Posted by John Behle on May 18, 1999 at 17:26:44:
…meet people over and over for the first time.
Playing with numbers / LTV - Posted by Sean
Posted by Sean on May 14, 1999 at 15:42:15:
LTV why is it important? How do you figure it?
Most people are going to say: The house is worth $100,000 you owe $80,000 which you’re trying to sell to me at a discount. That’s 80% LTV and that’s acceptable.
But if a person owes 90,000 on a $100,000 house a lot of people say no, LTV is too high.
Ok so let’s suppose we have two houses side-by-side. Both identical and FMV of $100,000. Both have a mortgage on them, privately owned, available for sale at a discount.
House A has a 90,000 loan at 7% interest, payments of $808.95 (180 payments). House B, on the other hand, has a $79,756.69 loan at 9% interest, payments of $808.95 (180 payments).
For the purposes of purchasing the note at a discount aren’t these two loans very similar? Why would someone buy one but reject the other? Any imput appreciated.
Actually it was sent here - Posted by John Behle
Posted by John Behle on May 14, 1999 at 18:00:06:
Actually I sent that article to J.P. to publish here, but I don’t think it has been yet.
Investment to Value ratio - ITV - Posted by John Behle
Posted by John Behle on May 14, 1999 at 17:57:05:
Years ago that was my argument. I started looking at what I called the “Discounted Loan to Value Ratio” DLTV. Over time the industry changed their focus that direction also. The term that stuck was “Investment to Value” ratio or ITV.
In either case of your example, the ITV is just over 50%. I’d buy either note in a moment or even a $110,000 note with a lower rate - yet same payment and terms. Go ahead and default. If I have 50k at risk and a 100k value that thrills me.
This is great in the case of first position liens. If you are in a second position behind a high LTV first then you do indeed have much greater risk.
I’ve always found the greatest profits in the notes others turn down - many times for what I consider stupid reasons. I wrote an article years ago titled “Leveragectomies and other LTV solutions”. I think it’s posted in the library at www.notenetwork.com
Re: Playing with numbers / LTV - Posted by Stacy (AZ)
Posted by Stacy (AZ) on May 14, 1999 at 17:07:10:
Which note would you rather have in the following scenarios?
A) Property devalues over a few of years, and is now worth only $85K FMV?
B) You want to sell the paper to another investor: which note has the larger buyer’s market, and is therefore worth more?
Stacy
ITV – thanks. - Posted by Sean
Posted by Sean on May 14, 1999 at 19:25:42:
Ok, I found the concept and now I know the name everyone else can recognize it by. Thanks for the information! 
I think you missed it… - Posted by Sean
Posted by Sean on May 14, 1999 at 17:39:49:
Suppose you invest in paper and want to buy these notes. You want to get an 18% yield. Putting those numbers through your financial calculator you will pay $50,232.21 for Note A. Not coincidentally an 18% yield on Note B is also $50,232.21.
Now suppose, as you say, in two years the property is now worth $85k FMV. A sad state of affairs, it’s true. However you expect to receive 156 payments of $808.95 with a present value of $48,643.99 (at an 18% yield). Even at the 85k FMV you have a comfortable 57.23 ELTV (effective loan to value).
In fact should it drop to 85k and enter foreclosure I bet you could pursuade a rehabber to buy the property for $50,000 and offer to consider the loan satisfied for that amount whether you bought note A or B. In fact considering that you were only due $48,643.99 (plus interest at 18 percent) this is a $1,356 victory! “I’ll have that reconveyance to your escrow office by messenger today, Mrs. Rehabber. Thank you for your business!!”
Maybe I’m missing something. If so John Behle will tell me.
Re: I think you missed my point - Posted by Stacy (AZ)
Posted by Stacy (AZ) on May 14, 1999 at 18:07:20:
Hi Sean-
No, my point didn’t circulate all around $85K, it was an example. The point is seeing the full picture, including the risks. There is less risk of losing money on an 80% LTV note than a 90% LTV note, if things go bad. You don’t need to figure TVM to understand that there is even less risk in owning a 40% LTV note: just degrees of safety for your investment. If your tolerance is higher than 80% LTV, no problem, go do it.
However, if push comes to shove, and you need to sell the 90% note for some quick cash, don’t expect that there will be a large market of investors that like to take the larger risks that you do. It just boils down to managing risks. Would you be willing to hold a complete portfolio of 90% LTV notes? If so, you are just chosing to operate at a higher degree of risk than most investors.
My take. As you said, John can save us both with a reply.
Stacy
Valid points - Posted by John Behle
Posted by John Behle on May 14, 1999 at 18:26:02:
There are a couple different risks and ways to look at it here. There is the risk of defaul and the risk of loss.
The risk of default may be higher on the higher LTV. The risk of loss, as I mentioned above, is still associated with the ITV - which is the same.
Stacy’s point about liquidity is one to look at too. My focus is always on having the note in my own portfolio. Even though funding sources understand ITV better now than they have in the past, they still balk at high LTV’s.
Re: what’s TVM??? (nt) - Posted by Stacy (AZ)
Posted by Stacy (AZ) on May 16, 1999 at 22:10:20:
TVM; Time Value of Money. Money today is worth more than money tomorrow. The basis of the note biz.
Stacy
Thanks Stacy - Posted by MarkHOUTX
Posted by MarkHOUTX on May 16, 1999 at 23:25:29:
I’m familiar with the concept. I just had one of those brain hiccup moments where I couldn’t figure what the acronym stood for. Thanks for waking me up.
Re: You’ll do the same for me sometime - Posted by Stacy (AZ)
Posted by Stacy (AZ) on May 16, 1999 at 23:58:01:
I understand, Mark. I think Bill Gatten said: “My memory is so bad I could hide my own Easter eggs.” I laughed out loud because I could relate.
Stacy