Coastline Capital Fund Management
Andy’s Stories from the Note Investing World
Note: Originally posted on August 6, 2019 on Medium.com
Have you seen the movie, “The Big Short?” I loved it! If you’ve never seen it, Steve Carell, Brad Pitt, and Christian Bale were a few of the biggest stars, along with a bunch of other well known actors and personalities.
The movie did an excellent job explaining the complicated sequence of events and the participants that led to the subprime mortgage crisis in 2008. It presented the 30,000 foot overview from the level of bankers, insurance companies, hedgefunds, politicians and everything Wall Street plus a couple of stories at the ground level from borrowers and homeowners.
In two hours, the movie entertained, educated, and connected the convoluted and complicated set of events into a coherent narrative, easy to understand to the average person (and “professionals” as well!)
What Housing Crisis?
It’s 11 years later and, for most people, the housing crisis doesn’t affect their lives in a significant way anymore. It’s part of the past. As someone who buys and sells defaulted mortgages, however, this is part of my everyday life. My partner and I run a private equity firm that buys, sells, and liquidates non-performing notes.
Although we buy some loans that were originated after 2008, most of the defaulted paper we buy originated in 2002–2007, during the run up to the housing bubble. There is still a significant amount of “mess” from that era that still needs to be cleaned up.
We try to buy the loans that are severely delinquent where the most likely outcome is foreclosure because the problems tend to be more complicated and harder for the banks to fix than for a small attentive company that can give more focused attention to fewer assets. We’re “fix and flip” guys but instead of real estate, we deal with the loans (or notes).
Banks (especially the “Big 5”) are great at processing tens or hundreds of thousands of performing loans but not so good at dealing with the few borrowers that run circles around their systems. Ever call customer service at one of the big banks and hang up in frustration at being transferred a million times and having the final customer service rep still not understand or be able to handle a mildly complicated situation?
I don’t fault the service reps; they’re doing a thankless job and suffer the abuse of irate customers on a daily basis. Their hands are tied and can’t do much about anything outside their particular box.
Crisis Gone, but not Over Yet….
I believe that our biggest troubles are behind us as a nation but I also believe that there are a significant number of bad loans still out there throughout the country. I believe that these represent a drag on the housing market and my intent is to do my part to transform these mini dysfunctions in the economy and allow capital to flow more efficiently, which helps us all.
When we untangle the knot of a defaulted mortgage, we get the borrower on a defaulted mortgage paying again. Or we foreclose on the note, which frees up the property so that a new, willing and able, person can get a loan and buy their first property.
We make money but so does almost everybody else. Cities and counties get paid delinquent property taxes. Contractors and property inspectors get more work when we fix up dilapidated properties. Realtors and mortgage brokers make commissions. Attorneys and title companies help us to foreclose and to clean up title issues leftover from the big banks’ mistakes.
Our investors make way more money than they would if they left their cash sitting in a savings account or a CD.
Yes, the delinquent borrower doesn’t necessarily benefit in the same financial way but they do benefit, even if they don’t see it at the time. We don’t steamroller every borrower we come across and go straight to foreclosure.
We’re willing to meet borrowers halfway when they are legitimately trying to fix their situations. We’ve let borrowers deed back the property to us, while giving them cash to move on with their lives. One borrower paid on the 10th every month so we changed the due date to the 15th just so she wouldn’t be late.
We’re trying to help a borrower rebuild his credit right now so he can refinance his home and we’ll provide principal forgiveness at the same time.
Most of the borrowers we deal with, however, are not trying to fix their problems. Some just bury their heads in the sand and do nothing to help themselves. I feel bad for them and wish they would contact us. Others play the game and try to stay to stay as long as possible but give up peacefully at the end.
The ones that are left are the ones that want to stay in their houses for as long as they can while paying the least amount possible. Some fight hard and dirty and get to the point mentally where they think they shouldn’t owe anybody anything for a loan that they took out.
Some borrowers ask themselves the question, “Why pay my mortgage, when I can pay an attorney $500 per month to stall the process forever?” For those that choose to go that route, you better hope that I’m not the one who buys your loan. Your games won’t work long with me and I’ll prevail in the end.
“The Big Short” was great at explaining the big picture. I’d like to give you a view at the ground level, where the rubber meets the road, the good, the bad, and the ugly. I’ve got some interesting stories to tell that will entertain as well as educate, whether you’re new to investing, just browsing, or an experienced investor. Interested? Check out my first story next week!
Coastline Capital Fund Management LLC
5861 Pine Avenue, Suite B, Chino Hills, CA, 91709, United States
P: (949) 371-6749