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Private Lending (10) – Disappeared Borrower
Continuing from last post, after the pandemic, the market has changed a lot, and there’s been a surge in fake applications, fake documents, and scammers. So, apart from laughing after reading all the real stories I will be sharing in this and upcoming episodes, don’t forget to adjust your strategies based on the current market conditions!
One borrower left a lasting impression on me. They kept missing payments, and when we followed the procedures and sent various default notices, the borrower finally came up with an excuse: “I was abducted by aliens.”
We’ve heard many reasons for defaults before, usually along the lines of negotiating with a new lender, being on the verge of finding a job after being unemployed, almost borrowing money from relatives to cover the interest, or the house being close to being sold, and so on, which are relatively normal. Generally, we would communicate in writing with them, expressing our understanding and our internal efforts to help them buy some time. This is mainly for future evidence in case we need to pursue legal action, to demonstrate that we’ve legally, reasonably, and compliantly pursued debt collection, and to obtain power of sale/foreclosure rights as soon as possible. Of course, we do try to resolve defaults outside court within the limits allowed by law, as that’s definitely the most efficient and mutually beneficial solution in terms of costs and time for both parties.
However, this case was far from normal. We could tell right away that the borrower had absolutely no intention of finding a way to repay. So, it was straightforward to handle, just following the power of sale/foreclosure process, issuing various demand letters, each carrying a processing fee. After a certain period, we could proceed to court. The lawyer would file documents at each stage, and we would wait to obtain rights to sell. This process typically takes several months to a year, with legal fees ranging from ten thousand to tens of thousands, depending on whether the borrower hires a lawyer to fight back. If they do, both the time and costs increase proportionally. In reality, this is the least desirable scenario for both parties, because ultimately, all these expenses are borne by the borrower. So, from our experience, as long as there’s equity in the property, homeowners usually cooperate and try to come up with some money. They won’t waste time and money hiring lawyers to fight back. They’ll cooperate, actively expressing their efforts to raise money for repayment, hoping for some leniency in terms of time. If they realize they can’t gather the funds, they quickly list the property on the market and provide evidence of their intent to sell. They’ll simultaneously inform us that they’re selling the property, hoping to convince us to give them more time.
In this industry, time is money, so if the borrower can face the problem directly, they’re already halfway to success (actually, isn’t this true for almost everything in the world? Facing the problem solves half the problem already. But if you choose to procrastinate, the time, monetary cost, and emotional cost increase exponentially. The longer you procrastinate, the heavier the price you’ll pay in the end).
This is also because the power of sale/foreclosure laws here really take care of the vulnerable groups. As long as the borrower shows any willingness to cooperate, as lenders, the side that the law holds more accountable, it’s best for us to document on paper how understanding we are of their situation, how grateful we are for their proactive problem-solving actions, and how willing we are to make every effort within the bounds of the law to give them as much time as possible to sell their property. This way, even if it eventually goes to court, the judge won’t be able to find fault with us lenders easily. They can just follow the process and timeline to grant us the rights to sell.
Especially if we can provide evidence that the borrower breached the contract and cannot be reached, and their response is that they were abducted by aliens. Based on our past experiences, the judge will definitely not sympathize with such borrowers. So, we confidently and promptly send out all the demand letters in this case.
Of course, as expected, just like 99.9% of defaulting borrowers, halfway through the process, the borrower shows up, claiming that the aliens finally released him and he can make the monthly payments, and the money will be available immediately.
Why aren’t we worried at all? Remember how we discussed in the previous posts about underwriting? The property location is good, the market has been good, rising steadily for the past few years, and we’ve kept the LTV very low (definitely below 75). So, many homeowners have equity in their properties, and every extra expense they incur is ultimately paid by them. So, even if they’re acting irrationally, they’ll eventually face reality. Either they quickly catch up on payments, or they hurry to sell the house themselves to salvage some equity in their house. In short, with a positive attitude and prompt action, if they cooperate with us, we’re willing to delay the power of sale/foreclosure process a bit, turn a blind eye, and let them sell the house themselves. If we receive repayment before the process is complete, everyone’s workload and expenses will be much lower.
So, the key point is – LTV, LTV, LTV! It must be well controlled before lending! You’re the boss before lending, but you’re at the mercy of the borrower after lending! If the borrower defaults and the market drops, plus various legal fees, the homeowner’s equity will quickly evaporate. Then, as a lender, you’ll definitely be pulling your hair out and screaming, wondering why you didn’t lower the LTV a bit more at the beginning!
In the next episode, we’ll talk about a borrower on the Forbes list, another true story.