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207: Non-Performing Notes in a Non-Performing Economy with Jorge Newberry

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Buck: Welcome back to the show everyone. Today my guest on Wealth Formula Podcast, well gosh, he is the guy who’s been on this show more than anybody else. A longtime friend, great businessman, Jorge Newberry. He is the founder and the CEO of AHP Servicing which is a company that services non-performing notes but it also has a fund which many people have invested in. He’s a longtime sponsor of this show as well. Jorge welcome back.

Jorge: Thanks Buck. Thanks for having me back. I think I’m setting a record. 

Buck: Yeah oh you’re definitely setting a record. You’re here more than anybody else, so that’s that’s great, we always enjoy it. So you know as you know even though you’ve been on a bunch of times, we have a constantly growing audience right, and you actually believe it or not I didn’t tell you this back in the day but you know you started advertising before anybody was listening. But I’ll tell you what I think you know it’s it’s turned out to be pretty good deal for you over time because now we have a a nice audience you had a lot of people invest with you and I’m you know very supportive of what you’re doing. But what I wanted to do knowing that there’s always new people on is first and foremost we are educational so we don’t want to start talking about something when we don’t have a context for it. Tell me about AHP Servicing, I mean what let’s start with a basic concept just quick review what is a note and what is a non-performing note and what in that context what is AHP Servicing doing?

Jorge: Sure so many in your audience probably have or have had a mortgage at some point which is security for a note and so when you buy a home oftentimes you’re taking out a loan from the bank or somebody else like that and you’re signing a note and you’re signing the mortgage. The note will be the document that includes all the terms and I agree to pay 100 back at you know 7% interest in 30 years at this amount of monthly payment and when those are not paid is creates a non-performing note and that’s what we specialize in. Some people are having trouble paying the mortgage sometimes lenders will sell those to us or they will ask us to service those on their behalf and so that’s what servicing is, simply in almost all transactions all mortgages there’s the Ambassador who actually owns the mortgage which could be some massive wall street fund could also be an individual and there’s usually a servicer in the middle which actually collects the payments and in our case we’re regulated by the different states we’ve actually gotten licensed in every state of the union except for New York we’ve got a license in Puerto Rico and District Columbia so we can service loans almost everywhere. In New York we’re very close to getting that license and we just got California a few weeks ago which is great those are the whole the long-term ones for where California and New York the ones that took the longest. So each of those state regulators regulates mortgage servicers who are servicing mortgages in their state and that is the collection of these payments. So we’ll collect you know $500 from the homeowner we’ll take out a fee call it $25 or $50 depending on the status alone and then we’ll forward on the difference to the investor and then if things like a foreclosure or bankruptcy or other types of challenges today it would be forbearances, any of those things are needed then the one that carries out that function typically is the mortgage servicer.

Buck: So when you have, you know I’m going to try to simplify this a little bit more, so you have none you see you have somebody who is unable to pay a mortgage and you have you know this distressed asset and then the lender ends up selling it to you you as an investor have a few different you know options, one is well you could just go and you know you could just foreclose on the person and then sell the asset that’s probably what you know the big banks and stuff are typically going to do. Another option which you guys tend to focus on is you know is basically to renegotiate that mortgage maybe forgive you know what’s due in the past and because you’ve bought at such a discount you can therefore make a make a profit by allowing somebody to stay in their home but pay a lot less to do so, am I missing any options there?

Jorge: No I think you got it. I mean the other way is when the homeowner doesn’t want the home anymore it’s already already moved out and in those cases will typically give them maybe $1000 they signed the property to us and then we sell the home.

Buck: Yeah so those are basically the three things so around this beyond the servicing business I think what you guys have been known certainly to our ecosystem the Wealth Formula ecosystem, is a fund and it’s these these funds where essentially what you’re trying to do is you know acquire substantial amounts of these notes and because you have a volume of them you’re kind of playing the numbers a little bit that you know you’re going to be able to you know make you know make a significant profit because you’re buying these so cheap and you’re buying so many of them. So in a nutshell that’s kind of you know, correct me if I’m wrong but that is the idea behind you know one of your AHP funds.

Jorge: Absolutely right.

Buck: So now given that context and I just wanted to make sure that people understood they weren’t confused about the rest of this conversation, let’s talk about right now okay. People right now in the middle of this pandemic, craziness, I mean literally you know we talk about unemployment right now for all intents and purposes we’ve got probably about 90% unemployment right I mean you can’t even count it because everybody’s required to stay home so people who never missed a mortgage payment are going to do so because pretty much everyone is like I said is pretty much unemployed right and if we’re are starting with people who’ve had problems paying their mortgage before the non-performers as we’ll call them, how is that affecting payments in your fund now? 

Jorge: Sure so we definitely had people that made their March payment and are unable to pay their April payment and they are calling in saying that they want to do a forbearance that they you know especially on the news everybody the Federal dock mortgages they’re offering I think a two or four months forbearance routinely and so we’re we’re offering a two month forbearance to anybody who was up to date or not more than 90 days behind at the beginning of this month. And so then it’s easy because it it’s easy to make that determination because that shows that they were making their payments and then all of a sudden their their income is interrupted due to this crisis and hopefully you know two months go by and a couple things you do they get back to work they uh they get stimulus money and or you know their unemployment kicks in some people are unemployed right now are having tough time getting unemployment because it’s you know the system is so overwhelmed with requests so we hope that we’ll you know we hope for most it’s a temporary situation but the reality is you know they come back and they the these stay at home orders are lifted and they may not have any job to go back to I mean some of these a lot of companies are not making it through you’ve already seen some major bankruptcies and mass layoffs and I think that we’ll probably see more of those in the next few weeks until this turns. And what’s extraordinary about the situation is I think twofold one is it happened so fast because two months ago for most people think life was fairly normal normal totally normal in the last five weeks it’s just turned upside down for almost everybody has been I don’t think any American or almost almost any person on this this globe on this world has has not been impacted in one way or another. And so that that’s you know that that massive shift is extraordinary and you know some people forecast that it it’s all temporary the economy’s gonna snap back you know soon as these orders are lifted and things get back to normal but I think that’s maybe optimistic. I think you see what really happens.

Buck: Very optimistic right I mean listen you know you I’ve talked about this on this show before I think that when you look at like and I mean neither one I was served stock market guys we’re not equity market players but you look at like the Dow Jones and Dustin watching it sort of out of like driving by a wreckage or something like that you know just trying to understand what’s going on there and I still can’t believe it’s it’s still hanging in there because what you and me see as business people is like okay you’ve had to probably furlough a bunch of people and you’ve you you understand what’s happening to businesses around you’ve got people who’ve got notes that you know they’re not able to pay on you understand the extent of this and to the idea that that we’re just gonna slingshot back into you know a booming economy is just absolutely dumbfounding to me but I think that’s what people are thinking. 

Jorge: People are hoping that.

Buck: I think they are and I think they’re just not getting the reality of what’s going on. I’ve described this as an earthquake and we haven’t even seen the tsunami which really causes the substantial economic fallout. So let’s talk about that fun because you know obviously we have a lot of investors in there and they’re getting lots of questions so what are you gonna do to you know at least in the next few months, I mean presumably you know these these stay at home orders etc are going to soften in the summer and you know you’ll see people getting back to work. But during that period of time how is that affecting the fund what are you doing to mitigate the damage. What should people be looking at during that time.

Jorge: Sure so bear in mind we’re servicers so we have you know in our current fund there’s two primary sources of revenue. One is servicing mortgages we service mortgages that we own we also service mortgages for dozens of third parties that service with us and we are fees on that. So regardless in the performance of those mortgages were earning fees and then the other part is we buy mortgages and earn revenue from there. The servicing side of our business is has seen a surge of interest from larger funds over the last thirty days and there’s a couple reasons. One is funds are anticipating a deluge of non-performing loans and so they are setting themselves up. In fact there’s new funds capital providers that have had different strategies let’s say they were funding flips now they’re saying that’s no longer a viable opportunity for them now they’re moving to non-performing loans and I shouldn’t say viable but preferred and they’re moving to non-performing mortgages and that’s where they see that the scale and so I see the. So we’re under contract right now with three major funds we’re in the contract stage with three major funds and we have four others that were discussing it got to the point of doing contracts but our goal is to sign up twenty funds by the end of June and the reason this is happening now is we’ve moved as a Monday we’ll be on black night technology which black night is used by the biggest mortgage servicers in our country and we went with a more modest-sized system up until now we over the last seven eight months we’ve been working on this transition and it was supposed to go live a couple days ago and actually the way it’s working out and spend will live this upcoming Monday that makes us attractive to larger larger clients and then the other part is waiting on getting these all these servicing licenses. We did get California which is a big step forward, I need New York and then I can certainly can service everywhere. So we’ve become an attractive option for funds and that will generate I think that will generate a lot of revenue regardless of you know our investments which we think that the exposure we have currently to the market os the loans that we purchase in all likelihood there’s been a drop in value over the last five, thirty days, there’s been a drop in value in the homes that secure those mortgages but bear in mind that the vast majority the mortgages that we purchase and continue to purchase are secured by homes in low to moderate income neighborhoods with values of call it $50,000. It’s usually forty to fifty thousand so you have a mortgage secured a mortgage of a hundred thousand secured by a home worth fifty and we paid twenty or twenty-five for it the chances are that that home may go down 10 percent 20 percent so goes from fifty to forty five or forty it’s still well above what we paid for the mortgage and still in this range of homes where they didn’t have the mass appreciation you know in contrast to high value homes let’s say you’re in California so California has significant appreciation over the last ten years and it all likelihood those homes that appreciated they’re now gonna give some of that back as they depreciate over the neck as a result of this crisis it’s just inevitable the more you know the more they rise the more they fall and these lower value homes rose early on a very limited basis and I think they’ll drop over a very limited basis and the reality is many of those homeowners I you know the mortgage payment is $400 $500 $600 payments that are equal or less than the rent so you know the question becomes a be my home went from fifty to forty, does that even matter when I paying five hundred dollars a month and that’s cheaper than rent you know. So I don’t think the values are gonna have as much of an impact as you know obviously.

Buck: The goal of the fund is cash flow anyway right it’s really it really doesn’t matter what the value of the assets are in some regards but that being said you’ve got a couple months here where I mean gosh yeah again you may not be collecting very much at all and it sounds like you know you’ve got the infrastructure to you know to handle that as a company so that’s not really too much of a concern but from an investor standpoint some of the some of the you know real benefits or the attractiveness has been related to you know the regularity of dividends that are paid every month also liquidity. I would think and I have no idea that that it might be harder for you to to offer the liquidity and maybe you may want to kind of back up and explain you know but those benefits I’m talking about are and how those may be affected in the near-term right next three months or so.

Jorge: Sure so liquidity feature is actually something that Buck’s started with us years ago and you came up with a situation where you said hey I just sold an investment property I have a bunch of money in the bank, I want to invest this with you because it’s not earning hardly anything in the bank but if I find a great deal I’m gonna need it back and so that was so we agreed to do that on a one-off basis for you but then all the future funds after that we said hey we’ll offer this to everybody and so how it works is that when you invest in AHP, you can request a redemption at any time and whether it’s doing it after a month after year after three years you can request the redemption and we will undertake our best efforts to redeem the funds within 30 days and it to me and sometimes people have called us and said hey I need the money for closing in five days and historically we’ve been able to accommodate those in those cases but if our documents provide that in the case were unable to redeem within 30 days then we simply just redeem in the order that they were received so the distribution was received on you know ten days ago that’s gonna be paid before one that was received today and in March we had more redemption requests than we have had in our history by far and people are calling in saying I need to make payroll, I’m the small business owner, and my business shut down and all these different things I have margin calls you know when the stock market was crashing yeah in mid-March all those things hit at once and we had more again more redemption press than ever. So we are over thirty days right now we are redeeming in the order received and the redemption requests we have outstanding right now we’re affecting that we’ll have them all redeemed by the end of May, it doesn’t and then the buying another extraordinary circumstance. We have had and there are redemption requested to be processed this week and I think that we processed every week until we until we’re caught up and so I think it will take longer than expected I think right now we’re thinking 60 days on average for its someone were to request right now he’d suggest it’s you know more like 60 then 30 but we also processing those and that will be it will continue that and the anticipation at some point it gets back to 30 days. Let me step back it’s not just homeowner is unable to pay their money but unable to make pay their monthly payments that’s certainly going to be a contributing factor but also we sell REOs every much we’re selling REOs. I ended up homeowners giving us an even more to foreclose on the property and we are you know in some cases right now we’re trying to sell the REO we have a buyer that’s ready to buy it and the County Court is closed and we has not record the deal yes so that’s just delaying that we also have homes that are most states we can still foreclose on a vacant home so we’re going to foreclosure on making homes but if they’re occupied and they haven’t paid in three years and maybe even the homeowner’s deceased but there’s some relative that’s still living there we can’t complete that foreclosure today in some states and we’re having so there’s going to be a delay and things that we were expecting to generate revenue we may  probably still do it just on a delayed basis. So that is an impact and the longer this goes the the more of an impact it could have. Again overall we’re bullish on the future of AHP and I think in particular the think um you know should I set all of the should offset this to some degree and help help us get through it.

Buck: The the month it’s basically a ton 10% annualized return and monthly checks or you can reinvest. Do you see are you concerned at all about not being able to or not wanting to I mean listen again you know in our multifamily strategies we remarkably in April across our portfolio or projecting that we’re not going to be a whole lot different than we were in March which is remarkable right but even that being said, May will probably be harder on us and I think the idea for us is that distributions at this point don’t make any sense because you know we could you know the state capitalizes you can. Are you looking at it that way at all or do you expect that those you know that you’re going to continue to make dividend payments over the next couple months here?

Jorge: We’re optimistic that we’ll the way things stand now we would expect that we continue to make distributions and we realize there’s all kinds of investment opportunities that are not you know some crowdfunding platforms and suspended Redemption suspended distributions and we understand that we also look at what they’re invested in many of them invested in fix and flip loans which they’ve had a surge of defaults in fact we’re talking to some funds about bringing those defaulted fix and flip loans to us to service and also commercial property or hospitality you know some of these funds that we’re buying in buying strip malls or office buildings or hotels I mean those have just been much there’s much greater investment in single assets that probably had a history of performing great and now they’re just those office tenants are asking for abatements because they’re not even using the office space then we’re working from home so I see massive I see challenges all around but I think I in in many regards we’re in a in better shape than most.

Buck: What I always think when situations like these you know it’s like you kind of get to see who as time passes by we’ll start to see who’s swimming naked right and in terms of their abilities and and or you know what they’re really doing in and I I’ve always been really impressed with your acumen you know as an entrepreneur and as a business guy so I look at this and I am sure you besides you know playing defense and thinking to yourself oh gosh I mean what kind of opportunities are we gonna have here and when, what are your thoughts on that?

Jorge: Oh this is absolutely we’re playing offense I mean there’s a little bit of defense but it’s always seem to play. Let’s think about this the last three years we kept building the service of thinking we’re building this an anticipation because we want to be prepared for the next downturn. Now that downturn is here and so now we need to execute and get this other servicing business, purchase loans but I don’t see that I don’t think people are dismissing their April payments in most cases and it’s for it’s not a forbearance plan they’re probably you forbearance covering May maybe even June and July people getting two to four months forbearances and most servicers. What’s gonna happen though is in six months then you’ll start okay forbearance expired and they’re now they’re not able to pay and those will be the defaults of mortgages and that crush I anticipate it won’t happen to the fourth quarter this year and start seeing just a massive supply of defaulted loans and I mean you look at a couple ways of opportunity to buy loans at big discounts and also opportunities to help families and in our case it would be to do both but that’s not happening today I mean there’s been we’re closing a trade next week they’re actually working on since January and the price will be is going to be significantly adjusted because of what happened and the seller understands that so we still have trades that continue on during that period that the massive supply and this kind of anticipated deluge you know I don’t think we’re gonna see that so late this year.

Buck: I mean that that’s kind of it’s interesting that you said that Jorge because I will I’ll just point out that Jorge and I have not discussed our outlooks on this but I have been pounding the Q4 table myself I mean I think that’s when the tsunami hits right that’s when the the safety nets go away and presumably and Q4, Q1 of next year I think that’s when you really start seeing distressed asset sales and so bottom line is that what you’re looking at now is the damage and you know you are as Warren Buffett said you’re being greedy when others are scared right and that’s the idea. I’m curious Jorge in terms of understanding the outcome what happens in Q4 what happens in in Q1 of next year, how do you think it’s going to look different when it compared to say what happened in 2008 when I mean you started AHP American Homeowner Preservation at that you know shortly after that how do you think it’s gonna look different and why.

Jorge: I think it will be so let just say that it’s not just my opinion. We looked at some statistics the statistics state that and this is about from a month ago their projections of how it was an analysis of how unemployment translates to mortgage delinquencies and you know I think our treasury secretary anticipated 20% unemployment and what that would do. The Federal Reserve Bank of st. the branch in st. Louis they put out something saying we expect this to get to 30% unemployment. So the analysis so that if we got to we have 30% unemployment it would be roughly 10 million homeowners who are defaulting on their mortgages and that would be greater than 2008 then the Great Recession so I think we’ll probably we’re going to see a situation that’s worse than then 2008, which people for years people are saying here that probably some adjustment yeah we’re all were talking about this this is a long hot market at some point there’s gonna be a downturn people say oh it’ll be a mild adjustment, there’ll never be something like 2008 again and here it is we’re actually the red 18 percent unemployment as of last Thursday, new numbers come out tomorrow which would probably put it over 20 percent. I mean we’re on track to hit that 30 percent and 30 percent will results in this situation in our economy that’s worse than 2008 and even more extraordinary is it’s happened so fast. 2008 was drawn out over over an extended period of time this has happened in just an accelerated extraordinary fashion which I think the impact is so unknown and back then you know business was still a lot of people a lot of people and a lot of businesses were impacted but it was slow motion compared to today and everything was pretty much still open I hear all these businesses are closed some are gonna reopen some are never gonna reopen and some way to reopen and then and then not be able to keep going so it’s gonna be I think it’s really unpredictable right now I think you have to look at you know take a conservative view which is gonna be things are gonna be pretty bad for a while.

Buck: Yeah I tend to agree with that and again you know any and I could they say 18% unemployment right now who knows where they’re getting that number I mean nobody I mean some people can’t even get through right and you know these I mean those watching 60 minutes and there was like Shaun and somebody trying to call in New York and they you know I’ve been trying to file for unemployment for a week and and they can’t even get through I mean when you think about the real numbers right now everybody’s sitting at home you know almost everybody’s sitting at home and effectively they’re all sort of unemployed I mean maybe they’re getting carried for a while because of the you know the bailout money that’s coming but as you’ve said and I think the the real effects of this you know what is it fifty percent of our country is is employed by small business like real small business right and there are the ones who really struggled getting this money and this what does this money do anyway I mean it’s just covering payroll for you know a couple months and it doesn’t take into account at all all of the you know costs that are gonna take to sort of restart up and then you know the other thing is that people aren’t gonna go back to spending right away. So I think that I agree with you and and you know I hope I hope I’m wrong but I think that this is a messy situation and you know I mean I think 20% unemployment in the fall is not at all unlikely. Anyway let me ask you this: with a potential feeding frenzy of positive opportunities and you being a guy who’s been around the block a few times now and you’ve taken a licking and kept on kicking and you know and that makes me trust you more right because you’re not a guy who’s kind of you know had nothing but good but when you see this potential opportunities coming up in say August or not August but you know in the fall or winter or whatever and you see people getting super excited what do you tell people when they say ok well you’ve been through this before what should I be careful of you know when I start doing this, when I start buying stuff up, when I start thinking about taking advantage of all of this you know all these discounts?

Jorge: Sure so I think one thing it’s easy to say hey today I’m paying eighty and two months ago it was a hundred so I’m getting a good deal and it would have been two months ago be paid 84 but today you really I think people need to use like prior trading price in the prior sales price as a reference but not take comfort in that because a hundred two months ago eighty today there’s no reason it’s not 60 in a couple of months and forty at the end of the year and I’m not and I’m using just yeah general numbers not saying that’s what it’s going to be but I mean look at oil for instance there is massive changes going on so I would think the risk is buying too early or paying too much even though you’re saying hey it’s a great discount over like people have paid in the past. So I would I think patience will pay off here and doesn’t mean to just there’ll be opportunities along the way but I think they’ll be modest size little opportunities along the way which will take advantage of with a large scale transfer of wealth this is when wealth gets transferred in this country and there’ll be some big winner some big losers but well that’s gonna happen late this year and to be you know makes the right to make the right bets and now the ones you’re gonna win. Here’s where the lack of predictability is what is in the is helpful in this case because when a market is fluid and predictable then it’s very easy for capital come in and and things to everything to be normal. People get scared I mean people obviously very fearful and like you quoted Warren Buffett but people are fearful today and they’ll be fearful in six months so people have money ready to pounce but they’re not sure this looks like a good deal that really isn’t a good deal this is the best deal I can get and not say you have to optimize every single deal but you want to be you definitely want to be very comfortable that you’re getting the absolute best deal because there will be more coming and me and others and I’m better at this today but you always think hey this is the best deal I got to take care of it today not thinking not recognizing that hey there’ll be another opportunity next month and another one that month after and probably a whole bunch of them so you can’t get caught up in having to do this and not being ready to walk away if you can’t meet the price that makes sense to sell it.

Buck: So the old saying I guess goes you know you don’t don’t ever try to catch a falling knife right. So tell us you know let’s tell us a little bit just as a reminder people are interested I think you’re in a you know a potentially really good position to capitalize on this, there really is nobody better at this in my opinion than you. Tell us, if you want to get involved, if somebody wants get involved with AHP funding tell us the the dirty details. You don’t have to be an accredited investor you can invest as a little as a you know a hundred dollars, what else?

Jorge: Yeah those are key things anyone can invest. Accredited and non-accredited investors. Minimum investment $100 so very easy to invest as little or as much as you want we can take $100 hundred thousand a million multiple millions whatever you’re comfortable with we can accommodate. The investments for a total of five years, it’s five years from when you make your investment it’s our expectations to return it at the end of five years, it could be earlier, and so that money as we use that money to build the servicer to buy loans you know we’ll continue to reinvest it until until in five years or you request it back early. We are we had to file all of our documents would be SEC there you can go to our website or to the SEC website to learn more about our offering. Our website is a AHPServicing.com you can go there you can invest it just takes a few minutes we’ve made it a very streamlined easy process and so what else am I missing, the liquidity we talked about that but certainly you know the goal is to be able to redeem it. Our best efforts to redeem within 30 days with the current situation that may take longer so be aware of that. Return’s returns 10%. If you do redeem early if you redeem in the first in the first year that would be that return goes from 10 to 8 and the second ago some kind of 9.

Buck: Got it. So great opportunity to you know to see what happens here in the note business over the next several months and Jorge will probably love to have you on probably in six months and and and come back to some of these issues and see how they’re progressing.

Jorge: Yes see if things have gotten better or is as bad as we’re talking about or maybe they hopefully gone better for the country.

Buck: And again how do you how do you if you want to invest or you at least want to think about it what’s the website?

Jorge: AHPServicing.com

Buck: AHPServicing.com. Jorge thanks so much for being on Wealth Formula Podcast again.

Jorge: Alright. I appreciate it, Buck.

Buck: We’ll be right back.