'Private Mortgage Lending'
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| "Fortune 500 Company Discontinues Health Insurance for It's Retirees..." |
Social Security Trust Fund --
Now a Portion of the General Fund, and Subject to the National Debt . . .
Major U.S. Corporation
Declares Bankruptcy to Avoid
Payment of Unfunded Pension Debt . . .
Impossible? No, I believe if you read your daily newspaper, study the financial
journals, or listen to many of our most respected economic forecasters, these are just mild manifestations of the
economic fears faced by many of us as we plan for our future.
Where, then, is the
solution?
Stocks, Mutual Funds, CD’s, Bonds,
Yes, but…that puts us right back in the system we are concerned
about. In addition our results, our 
security will be the result
of someone else’s decisions…. Someone who may very well have a
goal adversarial to our own, i.e. generating commissions (churning) or simply generating management
fees.
With the best of intentions, the market is still controlled by external forces, totally outside of our control. Riots in ???? and our portfolio loses 20%… the President wakes up with a headache, and we lose 20%… conversely, one of our companies develops a marketable cure for cancer and, “Happy times are here again,” but always out of our control, Good enough for a portion of our assets; however, there must be a better way! OK, how about Treasuries, Muni’s, or other Federal Instruments ..Yes, but…. the modest return may not adequately hedge against inflation.
All right then how about moving
offshore?
I’ve heard lots of folks are heading to the Islands to
protect their personal assets. No thank
you! When we analyze the potential of overseas investing, we
come to the realization that a portion of the forces driving up our stock market is the foreign moneys being invested here. Why? Well, despite our economic fears, despite our personal concerns over the value
of Republican vs. Democratic leadership, there is a certain inherent security in a free
society. There is no dictator, demi-god or the like with the
ability to simply nationalize or take what we have. So if we eliminate moving outside the safety and security
of the U.S. Constitution, if we understand that, yes, Swiss banking may be very secure. But they charge you to maintain an account, rather than pay you for the use of your
demand deposits.
We must find an alternative primary investment medium.
First,
I think it is an important part of the discussion to recognize that in anyfinancial plan, we must have
diversification (asset allocation). We have always
recommended that a percentage of our clients’ investments be held in cash for emergencies, and a percentage
put in equities to take advantage of the opportunities available as our corporations grow. But then where do
we take, where do we place, where do we hold, what do we utilize as our primary investment medium? As always,
we are brought to a question and the question is the same, whether it’s a corporation, a partnership, a mom and pop business or simply
your family. And that is, “why.” We must sit down and ask ourselves why, what is the
purpose, the goal, technically called “the mission statement.”
As we board our financial vehicle, to get what we want, we need to have a clear picture of our target. We must have a ticket. A ticket, by definition, requires a destination. So many of us have simply stepped up to the window of economic opportunity, put down our money, without a clear understanding of the trip we were undertaking.
At Grand Central Station in New York City, when you go to the man or lady, as the case may be behind the brass bars and say, “I want to ??------”
Before you establish your primary investment medium, your financial vehicle, you need to know where you want to go and to understand the type of vehicle you want to use.
Let us create a hypothetical situation. A family, economically secure, steady income from earnings, from CD’s, mutual funds, a few mixed stocks, maybe a few attractive prints, signed and numbered, a nice tourmaline, a couple of rubies, maybe an emerald in the vault, and maybe just a little too much cash in their cash management account, in their IRA, in their pension fund, checking account all currently earning less than 5% annual. That’s OK because safety is preeminent. We would like a better return … where ? No anticipation of immediate retirement, or maybe retired now … but that’s a function of choice.
What we’re looking for is a vehicle... something that can function pretty well on auto pilot, with limited risk, good record of safety of principal and maybe even have the potential for a home run here and there.
Well,
you have just described the world of private lending. You can be the
bank. You can use criteria 
similar to the tried and true
formulas of the banking world, but shifting the primary decision criteria to
the value of the collateral or security provided, rather than the credit worthiness of the
borrower. An awareness of this difference is the very essence of understanding
private lending. The inflexibility of
our financial institutions, the endless red tape, but most of all.....Banks, Insurance Companies, Mortgage
Companies, Institutional Lenders operate with blinders, they only see themselves as lenders, not possible, not
potential or even the ultimate owners of the security offered. They analyze the loan based on the credit, the
character and the ability of the borrower to repay. Then, for the frosting on the cake, they look to the
security.
We make Happy -- Happy Loans!
| We are very happy if we are repaid as agreed. We earn an excellent,
in fact a well above average yield... Even more important we are Happy if the borrower should get
confused as to their priorities, not putting us at the very pinnacle of their obligations,
therefore become for some unearthly inexplicable reason delinquent... we get the house... and
since we never are above the 60% of the value we are buying good property at 60 cents on the
dollar. Thus, Happy - Happy Loans. Why not try one, You'll like it! |
The
classic paradox, “Why is it so much easier to obtain a loan for a vacation than a mortgage on your
home?” Simply because it is easier for the
institution to underwrite, analyze, evaluate the decision process 
for the potential of getting a steady stream of monthly
payments on a vacation loan than a
mortgage. Private bankers or lenders look the other way. We are only concerned with the value of the
underlying collateral. We fill a need for those folks interested in investing in real estate, in buying houses
that need to be fixed up, in buying houses that as they sit are largely unacceptable, in buying houses after a
divorce, a business failure, an illness, or some other interruption in a normal steady stream of earnings.
This takes our borrower out of the acceptable credit worthy, high FICA score
borrower. We are very happy if we are
repaid as agreed. We earn an excellent in fact a well above average yield... Even more important we are Happy if the borrower should get
confused as to their priorities, not putting us at the very pinnacle of their obligations,
therefore become for some unearthly
inexplicable reason delinquent.… We get the house… and since we never are above 65% of the value we are
buying good property at 65 cents on the dollar. Thus, Happy - Happy Loans. Why not try one, you’ll like
it!
Our borrowers, might very well be the fireman, who buys one or
two houses a year, fixes them up in his off hours and then resells them for extra money. Maybe a retired builder, still keeping his hand in doing one or two houses a year to
supplement whatever savings or retirement program he has. It might be John and Mary, each the result of second
or third marriages with some credit baggage from their previous relationships. Might be someone like Tom,
“Professional Landlord,” who provides good quality housing for moderate income folks, but just doesn’t look good
on paper, and so forth. These 
are not the typical loans
that your Savings & Loan and local bank are even requested to make. No, 97%…95%… 90%… or even 80% Loan to
Value loans here.(Loan to Value is the relationship of the money or investment at risk to the professionally
evaluated security.) Our typical transaction might be an $80,000 appraised value, where we will lend $48,000.
That is 60% of the appraised value at 15% for 3 years with a Balloon, and if the loan is paid off early we
will increase our yield because of a prepayment penalty.
Before I can expand, or get into the details we need to be sure we are operating from a common data base, speaking the same language. So let me ask the question, give you the answer, and if I haven’t asked your question, there will be a toll free number at the end of this report where you can call us. We surely do not need to elaborate on the value of having our money appreciate at rates from 10%-18% rather than the available rates for CD’s or Money Markets today. Certainly, this is a program well suited for a Self-Directed IRA, Pension Fund or other tax sheltered entity, we are simply magnifying the results by sheltering the cash flow.
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First, are these loans Government guaranteed?
No, they have nothing to do with any Government, State, and Federal agencies, however the rules and regulations we operate under are both Federal and State. Underwriting decisions are made by the lender (you), with information provided by the broker.
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Is this some form of mortgage pool or other common collection of money in which I will participate?
No, you will own 100% of the loan with all supporting documents in either your name or your assignee.
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How much money do I need?
Well, we have requests for loans as small as $5,000 and up from there. That decision is your decision, and again is based on your goal or mission statement. And since we are dealing in percentages, the return you get will be based on the capital you have working.
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Who collects the payments?
Your choice. Many of our clients like to be in personal contact with their borrowers. They like direct communication and enjoy receiving the check from the borrower in their mailbox. They enjoy the repartee and discussion of why a payment might be delayed and the general personto-person interaction. On the other hand, a larger portion of our lenders prefer to have their investment treated in a more peaceful manner. They utilize a licensed mortgage service. These folks handle the selling, collection, processing and simply deposit cleared funds in your account. (These costs are always borne by the borrower as an additional expense, but not a reduction in your ROI.)
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How long will I tie up my money?
Well, we are dealing with folks, human beings, so there can’t be a definitive answer. Yes, you make an initial decision going in by structuring the instruments in which you are interested in investing, whether they be 1-year, 3-year, 5-year or even 10-, 20-, 30-year mortgages. That’s your decision up front, but it then becomes a function of the borrower and his needs and requirements. Therefore, to preclude the erosion of return and increase of ROI, we always add a prepayment penalty. The fireman fixes up the house and then resells it. Although your money is only out for 6 months you get paid for 9 months… the 3-month prepayment penalty. It doesn’t take a rocket scientist to see it is a dramatic increase in net amortized yield.
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What about the details, the specifics? What makes it all happen?
It all starts with a phone call. After reviewing a potential loan and finding it is within the parameters of your established criteria, your broker will offer you the opportunity to fund the loan. Going back to our example, your broker will give you the address of the $80,000 house, the
present condition, or goal or direction of
the purchaser, and if it seems of interest provide you with his opinion of this investment. Of
course, all closing costs are paid by the
borrower, and your return is based on your investment or a pure ROI (Return on Investment).
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And the Big Question??
OK, Mike, I understand all this, but you know I have been a stock market, mutual fund investor all my life. If I want to go to cash, I want to go to cash. These folks couldn’t pay me off just because I want to go to cash, so where’s my liquidity?
All of our privately funded loans utilize standard universally acceptable paperwork. There’s an active market for all forms of financial instruments. Just as we are discussing loan originations in this report, we have many clients who’s area of expertise or specialization is the purchase of existing financial instruments. Your mortgage or loan is convertible to cash, based on its desirability in the marketplace. Of course, I would presume that you might have to take a small discount, but that becomes a function of the instrument itself. No different than your securities portfolio cash flow being a function of the desirability of your stock at any moment in time. Liquidity is there, and I would anticipate no more than 10-14 days to go to cash on any of our private loans. Just call, and we’ll be glad to handle all the details.
OK. Now we know what you are talking about. We’ve got a common language. Let’s get down to the nitty gritty. We’ve got a vague idea of who it is that borrows our money. But come on Mike, why don’t they just go down to the bank? Why would anybody want to pay me 8%-10% or even 12% when they can get their money at the local bank for 5% or 7%? I read in the paper every day that loans are easier to get than ever before, the banks are overloaded with money and if you even breathe, you can get a loan.
Nope, that’s just plain not the way it works. Sure, Mr. & Mrs. Do It Right, pay their bills on time, have a job with a Fortune 500 Company, three credit cards, no late pays, one used car paid for. They live in suburbia, never had a problem in their life and are just moving from the house with the blue roof to a house with a green roof. But they’re not our clients. We have a varied selection of clients from folks who for one reason or another do not meet the criteria of the lending institutions, the self employed, the located, but in all cases they are highly motivated to own the subject property.
Our clients may be investors, buying houses to make a profit. As we said before, they are folks who for one reason or another are not deemed institutionally credit worthy. In some cases they are people who just don’t want to open up their entire financial world to a bank with its 1100 pages of paperwork for a simple loan, but would rather pay the larger interest rate, provide a large equity cushion to protect the investor, and operate in a more simplified mode.
Remember our safety, our investment decisions; the ultimate security of our loans is based on the underlying collateral.
We make Happy, Happy Loans!
What is a Happy, Happy Loan? Well, we’re real happy if the loan gets paid on time, paid as agreed, because we get a good interest rate, an excellent return on our investment and our investment vehicle is on track, on course and moving full speed ahead. But, we are even more happy, in fact doubly happy, if for some reason our borrower should get confused. By confused, I mean he finds there’s something more important to do with his money than make the payment due to us. His confusion leads to our profit. Remember, way back when we were talking about the criteria we looked for in our investment vehicle. We wanted something that might possibly offer us a chance for a home run. Well, there it is... a confused borrower.
Our collateral is worth a whole lot more than the principal amount of our loan… in our example, an $80,000 house vs. a $48,000 loan. So what can we do? Lots of choices. First, if it’s just a few days and we are servicing the loan ourselves, we get a late fee. That increases our yield. If our loan is being serviced professionally, they keep the late fee as part of their payment, but of course, we don’t have to make collection calls. But if the loan gets past the default stage, in most cases 15 days, we have a new set of choices. We can demand payment in full (including our prepayment penalty) or we can allow reinstatement with or without a fee. Remember what I said, Happy, Happy. A confused borrower simply means a larger return to the investor.
What if
he still doesn’t pay? Again, more choices. We have a group of investors just sitting on the sidelines like
vultures waiting to pounce on confused borrowers. If they don’t pay, just call me and it’s odds on they will
cash you out, take over the loan and go
for the property. And why not? To pay you off, 
in our example, takes about $48,000. Value of the
collateral -- $80,000. Potential profit - big bucks.
Hold it. Stop! Why would I want to give up the big bucks?
Nobody says you have to, it is always your choice. Many of my clients simply want to be involved in a passive investment. Payments coming in, no hassle, no complications. But others love the opportunity to make a home run, a big Home Run score, a capital gain every now and then. A confused borrower is their chance to maximize the potential of their investment.
OK, where’s the catch? What about divorce, bankruptcy?
Just as in every business venture it’s always smart to visualize the worst, anticipate the negative and be prepared well in advance. Divorce, bankruptcy, illness, loss of job. None of these things affect us because we’re not lending based on the borrower’s ability to pay. We are lending on the value of the collateral. We have a secured first lien position and for example in the case of bankruptcy, while we will be prevented or stayed from further action upon the filing of bankruptcy, a simple form presented to the judge showing our secured position creates the lifting or removal of the stay, and it’s back to the races. Any of the other mishaps that can occur to our borrower, or simple confusion time would be a direct path to additional profits.
With real estate as our primary collateral and our investment at no more than 60% of the appraised value, we are in good shape. We can expand on the problems of Chapter 13, second mortgages, nice people needing help, but all of these are nothing more than an extension of previously covered suggestions. Our loans are Happy, Happy. We are always in control. We make an affirmative decision that this is a situation we are comfortable getting into, and that should be that we would like the collateral better than we like our money. There is nothing that can happen which will startle us, shock us or make us unhappy. We either receive our money, getting an excellent ROI, or we end up with control of an asset worth far more than our money.
A win/win situation.
OK, sounds good. Where do we go from here? I’m ready to get started. --
Not yet. I think we need to take a moment to review the security of your investment. Major Financial Services, Inc. is not the only organization offering this type of investment. But we feel that we have taken the steps necessary to provide you with the best possible package insuring the maximum conceivable security for your hard earned dollars. We will always provide the following documentation, and I would strongly suggest that should anyone suggest any shortcuts to this documentation, you run, not walk to the nearest exit.
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First and foremost no loan is ever funded without Title Insurance. That is a policy issued by a recognized insurer, guarantying the position of your loan, first or second as the case may be, insuring that the borrower has the right to use the collateral as security for the loan, that there’s no one else in title for example, and that the title is not clouded in any way by previous judgments, loans or liens. In other words title insurance assures you that you will get what you have contracted for.
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A copy of the Dec sheet followed by the policy of insurance naming you, the investor as a loss payee.
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A copy of the mortgage or trust deed (the original will be mailed to you after recording,) and included in the mortgage instruments, a rental property addendum. (an addendum providing for receivership, assignment of rents, and inspection provisions - in case of default).
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The original note, the evidence of debt.
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A current appraisal, within 6 months prepared by certified and institutionally approved appraiser.
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An affidavit of no liens, an affirmation by the parties indicating no work has been done and not paid for, nothing which can generate a future claim on our security.
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Pest or termite report, to assure us our collateral is not endangered by insect infestation, dry rot, or other problems.
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Optionally, we like to have a copy of the credit report, a 1003 loan application form, and a survey.
| The security of your investment is the quality of the
paperwork. There are no acceptable shortcuts! |
OK, I like it. Just two Questions left.
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What if I send you the money and I don’t get a mortgage?
You don’t send me the money. All moneys are sent directly to the closing agent, which will be an attorney or title company, with an instruction letter. This simply tells them that when they have all of the documents we just reviewed, signed, and ready to go, then and only then do they disburse or lend the money. Nothing happens until the mortgage and note and all the ancillary paperwork have been completed.
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Well then, how do I use my IRA or Pension Plan?
Your trustee or director of a self directed program will simply send the money with instructions to the closing agent. The loan will be issued in the name of the tax deferred vehicle and all payments made in that name.
I guess you have answered all my questions, and I would like to get started. What do I do first?
Call 727-593-LOAN (5626) or 1-800-335-0256.
Tell us how much money you have available and when, or fax us at (727) 593-3152, with the attached investment lending criteria worksheet.
PS…. I am sure I haven’t answered all of your questions in this
brief report. Please don’t hesitate to call to get the elaboration, the additional explanation you need to
complete your understanding of the many variations available in Private
Lending.
PS: There are other ways to participate in the paper business…
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2nd Mortgages
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Defaulted Mortgages
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Factoring Receivables
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Commercial Real Estate Mortgages
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Commercial Paper
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Car Paper
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Viaiticals
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Title Paper
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Lease Paper
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Etal
Well beyond the constraints of our short report, however we are knowledgeable and in a position to be of assistance for any of the above. That said, here is some personal advice. Get a couple of hundred good solid 1st Mortgages or Trust Deeds under your belt, and enjoy the cream of the industry before you attempt to delve into the depths.
References:
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Private lenders, who have agreed to allow questions. Call for list.
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Sun Trust Bank - Nancy Soifer Manager, Belleair FL
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First Union Bank-Jenny Mazgaj, Manager, Belleair FL
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BB&T-Largo Mall Branch Manager, Michael Pollet
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Morris Berch CPA
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Most important … … Our HAPPY HAPPY LOANS
Your Author
Michael Rodetsky C.E.C. is uniquely qualified to discuss alternative investments. Majoring in Economics, with a Minor in Banking and Finance and enhancing his studies with advanced courses at NY Institute for Finance, Mike has served clients in Securities and Mutual Funds as an Investment Banker, Realtor and now as President of Major Financial Services, Inc. Mike has served as Past President of National Real Estate Investors Assoc. Inc., as Vice President of the Florida Real Estate Exchangers, as President of the Clearwater Real Estate Exchangers. He is currently President of Wealth Builders, The Florida Real Estate Entrepreneurs Association, Inc.
Major Financial Services, Inc., licensed, bonded as a Correspondent Mortgage Lender, an organization approved by the U.S. Government to initiate VA and FHA loans as well conventional loans insured or purchased by Fannie Mae and Freddie Mac. Accredited members of Florida Assoc. of Mortgage Brokers and National Mortgage Brokers Assoc. In addition to providing conforming loans, Major Financial Services, Inc. has taken a strong position in the area of non-conforming first mortgages. With more than 50 years of mortgage experience available through its Principal Broker, Secretary and President, Major Financial Services, Inc. takes its place among the preeminent mortgage lenders in the Tampa Bay area.
Craig Rodetsky
Major Financial Services, Inc.
13498 Walsingham Rd. , Largo FL 33774
(727) 593- LOAN (5626)
(800) 335-0256
fax (727) 593-3152