Bought 60 months of the spread on someone else's wrap instead of buying the note

A note holder I'd been talking to for a year had a wrap he wanted cash out of, and I didn't want the whole thing. So I bought a partial, and what I bought was the spread, not the payment.

The wrap: face 189,000 at 8 percent, 30-year amortization, P&I 1,387. Underlying loan under it, 121,000 remaining at 3.9 percent, P&I 648 plus escrow. Net spread to the holder was 739 a month. I paid 32,000 for the first 60 months of that 739, with the holder keeping everything after month 60 and keeping the tail of the note.

Call it 14 percent nominal before servicing, which is what I could get for money sitting in a position I could actually read the documents on.

The structure work was all about payment order. The holder wanted to keep collecting and remit to me. I said no, and that was close to a dealbreaker for two weeks. We ended up with a third-party servicer that collects from the buyer, pays the underlying lender first, then pays me my 739, then pays him whatever is left, which for 60 months is nothing. If the underlying loan goes unpaid, the whole thing is worthless to me, so I wanted a machine doing it rather than a person.

What I got wrong: the underlying payment includes escrow, and eleven months in the county reassessed. Underlying payment went up 84 a month. The wrap payment is fixed, so that 84 came straight off my 739 and there was no residual behind me to absorb it. I'd written my partial as "the net spread" instead of a fixed dollar amount with a stated source. He added nine payments to the tail of my partial to make me whole, which he didn't have to do.

What I'd keep: servicer in the middle, and copies of the underlying lender's monthly statement going to me directly. What I'd change is one sentence defining what my monthly claim is in dollars and who eats escrow movement. A note attorney in the property's state drafted the assignment and I wouldn't do a partial without one.

9 replies

1dmitri_v6CapitalPRO6

The nine payments he added were a favor, and favors aren't a document. Was the partial assignment recorded, or is it a private agreement between you and him that a later buyer of the note wouldn't see? That's the part I'd lose sleep over, and whether recording an assignment is even the practice varies by state.

2aliyah_bAU2APRO6

32,000 for 739 a month is easier to picture than most things I've read here. So you never owned the house or the note, you owned a slice of the payments?

1angela_burkeServicePRO6

Which servicer, or at least what did it cost? We looked at adding wrap servicing for a couple of clients and the pricing we got made small notes uneconomic once you're paying an underlying lender out of the same account.

1nataliehsuSO1BPRO7

@tally that's how I read it too. Which makes me wonder what @sable actually holds if the buyer stops paying. You're behind an underlying lender and beside a note holder, so what's your remedy?

2raj_mehta14CapitalPRO6

I've read this three times. The buyer pays 1,387. 648 goes to a bank that thinks the seller still owns the house. 739 went to you for five years. And the holder gets nothing for five years and then gets everything. Is he just borrowing from you at 14 percent using his own note as collateral, or is that a different thing?

1derekj19SB1B

The escrow reassessment eating your spread is the detail I'll remember. Every one of these structures seems to break at the place where one payment is fixed and the other one isn't.

0stephen_ok9CO2CPRO6

14 percent for taking underlying-loan risk plus buyer-default risk plus a due-on-sale clause you don't control is the trade I keep failing to price. What would you have needed to see to do it at 11?

1monica_tran3SF4CPRO6

@cobalt we quoted this out last year. The cost isn't the collection, it's the exception handling when the underlying lender applies a payment wrong and somebody has to sit on the phone for an hour. Nobody prices that per-loan fee high enough.

2mitchell_ray4 Get yoursPRO6

So the buyer in this thing pays 8 percent and never knows any of the rest of it is happening?

Bought 60 months of the spread on someone else's wrap instead of buying the note

9 replies