“Insanity is doing the same thing over and over again and expecting different results.”
Albert Einstein

I remember my beginnings in the finance arena back in 1978. Back then, I could have never
imagined that what has occurred over the last year or so could have ever happened. No
question, I have seen recessions and they have been ugly. I admit this one takes the prize
of them all. However, I remember my first recession involved innovative solutions using
seller carry backs and contracts of sale. While I was young then, even today, I am
impressed with the creativity of the industry. Banks did not like creative financing but the
real estate industry was gutsy and they did what they had to do, over those objections

Today the industry seems to be a tad lost towing the industry line. The banking industry
likes to be the conductor of every opportunity and the real estate industry seems to want to
go along. This is not a beat up of the industry…  instead…  it is a call to leadership and
creativity.

I do not have all of the answers, the best of the best are out there and I know, with absolute
certainty, great people with great ideas are just needing some prodding... I have seen them
before.

I started in what was known as the “hard money” industry. You know those 3 year bullet
loans. Lousy product to say the least but what we did was take private investors money and
provided a good investment vehicle to make a decent return on the money for private
investors. While bad at times due to our own stupidity but the concept is sound.

Where are all the hard money gurus these days? Don’t know how to say it any other way
but directly... your ship has come in, you have no competition and a great opportunity is
before you. The hard money industry needs a re-birth and they need to assist the real
estate community and, more important, they need to help all the distressed homeowners.
I have a vision of that help. An important component of that vision is understanding the
business case of those underwater homeowners.  I suggest you read the companion
article to this article titled, “The Business Case of Walking Away.”

The article will help you understand that a loan modification on a $400,000.00 loan on a
property worth $200,000.00 is more like giving the consumer a greater than 20% loan and
if the property value improves by $100,000.00 over the next 5-6 years, that consumer is still
a $100,000.00 underwater.

ENTER… SECOND CHANCE HOME FINANCING

I know many at first glance will think I am nuts, many thought that about creative financing
too… but let it sink in. I suggest that instead of doing a short sale or loan modification for
those consumers, they walk and walk on their terms. Given moratoriums and the
foreclosure process, a consumer can generally not make payments on their home for
about 8 months, legally. If a proper savings plan was created, a consumer could decide to
walk from the home and put the monthly payment (using the $400,000.00 example of
roughly $3,000.00 per month) could save in that 8 month period about $25,000.00.

The first element of the plan is to do the business case to walk and if that makes sense,
create a savings plan to assist the consumers to save that $25,000.00. The hard money
industry should be the facilitators of that plan as part of a bigger plan.

The next element of the plan is the hard money/private investor base should have a loan
product that turns those homeowners who are so underwater and about to lose their
homes in foreclosure to purchasers of a home in their own neighborhood at the lower
$200,000.00 price.

Generally the product should be:

Terms        30 due in 5
Rate        10% (this attracts the investors but is still half what the loan mod is)
Type        Contract of Sale for first 2 years and converts to fee simple after 2 years of timely
performance.
Qualification        Lost or losing a home in foreclosure. Owner occupied only. Employed.
Motivated homeowner.
Down Payment        No less than 10% from a savings plan identified above.

While we all may not agree on if we have hit bottom or not, what I do think most of us agree
on is that it is pretty near. A further decline in the 20% range does not seem realistic but a
10% decrease does. The above product then appears to be safe as the consumer has
sufficient skin in the game and it is a contract of sale.

The important part is the real estate industry. Free from the chains of conventional
financing, real estate agents can take an attitude of caring less about the REO lenders and
their games but instead represent a buyer who has the above product locked, loaded and
ready to close and can make all cash offers on those properties with 20 day closes.

As for the hard money industry.., create private securities to implement these products to
spread the risk of the pool. Finance only good properties in good condition. Get that
consumer to put some skin in the game to stay motivated to keep it. Use contract of sales
to resolve difficult borrowers quickly. More important, assess your borrower smartly.

All of this is very doable. It is all about all you smart people seeing the opportunity that no
one else sees and make it profitable. Of course, this is just my idea. Some will think it
crazy... well it’s not for you. Those of you who see it as not so crazy and could see it in your
vision or something similar… well… your ship appears to have come in.  Good luck!



(c) 2009, David A. Pereira
Is the Industry Lost? Short Sales? Loan Modifications?
By David A. Pereira (August 2009)
Law Office of Kimberlee A. Rode
- Mortgage Litigation Consultants -