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131: Buy Notes or Invest in a Fund?

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Buck: Welcome back to the show everyone. Today my guest on Wealth Formula podcast, Jorge Newberry founder and chairman of American Homeowner Preservation now actually it’s AHP Servicing, right? And his new CEO Deann O’Donovan. Jorge and Deanne, welcome to Wealth Formula Podcast. Jorge, welcome back, number four.

Jorge: Thanks buck, thanks for having us. I know number four, I’m really excited. I think I’m breaking records here.

Buck: I think you are. I think you’re actually two ahead of the next person.

Jorge: Oh that’s let’s keep it that way.

Buck: Yeah okay sounds good. So Jorge let’s start with you. So lots happened at AHP. Now AHP Servicing for example, a change in name since your last appearance on the show. Tell us about how that last fund that we, a number of listeners that we have, how did it and how is it doing and and ultimately how you decided to sort of transition into the new fund and bring on Deanne and all that story. Can you fill in the gaps there?

Jorge: Sure. Well that’s a lot of questions in one so we’ll try and get them all. So the old fund it’s not done it’s still going. We’ve closed to new investments so the existing fund for maybe your listeners that are familiar with it is American Homeowner Preservation 2015 A-plus. And we launched that in June of 2016 and it ended, we stopped taking new investments in May of this year 2018, however that money is still out there and it’s still invested in a lot of mortgages, in fact we still are I believe still investing some of it and as more comes in to the extent there’s extra we’ll continue to invest in that fund. So that fund will be around for five plus years. So actually basically five years from the last investment so roughly five years from may 2018 is the projected end of that fund. So there’s still a lot to go in that one

Buck: Jorge how does that, I’m curious how the end of that fund, how do you end something like that do you just sell off the assets, or what do you do?

Jorge: Yeah to the extent we needed to we would sell off assets. Your expectation is more or less in the third year or two, when we see that there’s two years left to go you know we’ll take an assessment of what’s left and decide to work on selling it, decide whatever is appropriate but bear in mind throughout this period of the next few years we’ll continue to sell loans loans, REOs will be sold so more money comes into the fund from revenues which can then be reinvested so but there’s a point at which that’ll stop and I imagine that’s in the last 24 to 18 months and then we’re gonna start instead of reinvesting that money’s start returning it to investors, at least that’s the current plan.

Buck: Got it. So the fund ends and you say, well gosh this thing was big and it’s you know I’m a great entrepreneur but if I want to sort of take the business to the next level maybe I need somebody to help me do that. So the decision at that point for entrepreneurs in the audience you know that decision where you start to realize your own limitations and that’s kind of what happened, right?

Jorge: Absolutely so about a year ago I we were doing very well, we had grown a great deal though and and my challenge was that as the company grew, even though we had a you know close to 20 employees more and more work with was was coming on my shoulders. I wasn’t great at delegating and managing my team, I think a lot of entrepreneurs kind of suffer from that. It’s tough to give up control. And at that point I decided, actually read an article from a friend of mine who had same thing with entrepreneur and his business was growing and he just didn’t feel that he was the one to grow it. And so he in fact he said he was kind of losing controlling so that was that was almost me, it was like, I didn’t work extraordinary hours 70 to 80 hours a week, I could not keep control of this thing. And so he hired a CEO and I said well that’s what I want to do and actually I contacted him and I decided to embark on this search for a CEO and the first candidate for the position was Deanne and although I did look at a few others because I had to see what else was out there, Deanne was was the best candidate. And she came on board and she has some of the qualities that I lack. She’s great at building, managing and getting the best out of large teams and she has a history of doing that and so is exactly what AHP needed in order to grow and we see a huge opportunity not just in what we’ve historically been doing which is buying non-performing mortgages and resolving them typically with borrower friendly consensual resolutions, which is historically what we’ve done, but also in servicing. For years we had to just take a step back just about every mortgage holder needs to utilize a mortgage server so that it was licensed in the state where the properties are located.

Buck: And we’re gonna get into that a little bit because that’s one of the major transitions as you become a servicing company but we’re gonna get into that in more detail in a bit when we start to back up because I think we want to talk a little bit about what exactly this whole Note business is about. But Deanne tell us a little bit about your background, I know you have a sore throat so we’re not going to push you too hard here, but tell us a little bit about your background because you’ve been doing, I mean you’ve been in the note space for a while with some larger institutions, tell us a little bit about the decision to come join and take I guess the helm of AHP Servicing.

Deanne: Yeah so my pleasure. I’m pleased to be here with both of you today. And I would also say I think Jorge has done a good job learning how to give up control, so it’s been a very smooth transition I think from the two of us which has been terrific. And in terms of my background, I initially started in commercial real estate, moved into the residential space during the last recession where I set up a team to work through a large portfolio of non performing loans and also spent a number of years as an executive with a financial services company. So that experience was really perfect for AHP Servicing. I actually set up a servicing company. I set up as a default loan servicing company and I set up all of the teams and the infrastructures related to the sort of corporate needs as we look at putting a team in place that can scale and grow. So you know Jorge mentioned that I was the first person he talked to and we got to know each other over a course of months and the more we talked the more evident it was that it was a great cultural fit, it was a great skill set fit and that I think we’re very complementary and together you know just what we accomplished this year is really remarkable so we’re excited about the next offering and where we take the servicing business.

Buck: So I want to back up a little bit because you know Jorge has been on the show now this is again number four, and I always had sort of a little bit of an idea of what this whole notes business was about. And there are some people who probably started listening to Wealth Formula Podcasts and have not heard Jorge or AHP, but even even in the last few shows I knew a lot less about notes in general than I do now, which is still you know pretty rudimentary compared to where anybody who’s really buying notes needs to be. And so what I’d like to do if it’s okay with you guys is kind of back up and for people who are listening saying, all right notes, what do you mean notes? What is this all about? Let’s talk a little bit about, I had the opportunity not only to you know to learn a little bit and read a bit but also to come to the AHP Servicing headquarters there in Chicago and learn some basics. So let’s go over some of that. So first of all Jorge maybe since you don’t have a sore throat right now, I’m gonna drill you on this, right? So tell me a little bit about what exactly are we talking about when we’re but the notes business.

Jorge: Sure. So notes typically in the context we use that there, there’s a promissory note which is court-secured by a mortgage or deed of trust on real estate, it could be a house could be vacant land could be a commercial building, and so those notes are typically you know most people think ok I got my loan through Bank of America and you know I owe alone to Bank of America, but as many people know these mortgages get transferred regularly. So that Bank of America loan can be transferred to Citibank to Wells Fargo or whoever. And that’s very very typical between banks, between hedge funds and other financial institutions and lenders, but the notes so that’s just in general. If you own a house, most the majority of real estate owners in this country have a mortgage on their property and that’s what these notes are, they’re these mortgages on these properties. Now what we deal with is when the people are unable to pay they fall behind they stop paying and maybe they’re at risk of foreclosure. Some of those bigger banks and lending institutions don’t want to deal with those loans for any extended period so they’ll sell those loans and there’s a network of buyers across the country, large and small who buy these loans and that’s what we are. AHP is one of those buyers.

Buck: So basically a note is I mean for for you know for simplicity it’s a mortgage, right? You’re buying somebody’s debt. You’re buying that kind of thing. And they’re, as you mentioned AHP Servicing is, AHP homeowner or American Homeowner Preservation before this the specialty has really been in this non-performing notes pace which means people who are delinquent in their payments. But there’s more to notes than just non-performing notes, maybe we can break that down. There’s really more than that, right? There’s the performing notes and then there’s what we call re-performing notes and then non-performing. Can you talk a little bit about you know the differences between those and maybe some of the risk-reward profile of investing in different kinds of notes like that?

Jorge:  Sure so a performing note you know today they’d be originated let’s say at 5% and there’s a demand from banks and other institutions to buy those loans and they’re happy with a yield of 5%. Maybe the originator gets to keep the keep the origination fee maybe some servicing, but people are buying those loans expecting returns in the low-to-mid single digits. And and the reason they’re willing to do that is because those loans typically have a history or the qualifications that make it likely that the holder of that note will continue to receive regular repayments so on a monthly basis they’ll likely receive whatever the scheduled payment is for an extended period of time and that is why those typically yield you know modest returns. Reperforming loans are loans where the families, the homeowners us fell behind for whatever reason and then they were able to modify the loan and then they started paying and now there’s a history of maybe six months of on-time repayments twelve months of on-time repayments and when that happens then oftentimes as a market of reperforming note buyers who are willing to take a higher yield than they’re performing and maybe that yield is anywhere from eight to twelve percent, sometimes even a little bit a little bit higher maybe sometimes a little bit lower, and then there’s non-performing loans these are loans where people may be started out paying but at some point they fell into trouble and and have not been able to catch up and they’re behind on payments. They could be behind on payments six months or six years. And so those loans, you know people are gonna expect to get higher yields you know twelve percent on up to 20 percent or more in some cases, is what most investors would would hope to yield on that.

Buck: You know it’s interesting so it’s classic sort of you know higher risk, higher reward. But there’s also a couple other elements that I think are interesting in your historical business model, there’s multiple business models here in the notes industry I mean. You want to talk a little bit about the different approaches maybe two or three different sort of common approaches that investors take to buying notes.

Jorge: I mean it really depends on their strategy, they’re going to be looking for, its whether they’re looking for cash flow, they’re looking for you know some kind of shorter term gains you know they buy it and then it becomes an REO and then they sell it, buy it, becomes an REO they fix it up, they sell it, there’s you know modifications that you know that’s primarily, AHP has learned that the best way to approach homeowners who are delinquent on the payments is to offer them solutions and let them choose, and whether that’s hey I want to stay in the home with a modification, I don’t want to stay in the home we’ll pay them cash for deed-in-lieu or they do a lump sum settlement and by approaching them with those options has worked really really well in our history.

Buck: Yeah I think kind of what I was getting at was one of the things that I noticed was there’s literally people out there who are more interested in the asset necessarily than they are in cash flow. So there really is different ways to approach it. There’s some confusion out there when you talk about the notes business for example, you know you have I think some people I’ve met now who target properties that are that no one lives in. So if no one’s living there of course they’re not really trying to figure out how to keep them in the house. So they’re really targeting the asset and seeing if they can get a discount so that’s one approach. And then as you mentioned AHP’s approach and probably you know the most people that I’ve met is to try to keep somebody in the house and the first idea is as you said to potentially renegotiate debt, I’m saying you know if you can pay a little bit less and I bought this at a discount so I’ll still make money here but I’ll lower your mortgage or lower your interest rate or whatever. Or you pay them some money to basically vacate the property and make it easy on everybody to prevent the third option which you don’t really want generally in this model which is foreclosure, right? Is that typically sort of the three routes along the way?

Jorge: That’s a fair assessment absolutely.

Buck: Deanne, do you have anything to that?

Deanne: No I think that Buck did a good job summarizing that you know we’re socially responsible so we want to keep people in the home but there are investors who are looking at the underlying asset.

Buck: Deanne, do you want to talk a little bit about because there’s also some other terminology I’d like to get to if you don’t mind, and again you know it’s because a little bit of knowledge is dangerous and now I have a little bit of knowledge. What’s the difference in, well you saw there are people who buy first liens and second liens and things like that. Why would somebody assuming that you know property, you know first lien means that you are entitled to whatever money is due first. Why would you even get into the second lien business. What are people doing there? Because you can buy a first lien, you can buy a second lien. Can you talk a little bit about that, because I know you guys don’t do it, but I just want to create sort of a holistic educational thing here.

Deanne: Sure so you’re right we focus on buying the first lien. There are some investors out there who specialize in second liens. And so if you’re buying a second lien you’re typically buying that at a very steep discount, and then you’re gonna want to understand what’s taking place with the first lien, right? So you could buy that second lien for pennies on the dollar hoping that when that property goes through foreclosure you’re gonna get paid off at a discount so you’re gonna make some kind of quick money so they can clean that up. Other people might buy a second lien also having an interest in the underlying real estate so they could purchase that second lien, foreclose on the second lien, and kind of step into the shoes and keep that first thing paying if they wanted to. So those are a couple of the reasons, Jorge anything else you’d like to add to that?

Jorge: No I think you’ve covered them well. I mean I guess the other part is almost nuisance when you do buy them for pennies on the dollars and let’s say you’re hoping that the family maybe does a short sale you could probably you know get everyone to agree to pay you some token amount. They may owe you 50,000, you may have bought the loan for a thousand, you may be able to get five thousand out of a short sale, that’s probably only other situation I can think of.

Buck: Sounds a little bit more speculative in general.

Jorge: Oh it’s definitely speculative.

Buck: So let’s talk a little bit about the note buying framework here because I think you know we’ve never really approached this as hey you know you have an option, here\ you can buy your own notes or you can invest in a fund. But since you’re a servicing company now, you know that is something that you can actually help people with. So first of all if you’re interested in exploring the idea of buying performing or reperforming or non-performing notes, where do you buy them? As an individual not, we’re retail investors typically right. So where do you get them if you’re not a hedge fund or AHP servicing. So really through kind of networking and going to events and finding other people who work in this space. We’re an active buyer and seller so over the years we’ve developed a network of trading partners. We also keep a database of people who are interested in buying. So when we are selling loans we may go through a broker or we may sell directly through our network and it really is I would say very much a relationship business.

Buck: Got it and so once you’ve got some opportunities to look at there’s typically something called that I’ve learned to be called a tape and then a tape basically has given you a bunch of information about the property. It might give you some values in terms of what the properties how much is owed on it, it might give you a value of the property itself etc. Talk a little bit about in very broad terms, what is that initial process, like for someone who’s interested in investing in notes, what are they doing? They’re looking at they’re looking at the tape, what kinds of things are they looking at?

Deanne: Sure so they’re looking at the payment history, principal balance, what the property is worth, if it’s severely delinquent, whether foreclosure has started, how close to foreclosure completion they are, market area, value, tax liens, other liens, so that you can really get a sense of what’s the history of the loan, what’s the likely trajectory of the loan, and what do I think a fair value is based on what I’m gonna need to do to either get that loan reperforming or find another solution.

Buck: And that’s really just sort of the first step and at that point you’re kind of already making an offer, right? Based on that tape which I found kind of interesting is you know even before you really get into the due diligence and everything else, you’d make an offer and maybe you go back and forth with, you get something initially accepted and then you start to the due diligence process. What does that due diligence process looks like and you know who does that? Do you do it yourself? Do you outsource it? How does that work?

Deanne: So we do it ourselves, a lot of smaller investors would outsource it to third parties because they wouldn’t have the size or the skill to develop their own team we’ve developed an amazing team in-house so we typically do the due diligence review itself in-house. But we do rely on third party vendor partners for things like taxes, title, which we typically order and then we also order, we use a broker’s price opinion, which is commonly referred to as a BPO. Other people might use online values or even a full appraisal. And so we’re also then looking at the collateral file and the history of how it’s changed hands. We put all of those things together and then we go back and look at what their initial bid is, what we learned through that due diligence process and we adjust our bid to come up with a final bid that we’re willing to pay, keeping in mind our model and our strategy for the portfolio.

Buck: What I found fascinating about this in being out there was that it’s a laborious process for each individual, no. And and so it’s interesting too when you’re buying these things in volume, the amount of work that must go into that, I mean I know you guys do it individually because I saw it, but I mean are there just some funds that are just buying in volume and saying hey some of these are gonna work and some of them aren’t, or is that…

Deanne: I’m sure that there are some larger institutional players who are buying in volume but you’re right, we take a look at every loan that we buy, it is a laborious process it’s definitely a situation where the devil is in the details, but you know we will buy things that have title issues, that need to be cured, and other kind of unique situations, but during our due diligence process we get reasonably comfortable that that’s something that we can find a solution for.

Buck: So the due diligence process is done and then you may in some cases go back and renegotiate a price if there’s something that’s totally unexpected and it seems to, at least from what I found, it seems relatively common that happens. And ultimately say you you get to an agreement and you buy a note. Now this goes back to what Jorge was talking about earlier, then if you get to that point and you buy a note, you have to have a servicer, right? And that’s something that you know I think it’s kind of a foreign concept because to, probably to most people who don’t know this area, so the idea being that you can’t go and collect money yourself right? So talk a little bit about the servicing business and what’s involved with that and why ultimately you started AHP Servicing.

Deanne: Sure so I’m going to talk about what a servicer is and then I’ll turn it over to Jorge to talk about why he made the decision that we should start a servicer before I joined the company. So if you’ve ever had a mortgage, the servicer is the company that sends you your monthly statement, they process your monthly payment that you turn in. If you have code for taxes and insurance they make sure that they receive those payments and pay your insurance and your tax is timely for you on the property. So at a very basic level in a performing loan that’s what the servicer does. The non-performing loans which is where we’re really a specialty servicer, primarily for non-performing loans a lot of other things go along with that so outreach to the borrower to make collection arrangements to develop payment plans, as Jorge noted earlier. We try to give the borrower as many opportunities as possible to have a hand in how they settle that loan, so it could be modifying the loan to make the payments more affordable, it could be a discounted payoff, if they’ve already vacated the property they would like to we’ll take a deed-in-lieu foreclosure where we can. So that’s where you get into kind of what I would call the secret sauce of AHP Servicing. We’ve got a long history of doing this with borrowers and so it made sense to take our portfolio in-house first of all so we can do it for ourselves, and then open the doors to third-party investors like us and our trading partners who really want that attention to detail.

Buck: Yeah Jorge so tell me because I remember you told me about the pain of this before you ever started this right? I mean this was sort of a major pain point as an entrepreneur the pain point generally means there’s a business there right? Is that basically what you saw?

Jorge: Very much so, yeah you’d want to, I mean we got frustrated. We went probably went through seven or eight servicers in our history. And we were now they never met expectations and you know we have this, we really want to call the homeowners ourselves, I mean that’s what probably anyone who on your show would think well I own the loan and I’ll just call them and you can’t, you need to go through someone who’s licensed in that state and follows all the proper protocols. And so that was always a source of frustration. We tried to do the best we could by kind of micromanaging the servicers but that created some friction, but what was most frustrating is they just weren’t doing a very good job but we were also paying them a lot of money. We owned a lot of loans so they actually we were paying tens of thousands and then it crept over a hundred thousand per month to third-party servicers to do this work and they weren’t doing it very well and they weren’t even trying to really improve much. So we thought well here’s the opportunity that the opportunity is twofold, one is most the servicers that we’ve worked with, the performance could be improved. And then the other part is you know the compliance. These servicers were not only having trouble I think sometimes servicing or serving their investor clients and the homeowner and the bars, but also there’s regulatory issues or regulatory concerns which are state agencies and the CFPB that oversees servicers. And you know in our instance we had to go to each state in order to get licensed or get an exemption get confirmation that were exempt from licensing for whatever reason in that state. And that’s the process that’s still ongoing but there’s regulatory scrutiny and if you make a mistake the fines can be extraordinary in the millions of dollars. So as a result of these challenges in the market I think a lot of concerns about compliance there was already some consolidation going on amongst the different servicers, but when you see people kind of exiting from the market then we saw the opportunity, hey we could do this for our loans and do it for other other people’s loans and that created the opportunity. But I think you know it’s great that when I first talked to Deanna, one of the things that came across early on is she built the service at a prior position. She had a little or no, I believe it was actually no but I’ll have her confirm it, no regulatory issues which is really remarkable in this environment because there’s a great deal of regulatory scrutiny in this on servicers right now in today’s era. Deanne was it was a zero?

Deanne: Yeah and we were audited by the OCC and the FDIC and a whole host of very large regulatory agencies and Jorge is correct that that belief and that attitude of regulatory compliance is hugely important for the servicer as well as for their clients, but it also kind of gets to that goal of trying to just do the right thing, right?

Buck: So now you have a servicing company. Will you be selling notes to retail investors as well?

Deanne: Yes so we already do. We do it on a you know kind of small basis but we have a couple of avenues that we sell loans through and we’ll continue to do that and we think that actually is a benefit to us as a servicer as well because we understand that you’re not looking to just necessarily hold a loan and ride it through foreclosure process two or three years, you’re looking for a quick consensual solution to that past due status so you can make money off that loan and get it paying or settle it and then reinvest those funds.

Buck: So the loans that you’re typically gonna be selling, I guess there’s a two part question. Are they typically going to be what we call the reperforming notes because you’ve gotten them to the point where they are now paying, and so are they those kind? And then the second well that’s it, will ask that first because I don’t want to get it too complex, but is that the kind of note that we’re talking about when you’re selling?

Deanne: Yeah that’s definitely in our sweet spot is to get a reperforming, seasonal reperforming and then sell it as an RPO.

Buck: Got it. And how, is there a platform right now? Is there a place right now? Or do people just contact you and say hey I’m interested in buying some reperforming notes or how does that work?

Deanne: Yep so they contact us, we’ll put them in our database and we do quarterly loan sales, so we’ll let them know what we have offerings available and then sometimes we use brokers as well.

Buck: So yeah do you have something to add to that Jorge?

Jorge: No I mean the the process I mean I think you’ve touched on it. The process to get into this business for us when I first started was it was real, the challenge was we decided we wanted buy notes, we raised a little bit of money, but how do you buy the notes? And so here certainly building a relationship with AHP is one way to buy the notes, but it is in general a pretty opaque business and built as Deanne mentioned on relationships which is in this era you know you would think there’d be some more technology which which would give greater transparency and maybe a more predictable path of entry for newer investors, but that just it doesn’t exist yet and hopefully it will. But in the meantime I think AHP can certainly provide especially a newer investor, can provide an avenue. Here’s the other issue, is a lot of the bigger hedge funds, bigger buyers you know you come in and say hey yeah I’m a newer buyer I want to buy three notes or five notes and there’s, you know they’re gonna, it’s not worth it, it’s just not worth their time. At AHP, I think that it’s hey we can sell you loans but we’ll also handle your servicing so you know maybe that, so combine those two in it I think it makes sense for us to cater to smaller investors as well.

Buck: Right and that certainly helps with, one thing that occurred to me and this may seem really kind of basic, is that whenever you look at notes, when I pictured the note business, the only thing that really came into my mind was what the yield would be when you put in a financial calculator and you find out what the yield is, but it’s not just the yield it’s actually, okay well then somebody might pay off that loan early and then that bumps up your yield quite a bit, right? So the reason I bring that up is that there’s there’s two things that kinda come up here, one is well how does that help AHP to sell a note or are they just selling the lousy ones? No they’re selling them because that actually helps them improve their cash flow. And then ultimately for you, if you want to hold a cash flowing asset you can buy something and then hopefully you’ll hold it until there’s some sort of bump at the end for you, right? I mean that’s so it’s kind of this symbiotic relationship.

Deanne: Yeah that was a great summary.

Buck: Yeah there you go I learned something from you guys, right?

Jorge: I know. And it’s tough to predict, I mean I remember we sold one, the people had started paying again but we saw that they owed, I mean it was Ohio I think they owed close to a hundred thousand. We thought the property value was sixty and this is a few years ago I think we sold the reperforming loan for like 35 now we bought it for 15 or something so we made a great return, but we it we took a non-performing loan made it reperforming. But then two or three months later the people sold the house, the people that just paid 35 got sixty thousand dollars. So they made 25,000 plus picked up a few payments. Their yield was through the roof I was saying, God kind of wish I didn’t sell it. But to your point it’s fairly unpredictable because you really don’t know what the the homeowner may have modified, but they may want to eventually sell the property, they may refinance you may get paid off early, and if you can capture that discount you know back in in a shorter period of time it certainly it will potentially increase your yield significantly. And from AHP’s perspective you know if we can capture that gain which nowadays is gonna be much more modest than that, but if we can capture that gain and roll the money there’s some advantages for us as well to keep our yields up.

Buck: So let’s let’s roll into based on that you know you just said, something at nowadays and so suggesting that times have changed a little bit in the note space in general, can you talk a little bit, obviously you started AHP, you started I think was a 2009, 2008. So I mean you picked a pretty good time to start this business. I mean so is it just a supply and demand thing that now you don’t have as much yield is that what’s going on?

Jorge: We’ll talk a little bit about that and actually Deanne’s probably better equipped because she’s the one operating it right now in today’s environment. It’s definitely tighter than when we started.

Deanne: Sure so you know overall you’re right, supply is down a little bit because foreclosure rates are lower, but we are starting to see a little bit of an uptick in some of the newer rich nations and I think that’s probably due in part to the easing of lending standards by the federal government. So I just listened   a podcast earlier this week that said the average down payment now for new origination is 5%. So we think about what that means for the next recession fast-forward a couple of years we’re gonna have this new crop of borrowers who are underwater on their mortgages. So there is a little bit of a cyclical ebb and flow. Our business I would say is somewhat counter cyclical in the sense that, or I should say maybe cycle resistant is a better term because even when times are good there’s still a lot of foreclosures that are hanging out there. So we are seeing more competition, we’re seeing some competition from some institutional players who as a result of settlements with the federal government need to forgive a certain amount of mortgage debt, but in spite of that we’re still finding good deal flow it really comes back to those relationships and being disciplined and making sure that you understand the product and that you’re sticking to your model and knowing when you’ve got a good deal and you’re maybe willing to extend that model a little bit because you’ve got a good return potential.

Buck: You talked a little bit about cycle resistant and it brings up something that I’ve thought about a little bit and it sounds to me like you’ve been through you know good times and bad with this. When you have say you’re buying non-performing or reperforming debt, and you’re buying it in good times are those notes statistically more difficult to keep performing once you get them performing when you go from being in a good part of the cycle to recession?

Deanne: Yeah it’s a great question. I’m not aware of any statistical data that’s out there, I have looked for it. What I would say is I think it just depends on how much cushion you’re giving the borrower. So you know we’re socially responsible investment firm and as a result, I should say we’re a socially responsible offering and as a result we’re not necessarily looking to kind of pull that last dollar out of the borrower, we’re looking for a fast consensual solution that’s going to allow them to keep paying, and I would say one of the things I was so impressed by when I was getting to know AHP before I joined is kind of looking at the before and after of the average borrower payment, was pretty remarkable, like it was evident that AHP was really living its mission and trying to set those borrowers up for success. and so it’s really kind of the underwriting that goes into or the formula that goes into how do you modify that mortgage that I think is the biggest determinant of whether that borrower is going to keep paying in the next market cycle. I think the other thing that’s critically important and studies do show this is whether once that borrower is back on their feet they’re saving money, right? Because unfortunately a lot of Americans have zero savings and that means that if they have a health event or something changes, they don’t have any cushion, so making sure we’re giving them payments that incentivize them to build equity and stay in the home and then also allow them to start gaining that financial stability.

Buck: So to the extent that part of your model though, buying at less you know basically creating a better cushion for for the home buyer or or the people who are living in these houses has got to be affected by the competition driving down yield and all that, you only have so much wiggle room, right? Even though you’re a mission based business it’s still tough, you still have some numbers and some investors to keep happy as well.

Deanne: Absolutely. It’s purpose plus profit. And so we’re very disciplined in terms of making sure that we’re making smart investments.

Buck: Got it. So let’s talk a little bit about the new fund, what is it called and could you tell us the features of it? From my understanding it’s pretty similar structurally to the first one, maybe talk about you know any similarities or differences between that fund and the past fund and how its set up.

Deanne: Sure so we’re very excited about the next offering we should be launching any day, we’re just waiting on our final qualification from the SEC so it will have a lot of similarities, it’s a Reg-A offering, we’re seeking to raise up to fifty million dollars, we’re open to both accredited and non-accredited investors, you can invest with as little as $100 and that’s kind of part of the sort of democratic underpinning I would say of the history of AHP that I really liked is that it’s another way that they’re encouraging financial stability and financial literacy by making this open to non-accredited investors. In terms of what’s changed between the last offering and the next offering, the next offering will have a preferred targeted return up to ten percent per year, again that’s not a guaranteed return it’s a preferred return. Distributions are paid monthly. Still use best efforts to return principle within five years of the investor making the investment. If investors redeem early the returns go down a little bit so if they redeem in the first year the return drops from 10 percent to 8 percent, if they redeem in the second year it drops from 10 percent to 9 percent and then after 2 years it’s that full 10 percent return. In terms of the business model you know we were still focused on purchasing non-performing residential loans, we’ll also use it for the servicing business, we’re gonna be growing the third-party servicing business, and then we’ll be able to use the proceeds of that offering, if we have opportunities to purchase mortgage servicing rights or to potentially acquire another servicer who’s struggling or other kind of related things to the core businesses.

Buck: Liquidity was a major factor I thought that was a differentiating factor for your last fund, which in other words typically when you see a notes fund you have your money locked in there for at least two or three or more years. But with your last fund you were able to, you had some level of liquidity will that continue? How will that work?

Deanne: Yep so we still offer with the next offering we will offer best adverse liquidity so there’s no lockup period and I agree with you I think it’s one of the things that really sets us apart. We have provided some clarification in the next SEC offering in terms of how much we may redeem in any one year, so that’ll be up to 25% of the fund in a given year and the reason for that is we don’t want to be in a position where we’re selling loans at an adverse time in the market and then that’s not good for the returns for the rest of the investors who stayed in.

Buck: So just just for clarification that’s just kind of to protect the fund. So as long as presumably if you have a certain amount of money in there and times are fine and not everybody’s trying to sell at the same time, you could get a hundred percent of your investment back upon request, is that right or am I missing?

Deanne: Nope that’s right. The only caveat that I would make since we’re having this conversation before we have SEC qualification is there may be some slight changes if they come back with any final comments so I would just ask any of your listeners who are thinking about investing to make sure they actually review that final offering then once it’s approved.

Buck: We’ll certainly get any clarification out to people ahead of time as well because I know a lot of people are invest in the fund last time I would probably have an interest in knowing if there’s any differences beyond that. Anything else we need to know about the fund Jorge? Is the new one, I mean here’s the way I see this is from the standpoint of what you’re offering now which I think is really interesting you’re saying hey if you want to go out and do this on your own, you know he we’re gonna give you some tools to do this. The two I think from the buyer standpoint the most difficult things are probably due diligence which you know that’s the part you’re gonna have to learn. I mean that’s the part where I’m trying to you know find time to learn myself. But the other part is finding a good servicing company now you’re providing that second component and so you’re giving people the tools to do that. Now if they don’t have the time or they’re not interested you can still get exposure to the pros, right? And say alright I’m good with 10% and that’s basically what you’ve created is an option either or, or both right? So is there anything else you want to add to that Jorge it sounds like a pretty interesting approach.

Jorge: No it makes it I mean I think your description is very accurate and it gives somebody who invests in a fund, they get regular reports, they can see our SEC filings and it’s something where they can kind of follow us and get to know the business and if they decided hey I want to I want to do this on my own, that’s great. In the past they buy a loan and they’d have to find a servicer who would take you know it’s maybe a handful, a loan for a small portfolio and then you know they’re dealing with any servicing servicing challenges on their own, here I think we can you know we’ll be there as a constant resource for them as they hopefully grow their portfolio. I mean one of the things when we first started I think we bought 11 loans in our first in our first purchase and in the first year we bought a hundred fifty loans and you know pretty soon we were buying over the years thousands of loans I think the last fund was over 2500 loans and so certainly somebody could buy it and and just buy a few loans here and there but we’d also love to you know somebody’s focused on getting big, you know we’d like to get big with them.

Buck: Yeah that’s fantastic. So one last thing before I gotta ask you about Jorge, what is debt cleanse?

Jorge: Ah that’s a new, so I the it’s made it a lot easier for me to let go of control of AHP by putting my mind under another business. So I did start another business which is called DebtCleanse Group Legal Services and what this is, is a nationwide legal plan which helps consumers and small businesses get out of debt and without filing bankruptcy.

Buck: S what are you doing? What do you usually do? Are you just helping to negotiate down debt and everything?

Jorge: So we built, I’ve written a book when I you know I before I started AHP I had some I had some challenges of my prior business which resulted in me being significantly in debt and I learned how use some of the lessons from that experience as we developed the strategies for a AHP. But here a lot of families say hey can AHP buy my loan? For instance you know we may help somebody and they tell their friends and family and the friends and family now calling AHP you know can you buy my loan and and we can’t call city or Wells and say hey you know sells sells bucks long for instance and it just doesn’t work like that but now if Buck or somebody that you knew was struggling with their mortgage we could share strategies that would help you get a good deal from your servicer or lender and if they didn’t give you a good deal then we’d provide you access to an attorney in your state who could who can assist you.

Buck: So is this primarily in the real estate space again or could this be any business or individual dealing with the debt issues?

Jorge: Any type of debt issue of student loans, business loans, payday loans, credit cards, mortgages any type of debt, and what we’ve done is we’ve trained a nationwide network or in the process of training a nationwide network of attorneys and so they can represent them and and each member here’s the business model, each member pays $29 a month to the to the plan and in return they get access to some technology tools they also get 30 minutes one-on-one phone consultation with an attorney in their state and if they decide to hire that attorney let’s say the sewer lender or defend a suit from a lender even write a letter or something like that they get a 25% discount off that attorneys regular rates.

Buck: Interesting so basically you’re giving some guidance and ultimately connecting with attorneys, it’s a referral service as well as you know just some basic tools. Fantastic and that’s up and running.

Jorge: No it should launch in the first couple of days of December.

Buck: Got it. And it’s DebtCleanse.com

Jorge: That’s it you got it.

Buck: I love it. You’re man after my own heart Jorge it’s great. Anyway listen guys if there’s the the website is different now so just to prevent confusion in terms of the the offering from AHP Servicing its AHPServicing.com now so make sure you make that change I’m sure they will also probably do a redirect or some kind of note if you go to the old site which we’ve talked about in the past. Also we have Jorge’s book up it should be up there in the resources section we changed our website so i I’s a book called burn zones it talks about, Jorge’s it’s a very good writer too it’s a great story about sort of his start in the world of multi-family real estate and how you sort of the highs and the lows of what that was all about so for people were interested in real estate if you go to WealthFormula.com you can sign up and Jorge will send you a real copy of that book to your doorstep as opposed to me who just has free downloads because I’m cheaper than Jorge for sure. Jorge and Deanne thank you so much for being on Wealth Formula podcast today.

Jorge: Thanks Buck!

Buck: We’ll be right back.