Part of our business rehabs houses, and part of it rehabs loans.
Stewardship Capital includes partners Bill Syrios and Sándor Lau. They buy non-performing mortgage notes for significant discounts and work with homeowners to get back on track with their loan payments. Because banks have done a poor job at such workouts, we can step in to provide a realistic plan that gives the homeowners and ourselves win/win solutions.
Three years ago we made a 7-minute video on how we got going:
STARTING OUT IN THE NOTES’ BUSINESS
Stewardship Capital was founded by Bill Syrios and Sándor Lau in 2013. We specialize in the purchase and workout of non-performing junior liens secured by residential properties.
During the US real estate boom of 2004-2007, a large number of second position and other junior bank loans were issued in the US, secured by single-family homes. In the recession immediately following the boom, many homeowners lost their sources of income and equity in their homes and stopped paying on their junior loans. Banks were and continue to be overwhelmed with bad debt.
As of early 2013, US banks are holding about $600 billion in junior residential loans. Approximately 1% of those loans or about $6 billion in debt, are in junior position behind a first loan on which the borrowers are current on payments. Stewardship Capital focuses on those notes. Stewardship Capital also purchases other debt secured by real estate.
Banks are incapable or unwilling to deal with these nonperforming notes. They are highly motivated to liquidate nonperforming debt and typically offer these junior debt assets for a fraction of their face value, often under 20%. Banks are not positioned to create positive solutions for themselves or their borrowers, frequently insisting on either full payment or foreclosure. By staying current on their first mortgage payments, borrowers have clearly indicated two important facts, 1) They consider the property their home and wish to continue living there and 2) They have sufficient income to pay the first mortgage.
Stewardship Capital acquires these nonperforming bank assets at fire sale prices and works with borrowers to create positive solutions.
The opportunity for Stewardship Capital to add greatest value is to purchase notes with partial or no equity, where the combined amount owed on the first and second loans exceeds the fair market value of the property. Second liens behind performing firsts without equity can be purchased in the range of 10-20% of face value through institutional sellers who buy in bulk from banks and sell to retail-level investors. Seconds with full equity can trade in the range of 30% of face value or more. Face value of a typical second in the sweet spot of this market niche is around $50,000.
Purchasing these seconds is like acquiring virtual options. For a small investment, the owner of the second can gain a considerable deal of control over a property without owning it. Unlike first mortgages, which typically require an investment in the tens or hundreds of thousands of dollars each and sell at smaller discounts, seconds allow diversification of investments at a much lower price point, spreading risk and creating the potential for greater returns.
Many property owners will agree to a loan modification because they are emotionally attached to their homes and they think of them as a place to live and raise their families rather than a purely financial investment. Not every note will work out profitably, but the likelihood of achieving profit is far greater buying three underwater notes for $10,000 each than one equity note for $30,000.
Solving problems is the core of all business. Stewardship Capital solves the problem of banks who are incapable of dealing with their nonperforming debt and obligated to retain seven times the amount of that debt in reserves as long as they keep it on their books. Stewardship Capital solves the problems of borrowers by offering options and working with them on the best one for their situation. Most banks treat delinquent borrowers like numbers. We treat them with dignity like human beings. Our financial future depends on having their goodwill. Theirs depends on having ours.
The window of opportunity for these investments is limited. Because of the recession, many junior notes originated in 2004-2008 stopped paying between 2008 and 2011 in the worst part of the economic crisis. Many have not made a payment in years and banks are now in the process of shedding that bad debt either by disposing of the property (foreclosure, short sale, deed in lieu) 10% of time or by selling the paper 90% of the time. A large number of second loans are also resetting between 2014 and 2016 (see Bloomberg news article). The higher payments of these resets will undoubtedly cause additional defaults and opportunities for creative investors to create positive solutions.
Acquisition: While banks are the original holders of nonperforming seconds, they primarily sell to institutions capable of buying note pools in the tens of millions of dollars or more. Many of these institutional buyers are hedge funds who buy in bulk and sell one-by-one or in small pools to smaller investors. It is possible to contact smaller banks and lenders directly but it is a time-consuming process like finding a needle in a haystack. Stewardship Capital’s strategy is purchasing notes from hedge funds. Some sources of notes are:
Coast Capital (CA) http://coastcapinc.com/
Partners for Payment Relief (PA) http://www.partnersforpaymentrelief.com/
US Mortgage Resolution (PA): http://www.usmresolution.com/
Keystone Financial Management (PA) http://www.keystonefinancialmanagement.com
Dream Builder Investments (NJ) http://www.dreambuilder.net/
Stewardship Capital began investing with Bill’s and Sándor’s own funds to establish proof of concept in summer 2013. With their first pool in the process of workout and pay off (early 2014), Stewardship Capital now offers the opportunity for investors to participate in profits. Because of the relationships and track record of the Stewardship group of companies, we have access to funds in the tens of millions of dollars and potentially more from investors who simply want a secure, passive return on their investment. As Stewardship Capital grows and begins buying larger pools of notes, we enhance purchasing power and pricing.
Stewardship Capital performs due diligence quickly online. Note pools must be bought quickly with only a few days of time for due diligence.
It takes many from time of purchase until receipt of notes when buying the right pools that have not been worked over by other investors. The notes must then be recorded.
Wake Up and Workout: This is the phase where Stewardship Capital has the opportunity to add greatest value and solve problems. Borrowers who have not paid their second mortgage are often in denial, angry, confused and unaware that the second lien holder can and will foreclose. Stewardship Capital sends them a FedEx package to wake them up to the reality of their situation. If we cannot reach them by phone, we also send a private investigator to personally knock on the door of borrowers, and if possible, put them directly on the phone with us. We can communicate with borrowers in both English and Spanish.
Our goal is to create a cooperative and mutually beneficial resolution with the borrower. The threat of foreclosure is the primary motivating stick. We begin the foreclosure process within a short time of contacting the borrower and continue actively pursuing foreclosure parallel to workout resolution efforts. With the threat of foreclosure, we also offer the carrot of alternatives for the borrower to either keep their home or move on to housing that is affordable. We do not push them to any one of these foreclosure alternatives. Borrowers become actively engaged and emotionally invested in the process because it is their choice of what to do. We develop a relationship of mutual trust and respect. Borrowers earn the right to foreclosure alternatives by keeping their promises and providing the information we request.
It is typical for borrowers to initially react with antagonism or simply ignore communications, then later contact the lender as they come to the realization that they will lose their home (that they are invested in—after all, they are paying the first mortgage) if they do not take some kind of action. They will often turn completely around and become very grateful and cooperative when they realize that their new lender listens compassionately to their situation, treats them with respect like human beings, and is prepared to work out a solution that fits their needs. This is unlike anything they have ever experienced before from their bank, who will typically either insist on full payment or foreclosure, or force them through a drawn-out and excruciating process for a short sale or deed in lieu. Stewardship Capital can put most of our workouts into place within a few days of receiving the borrower’s full financial information.
Stewardship Capital can profit through all of the available exit strategies.
Servicing: In the case of a payment plan, we set up servicing of the loan with a company specialized in collection of payments. We may also service some notes ourselves. There are many quality companies servicing notes for private investors. Some of those with the best reputations are:
–FCI Loan Servicing http://www.trustfci.com/LoanServicing.html
–Madison Management http://madisonmanagement.net/
–BSI Financial http://www.bsifinancial.com
–Allied Servicing (WA) http://allservicing.com/
Stewardship Capital is a workout company that handles negotiations with borrowers. Our servicers collect payments, create monthly statements for our review and produce tax documents. Should any borrower fail to make their scheduled payments, management of that file will return to Stewardship Capital to understand the problem and create a resolution.