A partial that buys 60 months of the spread on a wrap instead of the whole note
A structure worth studying: a note holder with a wrap wants cash out, and the investor does not want the whole thing. So the investor buys a partial, and what gets bought is the spread rather than the payment. Take a wrap with a face of 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 is 739 a month. Say the investor pays 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, for money sitting in a position where the documents can actually be read. The structure work is all about payment order. The holder in this pattern wants to keep collecting and remit to the investor. That should be a firm no, and it is often close to a dealbreaker for a couple of weeks. The right landing is a third-party servicer that collects from the buyer, pays the underlying lender first, then pays the partial holder the 739, then pays the note holder whatever is left, which for 60 months is nothing. If the underlying loan goes unpaid the partial is worthless, so a machine should be doing the ordering rather than a person. Where this structure typically breaks: the underlying payment includes escrow, and a county reassessment eleven months in can push that payment up, say by 84 a month. The wrap payment is fixed, so the 84 comes straight off the 739 and there is no residual behind the partial to absorb it. That happens when the partial is written as the net spread instead of a fixed dollar amount with a stated source. A holder who adds nine payments to the tail of the partial to make the investor whole is being generous, and nothing in that paperwork obliges him to. What to keep: servicer in the middle, and copies of the underlying lender's monthly statement going to the partial holder directly. What to add is one sentence defining the monthly claim in dollars and who eats escrow movement. A note attorney in the property's state should draft the assignment, and a partial without one is a mistake.
