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Step up and take a chance on yourself

Timi Pereira
Jul 14, 2009

Do you have a mortgage broker’s license? Are you an agent or a real estate broker? Are you working for someone else for a few years, but with no future? Are you aggressive and self motivated? Are you an individual with a vision but not sure what you can do for yourself? Do you want to make more money? Are you willing to take some risks in business to succeed? Are you interested in buying some real estate with no money down? Do you want to do something else, use your knowledge acquired as a mortgage broker but don’t know what exactly? Here is an idea: become a direct lender and service loans. Here is the opportunity: FDIC is selling loans and find out more at: ◄ www.fdic.gov/buying/index.html ◄ www.fdic.gov/buying/loan/loan/index.html ◄ www.fdic.gov/buying/loan/index.html Here is how to do it in 10 general steps: 1. Make a business plan, set up a corporation with your new company name, and get a business license from the county where your office is located. From a reasonable lawyer to the inexpensive NOLO Press, you can form a corporation with very little money. Remember, the Internet is a great resource tool for learning how to do a business plan as well. 2. Find an office space, even a 200-sq. ft. one for a few hundred dollars per month. A land line and/or cell phone with voice mail, Internet access and a laptop with a printer/fax/scanner would be a good start. Also, SBA offers microloans for small startup businesses. 3. Establish a Web presence with a Web site and e-mail. 4. Check with your local government agencies in your state for any special license needed to originate, purchase and service loans using private investors’ funds or your own funds. 5. If you will form a Limited Liability Company (LLC), in order to buy a pool of loans using private investors’ funds, and pay them dividends, you should also consult a securities attorney for the necessary permits from the Securities Exchange Commission (SEC) and meet your local state requirements.  6. Hire a Certifed Public Accountant (CPA) and consult an attorney when necessary. 7. Get accounting software, like Quickbooks, and someone with bookkeeping knowledge to keep your business accounting straight from the beginning for filing your business income taxes. 8. Open a business operating account and a trust account at the bank designated for loan collections. Choosing a small commercial bank may offer more of a personalized service to small business customers versus a larger financial institution. 9. Get loan servicing, trust accounting and loan document preparation software from the start of your business. Don’t attempt to use Excel spreadsheets to track loans or hodge-podge loan documents taken from other lenders. It just doesn’t work, you will get yourself in legal trouble and it is not worth the effort. 10. Make your marketing plan as to how you will acquire investors and loans. Investors can be acquired via marketing as well. These persons can be individuals, companies, estates, IRAs and pension plans, which can purchase loans with you or invest in loans, and you service them. The media to market can be any of the following or combination thereof: radio, television, website, e-mail marketing, direct mailing campaigns, postcards, flyers, cold calling, talking to title companies, realtors, and attending networking events. Joining local trade groups and associations is not only god for meeting new prospects, but to also benefit from any education they offer to their members. One more piece of advice: Do everything right from the start without cutting corners. Originating loans is probably a very well known subject to you. You have done it many of times. You found the borrower, qualified him or her and found a lender who meets the parameters. Underwriting though may need some experience in the field because being a direct lender you also become your own underwriter. You have to know or learn how to look at a property, its appraised value, compatible properties, the security itself from other perspectives, the borrowers and their ability to repay back the loan, and everything else that is a material factor in the decision making about the loan. In private money lending, because of usually requiring a lower LTV on a property, it is not unusual for the investors to want additional collateral, so the loan ends up being a cross collateral one. The loan documents should be generated in-house, and should be specific for the type of loan you have. You should not use Residential loan documents for a Home Equity Line of Credit (HELOC), Commercial or Construction loan but rather have specifically designed and drafted loan documents for those types of loans by an attorney or via your software vendor. Also, if the loan is fixed rate, you have to use a promissory note for fixed rate loans and the same for a step rate or adjustable rate mortgage. You should know enough about the Predatory Lending laws of your state, and have software that performs an analysis to make sure the loan can pass the test on a residential one- to four-unit owner-occupied loan. On the estimated funding date, the investors’ or your own loan funds are placed in escrow, and this outside escrow or title company should be used to sign off the borrower. When the loan closes and gets recorded, the servicer should send the first payment notification letter along with payment coupons for one month at a time or best enough coupons for the remaining of the year plus January. In January, the servicer has to provide the borrower with a 1098 IRS form for the interest paid for the year, and can include an Annual Accounting Statement of all payments received for the previous calendar year along with a new set of payment coupons for one more year, thus saving some money and time on postage. Note some states mandate that payment coupons must be sent to borrowers, if the beneficiary/lender wants to be entitled to collect late charges on the loan, when payments are received after the grace period. There are many benefits of servicing loans in-house versus outsourcing. Besides having control and direct knowledge of your own borrowers, servicing loans allows the servicer to dramatically increase his/her bottom line income. Normally a direct lender, using private investors’ funds or his/her own money, makes his/her income from new loans being originated from points and other loan fees. Although, the residual income that increases based on very loan made, it comes from servicing that loan. Imagine over a period of how many years you have worked, if the loans you have made or your team made were loans you originated yourself using your own money or private investors funds. What was the total number of the principal balance of all the loans? Now, multiple the total unpaid principal balance of those loans times an average of one percent or two percent, divide it by 12 and the result is the monthly income you can earn. This is your standard servicing fee. On top of servicing fees, you can participate with the investors in the interest the borrower pays. For example, if the promissory note rate is eight percent, the investor can receive seven percent and the servicer one percent. In addition, the servicer may charge from $1 ‘check fee’ to $5-$10 additional servicing fee. This fee may be enough to cover someone’s time to process a borrower payment on the computer loan servicing software, the cost of the envelope & printed check and postage for mailing a check to the investor, thus, making the standard servicing fee a “pure profit.” Now, add late charges on loans that are paying after the grace period. These late charges can either be split with the investor (50/50 or 60/40) or entirely retained by the servicer with the investor getting no portion of the late charge. You can argue that for the cost of the late charge, you are making reminder or collection calls to the borrower and tracking the loans that are paying late. Of course, you have a loan servicing software that does it all for you anyway, the tracking of loans, payments and check writing to investors, so your job is not that difficult to do! Depending on your local states statutes, let’s not forget fees for issuing demand fees and for other servicing related functions that you are allowed as the servicer to add them to the loan as expenses. As a servicer you can work directly with your borrower and modify the terms of the loan, if necessary, and help them during these difficult economic times. Make sure you have a strong loan modification agreement and your software can handle any step rate loan servicing, if you are modifying the loan to include different fixed interest rates. Have an organized system in place to do certain functions throughout the month. For example, although the loan servicing software of choice should handle payments due at any time during the month, if all payments on new loans were due on the 1st of the month with a 10 day grace period, this is what your monthly timeline "to-do" list should look like: ◄ 1st of the month: Payments are due/check insurance on accounts/check impound pending payments ◄ 10th of the month: Grace period ends. Payments are posted on a daily basis as they are received or posted via Automatic Clearing House (ACH)--electronics funds transfers. ◄ 12th of the month: Print and send late notices. ◄ 13th of the month: Reconcile your bank trust account. ◄ 15th of the month: Print and send payment borrower statements for next month’s payments on loans that payments change monthly. ◄ 16th of the month: Process, print and send checks to investors (check run includes all payments made on time plus anyone paid within and after the grace period). ◄ 20th of the month: Print and send second late notice for loans that have not paid yet. ◄ 25th of the month: Print and send third late notice for loans that have not paid yet. ◄ 26th of the month: Process, print and send checks to investors (check run includes any other payments received late). ◄ 27th of the month: Collection calls for anyone who has not paid. ◄ 28th/end of the month: Scan any loan documents and attach them to your software’s loan servicing borrower and investor profiles for easy reference. Usually end of the month or end of the quarter some state reporting forms with loan or trust accounting data may be due for filing with the authorities.  Although, during the course of servicing the loan, the reasonable servicer makes every attempt to collect a debt but also works with the borrower in making it easier for him/her meet the financial obligation. The agency relationship lies between the servicer/broker and the beneficiary/private investor and as such, there times were a foreclosure is unavoidable. If the property does not sell in a public trustee sale, the property becomes an REO (real estate-owned) one. Reality is that investors only want their principal back and interest and are not interested in the property itself. Broker/servicers often are able to buy those properties with no money down from the investors and they start making payments to them on a new loan, for the sole purpose of getting the investors out of the property. To conclude, being a mortgage professional for a while, it is time to step up, take a chance on yourself and succeed in a business that made other individuals financially secured. It is a whole another business and future waiting for you; the private money and loan servicing industry. Timi Pereira is president and founder of Goldenomega.net. Goldenomega.net specializes in software for the lending and construction industries. She can be reached at (866) 830-5147, ext. 203.  
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