Mechanics of Investing in Mortgage Notes – Investing in Mortgage Notes [Part 6]

This is a transcription of part six of our video series, Investing in Mortgage Notes. In this video, we discuss the daily maintenance and mechanics of investing in mortgage notes.

Welcome to the sixth of our series of investing in private mortgage notes. Today, we’re going to be talking a little bit about the daily maintenance or mechanics of investing in notes. If these are supposed to be pretty much set and forget type of investments, how do we do that if we’re collecting mortgage payments and everything of that sort? Let’s dive right in. First thing you need to know is that there are a network of loan servicers that do nothing but service this type of loan, much like the servicing companies that service loans for major banks. As this industry has grown, and especially after the recession, there’s maybe as many as a dozen servicing companies nationwide That will make your servicing life a lot easier for you.

They collect monthly payments. They send out notices to the borrowers. They make sure that the principal, interest, and taxes and insurance are all being collected. If they’re not, they send out notices to the borrower, reminding them that that’s what they need to do, everything of that sort. They take care of the day to day maintenance of your loan.

Now, as we all know, sometimes borrowers get late, and it happens very much so in this borrower band, if I can use that term, or group, meaning that a lot of these people live from paycheck to paycheck to paycheck, so they may pay in advance one month, and they may pay a little bit late the next month, and you have to be used to that. Those of us who are in maybe the more urban areas and the more expensive housing tend to have regular payments made just automatically through our banks, and a fair number of these borrowers do that but there’s also a number of them who go to their bank and make their deposits and send you that money or send the servicer that money every month.

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There’s also reporting that’s done to you, the note hoarder by the servicer. Quite often, these companies have a portal on the internet where you can simply go to their portal, put in your loan number and ID and access information and find out how the loan is doing. Let’s say it’s a loan on 123 Main Street. They’ll show you who the borrower is, where they are in their payments, what they’ve made in terms of principal and interest, and anything else you’d like to know. That part of it is very simple.

If the borrower is 30 days late, quite often, the servicer will just give them a call and say, remind, just a reminder to make your payment. If they are 45 days late, there’s something called a 45 day late payment requirement, and that requires them to send out a notice to the borrower saying that you’re 45 days late and reminding them that they need to pay up and move on with life.

Loan Servicers

If it goes beyond that, there is a set sequence that each borrower has where they make phone calls, they send emails and/or letters to them to ensure that they make their payments. If they do not, then the servicer usually calls you and says what do you want to do Mr. note holder? Now, nine times out of 10, if I have something with one of my investors, they will call me.

I actually always maintain access to these servicing files so I can tell what’s going on, because I consider it part of my responsibility to shield you, the buyer as much as possible so if there’s something could be worked out, I’ll work it out and I’ll just tell you after it’s all taken care of. I’ll work with a servicer, they’ll notify both you and me and tell us what’s going on.

I actually always maintain access to these servicing files so I can tell what’s going on, because I consider it part of my responsibility to shield you, the buyer as much as possible so if there’s something could be worked out, I’ll work it out and I’ll just tell you after it’s all taken care of. I’ll work with a servicer, they’ll notify both you and me and tell us what’s going on.

The day to day mechanics are largely held or taken care of by the servicer. You don’t have to have a servicer, you can do it yourself. The cost is usually very minimal, $20, $30 a month to service these loans so I would advise that you have it done for you. It also makes the loan much more saleable. In the case of where you might want to sell the note yourself, maybe you have some life event where you need the money, or you want to put it to some other purpose, you could always sell one of these notes. They’re not as liquid as a stock is, but they can be sold, that can be sold back to people like me or to other other investors.

You want to have it being serviced by a loan servicer, so you have good records, and also, it just makes the transfer easier because they can keep the same loan servicer that you have and it doesn’t make any difference in that case to the borrower. It’s pretty much invisible, other than the fact that they get one of those wonderful little notes that says your loan has been transferred from person A to person B. That’s our episode for today regarding the daily mechanics of investing a mortgage note. If you have any immediate questions, please don’t hesitate to call me Richard Thornton at 800-508-5212. Otherwise, I hope that we will see you in the seventh installment of our series on podcast.

Missed our previous installments of this series? Click the links below to view them.

Part 1: Investing in Mortgage Notes
Part 2: Notes Vs. Deeds, Land Contracts, and Subprime Mortgages
Part 3: Buy & Broke Mortgage Notes
Part 4: Alternatives to Investing in Mortgage Notes
Part 5: Mortgage Note Underwriting