Val_Sotir2

In today’s AIPIS Show, Jason Hartman invites Val Sotir of Watermark Capital Partners to discuss his company’s specific details in the note business. During the interview, they also get into topics such as the changing ways of Wall Street, how bankers are always looking for the best route for themselves and the patterns between liens.

 

Key Takeaways
02.29 – Val Sotir, of Watermark Capital Partners deals with notes in lower-banded residential properties.
04.49 – Always remember with first and second liens, if the first and the second are not performing, the pricing is a lot lower.
07.46 – With the banks still having 80-85% of notes not released, there are still lots of trading opportunities available.
10.07 – The Wall Street from 1-2 decades ago was very different to the Wall Street we know now.
12.40 – Jason Hartman tries to understand the ever-confusing motives behind bankers’ actions.
14.39 – Banks have to treat all homeowners the same, so it’s easier for them just to sell!
15.14 – Find out more about Val Sotir and his company at www.WatermarkExchange.com

 

Mentioned in this episode
www.WatermarkExchange.com

 

Tweetables
When it comes to notes, the lower the value, the bigger the discount on the purchase.
Often when buying seconds, the return greatly outweighs any associated risk.
Even though fractional reserve banking perverts the system, there are some great opportunities to be had from it.

 

Transcript
Introduction:
This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit www.HartmanMedia.com
Welcome to the AIPIS Show, for Accredited Income Property Investment Specialists, and those who aspire to be. If you’re a real estate, mortgage or financial professional, this is the place for you. We’ll explore innovative investment analysis, sales, marketing and income generating strategies for the most historically proven wealth creator: income property. Learn from the experts as they show you how to build a better business and a better life.

Jason Hartman:
Welcome to the AIPIS Show for Accredited Income Property Investment Specialists and those who desire to be. This is your host, Jason Hartman, where we talk about increasing your income, your productivity and just generally having a better life while serving your clients better, with America’s most historically-proven asset class, income property.
We have a great interview for you today and we will be back with that in less than 60 seconds.

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Jason:
It’s my pleasure to welcome Val Sotir to the show, he is the Founder and CEO of Watermark Capital Partners in the Big Apple, New York City. Val, welcome, how are you?

Val Sotir:
Good, Jason, thank you for having me.

Jason:
Good, well it’s a pleasure to have you. Now, Val, you have extensive experience in the note business, and of course, you’re in the world of Wall Street there. I just wanted to teach our listeners more about the note side of the business – discounted mortgages etc. I’ll start off with asking you: What is your target market? What is your specialty for your company?

Val:
We specialize in non-performing notes into residential spaces. To be more precise, we specialize in the low bands of residential, which means values of $150,000 and lower.

Jason:
Okay. So when you say $150,000 and lower, that’s the value of the property that the note is secured against?

Val:
That’s correct.

Jason:
Okay. And then what is your average deal size, the amount of the note – I guess that’s the unpaid balance, right? The UPB.

Val:
Right, As we all know that the market has been upside down over the past 5-6 years, I would say the average UPB, the average unpaid balance is about $50,000-$65,000.

Jason:
Okay, and so this is a non-performing note, it could be a first or a second, right?

Val:
That is correct.

Jason:
Okay, and what type of discounts are people usually seeing in today’s market on a first and on a second?

Val:
That’s a very good question. The reason we like the lower band space is because of the discounts that come with it. I’ll give you an example: let’s say the value is $60,000, you can buy a note at about 50% of the value. If the value is $40,000, you could be in the 40-45% of value. The lower the values go, the bigger the discount on the purchase.

Jason:
And are we talking first or second trust liens now?

Val:
We are talking about first liens.

Jason:
Okay, so with the second liens, the discount is much larger.

Val:
The second liens are a different phenomenon, and I’ll explain. The pricing on the second liens depends on if the first lien of that property is performing or not performing. 3-4 years ago, you could afford seconds with a performing  lien for, let’s say, $20,000. 2, 3, 4, 5% of UPB. Nowadays, they’ve gone up to 20-22% of UPB. Again, it’s important. If the first is performing and the second is not, you buy the second not performing – it’s a lot easier to modifier the loan.
If the first is not performing and the second is not performing, the pricing is a lot lower.

Jason:
Did you want to explain that phenomenon a little more to elaborate on that a bit?

Val:
Right. Coming from the mortgage business, I spent about 10 years in the mortgage business and so when I first got into this industry, I just couldn’t understand why an investor would buy seconds. Normally, when you foreclose, the second gets whacked out. There are some interesting ways of making money in seconds – there is a risk associated with buying seconds, however, the returns are a lot greater and it kind of makes up for the risk. Here’s an example.

A lot of homeowners don’t pay their second lien because they know that if they continue paying the first lien, a second lien would be more like a Home Equity Loan of Credit (HELOC). Normally, if you pay your first lien, you’re safe in the house. A lot of the investors are buying second liens for 20-22%, sometimes cheaper, of UPB. The idea behind it is to send a notification of foreclosure to the owner and have the owner respond and try to get a modification on the mortgage because you buy the loans cheap enough and it gives you a very good return on your investment.

Jason:
That makes sense, okay.

Val:
Keep in mind that you can get wiped out if the homeowner stops making payments on the first. If you don’t have the money to pay that first down as a second lien investor, then you’re going to get wiped out when it goes to foreclosure and the seconds never get paid.
There are risks associated with seconds. At Watermark, we don’t buy seconds, we trade seconds. There is an investment for everyone.

Jason:
No question about it, and of course, there are many people that talk about investing and second trust deeds or second liens. Gordon Moss wrote a great book on that, and there are some interesting opportunities. That’s an interesting dynamic that you mentioned.
Tell us more about the note business, just maybe overall. What’s going on right now? How is the supply and demand ratio out there? Is that market slowing down or are there still zillions of mortgages out there to buy? What’s happening in the marketplace, just in general?

Val:
I think that over the past couple of months, and I’ll elaborate on this later, but we’ve seen a little bit of a drop. It’s not big, but just a little bit of a drought. I think pricing has gone up a little bit over this summer and in the last three months. In general, I think we will have a lot more product to work with. Keep in mind that over the past 6 years, we’ve only worked with about 15-20% of the defaulted notes out there, so the banks will have to release more and more notes for us to trade with.

Jason:
Why are they not releasing them?

Val:
That’s a very good question. For a lot of reasons. Keep in mind that these asset managers, when they release these assets, they have to respond to their committees. The committees will ask a simple question: Why are you selling this loan so cheap? For them to be able to let go of this loan, they have to sell them at 40-50% below market value, and it’s not an easy approval by their committees. I do think, very soon, they will have to start releasing more and more loans and we’ll have product to trade.

One thing I want to touch on – what I spoke of just now is about the low value band of $150,000 and lower. The pricing is still attractive to the investors for us to buy and sell. When you go to a value of $150,000, the higher band loans, the pricing is significantly higher. We’re talking about 70-75% of value. That’s where the bigger boys, the Carringtons, the BlackRock guys are parking their money. Literally, they have 4-5% money and they’re investing that money into non-performing notes.

What’s left for us is really the lower value assets. The pricing differs greatly between $150,000 and lower, and $150,000 and higher.

Jason:
Okay, so why do they like the large deals? Carrington and the big companies.

Val:
Just for the sole reason of..

Jason:
Scale?

Val:
Yes, scale. It’s about scale.

Jason:
Okay, speaking of scale, I wanted to give the listeners some background on you. You were on Wall Street before, right?

Val:
I was, I spent 9 years in the Nineties.

Jason:
Yeah, well I like to always call Wall Street the modern version of organized crime.

Val:
[Laughs]

Jason:
So, why did you leave Wall Street?

Val:
In the late Nineties (1999-2000), it wasn’t the same. We didn’t see the same deals, the same ideals – things changed and a new generation came in, as we like to call it. Also, the mortgage market was hitting up. The mortgage market was really the place to be, and I would say, in 2000, around 40% of the stockbrokers moved over into the mortgage space when Sub Prime came around. That’s when AmeriQuest was the place to work for. That was the reason. We saw a different trend developing and we took advantage of it.

Jason:
Was it really the mortgage securitization market expanding so much? Was that what created the opportunity for you?

Val:
In the beginning, to be honest, it was just a new business. Everyone was interesting in refinancing their mortgages. Every homeowner wanted to get a lower mortgage payment, there were a lot of buyers in the market, which resulted in more and more mortgages to write. That was the reason. Later on, the securitization came around and the packing trade, but in the beginning, it was just origination. Origination was very exciting.

Jason:
And this is what happens, folks, when you see these artificially low, declining interest rates. Everybody refinances their property 6 times in just a short span of a couple of years. I owned a couple of different mortgage companies over the years in that heyday period and it was just crazy. But that just spins off so much paper for the market to digest that I can imagine the opportunity would just be giant.

What kind of volume are you doing? How many loans are you trading on your exchange?

Val:
We trade a few hundred loans a month on the exchange. We have close to 4,500 registered note buyers on the exchange.

Jason:
And I’ve always been curious – when we were talking about banks before and how the banker would have to justify to the committee why they’re selling this loan and taking a haircut on it – why would they sell the loan, rather than just foreclose on it? Wouldn’t they be much better off from the bank’s perspective or the lender’s perspective, to just foreclose?

Val:
I love`the question, that’s a very good question. Let me explain why. First and foremost, the bank is not in the business of foreclosing on properties. They would have to give the asset to an area broker, and the area broker would have to sell the asset for them. As simple as it sounds, it’s very complicated for the bank to do. They don’t have the personnel to attend and process these defaulted notes. The banks are in the business of lending money, so they can lend out approximately 10 times the amount on a non-performing mortgage loan, depending on the institution’s financial strength.

For example, a non-performing mortgage with a balance of, let’s say, $250,000 results in a lost lending opportunity to the bank of $2.5 million.

Jason:
Right, see that’s how fractional reserve banking and lending perverts motivations and perverts the system. However, at the same time, there are some good opportunities to be had from it, right?

Val:
Exactly.

Jason:
I was speaking philosophically at first; now I’m speaking like a Capitalist!

Val:
It’s also known, Jason, as the time value of money. For them to sell the note, it is creating the liquidity they’ve always looked for.

Jason:
Yeah, absolutely, and so that gives them the opportunity to lend a whole bunch more money to the power of 10, and so they’re much better off, right? They can make a lot more money getting that non-performing loan off the books and going and lending, right?

Val:
Exactly. One more reason is – if a homeowner did not pay their mortgage in 6-7 months, as a bank, you want to perform the note and help the homeowner. It creates an ethical problem for the bank. If you do it for one homeowner, you have to do it for every single one of them. For them, it’s just a lot easier to sell these notes to investors like us who can actually do that for the homeowners.

Jason:
Right, so the bank really needs to outsource that because they can be accused of unfairness and all kinds of things, right? That makes a lot of sense.
Val, give out your website and tell people where they can find out more about you.

Val:
The website is www.WatermarkExchange.com. We have a very good exchange for educational purposes. Go to our FAQs, Frequently Asked Questions, because there are a lot of good questions and answers that can give you an idea`of the note business. For example: What’s a defaulted note? Why do banks sell defaulted notes? and all these questions and more from what we discussed here today. It’s www.WatermarkExchange.com. And our trade desk number, if you have any questions, is 2122204044

Jason:
Val Sotir, thank you for joining us.

Val:
Thank you, Jason.

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This show is produced by the Hartman Media Company, all rights reserved. For distribution or publication rights and media interviews, please visit www.HartmanMedia.com or email media@hartmanmedia.com. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate or business professional for individualized advice. Opinions of guests are their own, and the host is acting on behalf of Platinum Properties Investor Network Inc. exclusively.