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Chapter
1: YOUR NUMBER
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What is Your Net Worth? // 1
Ground Zero // 2
How to Increase Your Net Worth // 2
Investing is Serious Business // 3
Personal Financial Statements // 4
Balance Sheet // 4
Personal Balance Sheet // 6
Income Statement – Profit and Loss Statement // 7
Personal Income Statement // 7
You Need a Financial Statement // 9
Returns and Precentages // 12
Cash-on–Cash Returns // 12
Payback Period // 13
Mortgage Averaging // 13
Value of Money Over Time // 14
Time // 14
Effect of Time on Money // 15
Investment Vehicles // 16
Safety, Return and Liquidity // 16
Safety of Investment // 16
Rate of Returns // 17
Investment Liquidity // 17
Classes of Investments // 17
Cash Investments // 17
Fixed Income // 18
Equities // 19
Private Mortgage Investing – Fixed Income // 19
Guideline for Successful Investing // 20
Start Right // 20
Listen to the Righteous // 20
Know Yourself // 21
Decide What You Want // 21
Know Your Speed // 21
Know Your Number // 22
And These // 22
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Chapter
2: THE MORTGAGE MARKET // 23
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What Is a Mortgage? // 23
How the Mortgage Market Works // 24
The Originator // 24
Securitization of Mortgage // 25
Mortgage-Backed Security // 25
Classes of Mortgages // 25
Why Secondary and Third Mortgages? // 26
Types of Mortgages // 27
Open Mortgage // 27
Closed Mortgages // 27
Adjustable Rate Mortgage (ARM) // 28
Convertible Mortgages // 28
Equity Mortgages // 28
Reverse Mortgages // 28
Subprime Mortgages // 29
The Subprime Mortgage Mess // 30
How the Subprime Problem Started // 30
Benefits of Subprime Lending // 32
Proper Use of Subprime Lending // 33
Predatory Lending // 33
Mortgage Terminology // 34
Amortization // 34
Foreclosure // 36
Judicial Sale // 37
Non-Judicial Foreclosure – Power of Sale // 37
Mortgage Rights // 38
Right of the Borrower // 38
Right of the Lender // 38
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Chapter
3: PRIVATE MORTGAGES // 39
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Private Mortgage Investing // 39
What is a Private Mortgage Investment? // 39
Players in the Game // 40 Mortgage Lenders // 40
Mortgage Brokers // 41
Representation Provided by Mortgage Brokers // 41
Benefits of Using a Mortgage Broker // 41
Mortgage Broker Compensation // 43
Mortgage Borrowers // 43
The Lawyers // 43
Service Providers // 44
Real Estate Appraisers // 44
Insurance Companies // 45
Homeowner Insurance // 45
Title Insurance // 46
Mortgage Insurance // 46
Renovation Contractors // 47
Mechanics of Mortgage Investing // 47
Mortgage as an Investment Vehicle // 48
Characteristics of Mortgage Investment // 49
Safety // 49
Returns // 49
Liquidity // 50
Mortgage Investing Versus Other Forms of Investments // 50
Security // 50
Return on Investment // 52
Administration Costs // 52
Cash-Flow/Dividend // 52
Liquidity // 52
Private Mortgage Investment Versus Rental Property Investments // 53
Transaction Cost // 53
Management and Maintenance Cost // 53
Diversification // 53
Performance Measurement // 56
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Chapter
4: DUE DILIGENCE // 57
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The Mortgage Application // 58
Underwriting the Borrower // 60
Credit Investigation // 60
Credit Bureau Reference Check // 61
Credit Score // 61
Credit Rating // 62
Personal Credit Check // 63
Borrower’s Capacity to Service the Loan // 64
Affordability Ratios // 64
Gross Debt Service (GDS) // 64
Total Debt Service (TDS) // 65
Underwriting the Property // 66
Legal Title of Property // 66
Area and Location of Property // 67
Type of Property // 67
Loan-to-Value (LTV) Ratio // 68
LTV Calculation for Property with Multiple Mortgages // 70
Setting LTV Ratio // 70
Pricing Mortgages // 71
Risk-Based Pricing // 73
Interest-Only Mortgages // 73
Document Verification // 74
Employment Information // 74
Pay Stubs // 75
Rental Income, Dividend and/or Interest Income // 75
Child Support, Alimony Income // 75
Income Tax Returns // 76
Account Statements // 76
Current Debts // 76
Mortgage Verification // 76
Title and Tax Verification // 77
Lien and Priority // 77
Priority of Mortgages // 78
Commercial and Construction Lending // 80
Feasibility Studies and Site Analysis // 81
Projected Income and Operating Expenses // 81
Borrower’s Experience // 82
Mortgage Broker’s Experience // 82
Red Flags for Potential Fraud // 83
Difficulty Verifying Employment // 83
Difficulty Verifying Applicant’s Income // 83
Inconsistent Income Information // 84
Down Payment Problem // 84
Other Red Flags // 84 In
Conclusion // 84
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Chapter
5: PROPERTY VALUATION // 87
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Market Value // 87
Approaches to Valuation // 90
Residential Appraisal Report // 91
What the Appraiser Needs // 98
Applicant and Property Identification // 98
Neighborhood Description // 99
Site Description // 100
Physical Condition // 100
Location Condition // 100
Environmental Condition // 101
Description of Improvement // 101
The Cost Approach // 102
Procedure // 103
Classification of Depreciation // 103
Physical Depreciation // 104
Functional Depreciation // 104
External and Location Depreciation // 104
Four Formulas in the Cost Approach // 104
Direct Comparison Approach // 109
Procedure // 109
Characteristics of Good Comparables // 109
Adjustments // 110
Explaining Adjustments // 112
Lot Location // 112
Square Footage // 112
Dollar Amount Adjustments // 113
Income Approach // 113
Gross Income Multiplier (GRM) //
113 Calculating GRM // 114
Income Capitalization Approach // 115
Direct Capitalization // 115
Procedure // 116
Net Operating Income // 116
Capitalization Rate (R) // 118
What Is Capitalization Rate? // 118
Estimating the Cap Rate // 118
Limiting Conditions and Due Diligence // 120
Title Verification // 120
Survey // 120
Physical Inspection // 121
Disclaimer // 122
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Chapter
6: LOCATING AND ANALYZING OPPORTUNITIES // 123
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Why Borrowers Need Private Mortgages // 123
Credit Problem // 123
Property Problem // 124
Short-Term Financing Problem // 124
Closing Date Problem // 125
Private Mortgage Insurance Problem // 125
Prepayment Penalty Problem // 126
Debt Problem // 127
Employment Problem // 128
Foreclosure Problem // 128
Locating Opportunities // 129
Mortgage Brokers // 129
Real Estate Brokers // 130
Real Estate Lawyers // 130
Accountants // 130
Types of Properties // 130
Non-Income-Producing Real Estate // 131
Income-Producing Real Estate // 131
Multifamily Residential // 131
Offices // 132
Retail // 132
Industrial // 133
Hotels // 133
Type of Opportunities // 133
New Mortgages // 134
Buying Existing Mortgages // 134
Selling Existing Mortgages // 134
Market Value of a Mortgage // 135
Benefit of Selling a Mortgage // 136
Evaluating Opportunities // 137
Working with Numbers // 138
Cash Investing // 139
Yield on Capital Invested (YOC) // 139
Gross Yield // 139
Net Yield // 140
Net Yield After Tax // 140
Leverage Investing // 141
Borrowing to Invest – Leveraging // 141
Why Borrow to Invest? // 142
Gross Yield on Equity (YOE) // 143
Net Yield on Equity Invested // 143
Net YOE After Tax // 143
Before Borrowing to Invest // 145
Interest from Operation (IFO) // 145
Cash Flow After Debt Service (CFDS) // 146
Financial Leverage // 148
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Chapter
7: WAYS TO INVEST IN PRIVATE MORTGAGES // 149
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Sole Proprietor Mortgage Lending // 149
Advantages // 150
Disadvantages // 150
Sources of Funds for the Sole Proprietor // 150
Unsecured Personal Loans // 151
Unsecured Line of Credit // 151
Home Equity Loans // 151
Partnership in Private Mortgage Lending // 152
Advantages // 152
Disadvantages // 153
Corporation // 153
Advantages // 153
Disadvantages // 154
S-Corporation (United States) // 154
What About LLCs? // 154
Advantages // 155
Syndications // 156
History of Pooled Funds // 156
Syndicated Mortgages // 158
How Syndication Works // 159
Advantages // 159
Mortgage Investment Corporation (MIC) – Canada // 160
Requirements of an MIC // 160
MIC Management Responsibilities // 162
Mortgage Investment Club // 163
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Chapter 8: RISK AND RISK MANAGEMENT // 165 |
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Types of Risks // 166
Risk Associated with Mortgage Lending // 167
Borrower’s Credit Risk // 168
Mortgage Default Risk // 168
Risk of Defective Appraisal // 169
Management Risk // 169
Compliance Risk // 169
Environmental Risk // 169
Other Risk Factors // 170
Risk Management in Mortgage Lending // 170
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Chapter 9: LENDING POLICY AND COMPLIANCE PLAN // 173 |
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How to Develop a Mortgage Lending Policy // 173
What to Include in a Lending Policy // 174
Introduction // 174
Types of Transaction // 175
Credit History // 176
Bankruptcy // 177
Employment Information // 178
Underwriting Standards // 178
Property Valuation // 179
Loan-to-Value Ratios (LTV) // 180
Excluded Transactions // 181
Insurance Requirement // 182
Compliance Plan // 184
What Is Compliance? // 184
Developing a Compliance Plan // 185
Introduction // 186
Organization Structure // 187
Compliance Plan Implementation // 188
Hiring Mortgage Brokers and Agents // 188
Training // 189
Marketing // 189
Complaint Handling // 190
Complaints Procedure // 190
Underwriting and Pricing // 191
Loan Administration // 192
Quality Control // 192
Reporting // 193
Disclosures to Borrowers // 193
Outsourcing Mortgage Compliance // 195
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Chapter 10: MORTGAGE MANAGEMENT // 197 |
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Duties of a Mortgage Administrator // 197
Benefits of Loan Service to Lenders // 198
Monitoring of Due Date // 199
Dealing with Delinquent Accounts // 200
Per Diem on Mortgage Loan // 200
Options for Dealing with Delinquent Accounts // 202
Payment Plan // 202
Refinancing // 203
Consolidation // 204
Foreclosure Prevention // 204
The Three-Point Plan // 204
Point 3 and Beyond // 205
Foreclosure // 205
The Foreclosure Process // 206
Judgment, Payment and Possessuion // 206
Right to Redeem (ROR) // 207
Garnish Wages // 207
Final Order of Foreclosure (FOF) // 207
Marketing and Selling Foreclosure Property // 207
Mortgage Payoff // 208
Prepayment Penalty // 209
Calculating the Prepayment Penalty // 209
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Chapter 11: CONCEPT TO COMPLETION // 213 |
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The Private Mortgage Business // 213
Tools for Success // 214
Real Life: New in the Country // 215
Step 1: Agreement in Principle // 215
Type of Disclosure // 215
Geographical Location of Property // 216
Applicant’s Legal Capacity to Enter Loan Agreement // 216
Transaction Type // 217
LTV Ratio // 217
Step 2: The Loan Application // 218
Step 3: Information and Document Verification // 219
Proof of Identity and Address // 219
Employment Verification // 219
Credit Check // 219
Asset and Liability Verification // 219
Step 4: Determination of GDS/TDS Ratio // 221
Step 5: The Appraisal // 222
Step 6: Mortgage Pricing // 222
Step 7: Mortgage Commitment // 223
Step 8: Signing the Contract // 225
Step 9: Instructing the Lawyer // 225
Lawyer’s Due Diligence // 225
Title Search // 225
Disclosure // 226
Step 10: Closing // 226
The Charge/Mortgage of Land: Standard Charge Terms // 227
Stage 11: After Closing // 233
Stage 12: Mortgage Payment and Collection // 233
Stage 13: Record Keeping // 234
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Chapter 12: Making Double Digits Returns // 235 |
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REAL LIFE 12.1: Mati and Luci Pallucci’s Retirement Plan // 235
Strategy and Lending Criteria // 236
Analysis // 238
REAL LIFE 12.2: Education Solution // 238
Strategy and Lending Criteria // 239
Analysis // 240
REAL LIFE 12.3:
The Oketchika Invest in Mortgage Investment Corp. (MIC) // 240
REAL LIFE 12.4: Vincent’s Retirement Plan // 242
Strategy and Lending Criteria // 243
Analysis // 244
REAL LIFE 12.5: Real Estate Broker Created Own Mortgage // 245
Strategy and Lending Criteria // 246 Analysis // 247
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Chapter 13: DON’T LOSE MONEY // 249 |
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REAL LIFE 13.1: LTV Ratios // 249
Mr. Martins’ Lending Criteria on Rathburn // 251
LTV Ratio // 251
GDS/TDS // 251
Credit Score // 251
Income // 252
Notice of Default // 252
Lender’s Mortgage Default Options // 252
Analysis // 252
Step 1: Order a CMA // 252
Step 2: Test the Options // 254
Caution: LTV Ratio // 256
REAL LIFE 13.2: 3rd Mortgage Transaction //
Mike McDavid Lending Criteria on Portico Dr // 258
LTV Ratio // 258
GDS/TDS // 258
Credit Score // 258
Income // 258
Analysis // 260
Step 1: Order a CMA // 260
Step 2: Test the Options // 260
Caution: Borrower’s Capacity to Service Debt (GDS/TDS) // 261
REAL LIFE 13.3: Third Mortgage Blunder // 261
Jane Matthews’ Lending Criteria on Dewberry Drive // 263
LTV Ratio // 263
GDS/TDS // 263
Credit Score // 263
Income // 263
Analysis // 265
Step 1: Order a CMA // 265
Step 2: Test the Options // 265
Caution: Appraisal, Credit Score and Borrower’s Capacity to Service Debt // 265
REAL LIFEE 13.4: President of 10108661190 Ontario Limited Borrowing // 266
Chamin German Lending Criteria on the Land // 267
LTV Ratio // 267
GDS/TDS // 267
Credit History // 268
Income // 268
What Should the Lender Do? // 269
Analysis // 269
Step 1: Order a CMA // 269
Step 2: Test the Options // 269
Caution: Appraisal and Location of Property // 270
REAL LIFE 13.5: Not the Amount But the LTV // 270
Dunkans’ Lack of Knowledge // 272
LTV Ratio // 272
GDS/TDS // 272
Credit Score // 272
Income // 272
Dunkan’s Options // 274
Analysis // 274
Step 1: Order a CMA // 274
Step 2: Test the Options // 274
Caution: Not Amount but LTV // 276
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Chapter 14: SUMMING UP // 277 |
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Why Do People Take Private Mortgage? // 277
What Is the Risk Level? // 277
What If Borrowers Default? // 278
As an Individual, How Can I Start Investing in Private Mortgages? // 278
As a Mortgage Brokerage, How Do We Make Money? // 278
How Do We Find Investment Opportunities? // 79
Conclusion // 79
Glossary // 281
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