- Investing In Partials; Non-performing notes
Published: Thu, 07/31/14
A Service of The Paper Source, Inc.
July 31, 2014
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"A pessimist sees the difficulty in every opportunity;
an optimist sees the opportunity in every difficulty."
-- Sir Winston Churchill
How You Manage Partials Can Make You Money...Or Lose It
by Bruce Blohowiak, Attorney at Law
Are you losing money without even knowing it? How you
manage your Partials may make a difference.
Partials are vehicles utilized to get more deals done.
The term Partial refers to a transaction in the private mortgage
industry in which the owner of a private mortgage sells less
than the entire remaining balance owed the Seller.
They come in many forms and variations. A Partial may
consist of a balloon payment to come due in the future, bump
payments (extraordinary payments made during the term of the
mortgage), split payments (a portion of each payment is purchased)
or a reverse Partial where the investor's right to receive
payments begins at a future date and runs until the investor
receives the purchased amount. More often than not, however, a
Partial consists of an agreed-upon consecutive number, or stream
of monthly payments coming due, beginning at a date
certain and extending into the future under an amortizing note and
mortgage, deed of trust or real estate contract.
In creating a Partial, buying a Partial and/or negotiating
the sale of a Partial, various legal issues must be dealt with,
including but not limited to securities issues, usury issues,
disclosure issues, licensing issues and the rights and
responsibilities of the Seller, the Broker and the Investor under
the Partial Agreement. With proper planning and the advice of
legal counsel the inherent risks in the transaction may be
eliminated or minimized. If not tended to, these issues could
resurface and destroy or negate much of the financial benefit you
anticipated when you first agreed to the deal.
While much has been written and could be further expounded upon
concerning the licensing, securities, usury and disclosure issues,
relatively little has been published on the benefits of properly
structuring the Partial Agreement and the importance of monitoring
the administration of that Agreement as it relates to the parties'
financial expectations and their rights and responsibilities.
Many of the Partial Agreements utilized in the industry are
variations of Partial Agreements that were created by visionary
brokers and institutional investors. Some are good and some are
not. Most could benefit by additional clarification and
simplification.
More often than not these Partial Agreements provide for the
full assignment of the promissory note and the mortgage or deed of
trust or the real estate contract to the investor until such time
as the investor receives the cash flow that it bargained to
receive. When the purchased cash flow is fully received, the
Partial Agreement may provide for the automatic redirection of the
cash flow to the remainder person, or the investor may be required
to take some affirmative action to make sure that in fact takes
place. Most Partial Agreements are not negotiated but rather are
the standard forms utilized by the investor, who also completes the
Partial Agreement, the associated documents and "closes" the
transaction or directs how the closing is to occur.
Generally, the investor takes an assignment of, and
administers or services, the entire mortgage, deed of trust or
real estate contract, and proceeds to collect the payments subject
to the terms and conditions of the Partial Agreement and their
standard servicing practices. (Some servicers are also better
than others).
How that investor administers and services the cash flow,
accounts for the payments and applies the payments during the time
the investor has the right to receive the funds purchased, has an
effect (positive or negative) on the performance of receivable, the
balance of the receivable available to be returned to the seller
and/or broker.
The investor's actions or inactions may affect the
broker/seller's ability to realize their full financial
expectations in regard to the transaction. The importance of these
events is most often not fully realized or appreciated by the
broker/seller.
Having seen many variations of Partial Agreements while
I was with Metropolitan Mortgage, many more since my departure,
and having been in the business of servicing Partials and other
complex cash flows, I would advise you to relook at your existing
Partials for the purpose of ascertaining whether the agreement:
(1) contains your understanding of the terms and conditions of the
sale;
(2) adequately protects your remainder or residue interest by
apprising you of certain events in regard to the servicing of the
receivable, i.e., (what accounting or notification rights do you
have?);
(3) whether or not you are receiving the proper notification of
certain events;
(4) given your interest and/or the Seller's interest, whether or
not the investor is properly servicing the account and properly
administering the receipt of the payments pursuant to the
Partial Agreement, and applying them to the account; and
(5) if the property was already foreclosed on or repossessed by the
investor, or if it is in the process of becoming a repossession,
what rights and remedies still may be available to you.
I have seen instances in my practice where the investor
did not properly administer or service the account, did not
properly apply payments to the account, or failed to give the
seller/broker the required notices pursuant to the agreement
executed by and between the broker and the investor. In some cases
the investor breached its agreement with the broker, breached
fiduciary duties owed to the broker, retained funds that they were
not entitled to, made erroneous representations to the
Seller/Broker and/or administered or serviced the receivable in
such a manner as to facilitate a default which had the effect of
depriving the Seller/Broker holding a residual interest of the
benefit of his or her bargain. In other cases some of the
provisions in the Partial Agreement given by the Investor to the
Broker were in my opinion unenforceable.
In regard to contemplated or future transactions, look again
at the capabilities of the people you are dealing with and whom you
are relying on to protect your financial interests and abide by the
terms and conditions of this Partial Agreement. Do you feel
secure? If not, you may want to continue your search. The best
up-front pricing is not the only factor you should consider in
determining whom you should deal with.
A broker who diligently administers and keeps track of his
Partial Agreements can preserve the expected future benefits of the
transaction. However, a Seller/Broker who simply relies upon the
investor to do the right thing and focuses solely on chasing the
next deal may be leaving dollars on the table.
Bruce Blohowiak is the former Executive Vice President, Chief
Operating Officer and General Counsel of Metropolitan Mortgage &
Securities Co. Inc. when it was the nation's largest note
investment firm.
He is now in private practice with the law firm of Algeo,
Clarke & Erickson in Spokane, Washington, phone 509-777-1388.