generation, transforming the commercial lending process. With a fully cloud-based platform, GoDocs provides a flexible digital solution that makes commercial loans more cost-effective to document and faster to close, all while maintaining compliance in all 50 states. GoDocs is a Corporate Member of the NPLA.

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