Posted by John Behle on January 26, 1999 at 17:19:02:

The type of “Wrap” examples I detail in the book “Mortgage Magic” are the type that you would not want to sell - because of the high yields.

The examples in the book reflect the type of deals that got me into the paper business - through the back door. I started by creating paper. I hoped to sell some of my wraps to get cash to do more deals. I remember one wrap I shopped around to sell that had an interenal rate of return of 21%. The current market was 18% yield for note buyers. I didn’t expect a premium over the face value, but I was stunned that the buyer still wanted a 20% discount from face!

That’s when I started financing paper through borrowing from private investors and structuring “Nothing down” wrap deals through what I term “Split Wraps” and “Split Cranks”. Then I ended up with nothing into the deal and $100+ per month positive cash flow.

As far as the underlying loans being paid, that is simple. They pay you the full payment and you pay the underlying loan. You know it is being paid, because you or the escrow company doing collections is paying it.

The yield on your deal you described either breaks down into several cash flows which can be discounted in the simple three step process detailed in “Discounting as Easy as 1,2,3” or through the “Uneven cash flow” functions of some calculators. I’ll choose the later method to save some time now.

CF0 = -10,300

CF1 = $210.13

N1 = 180 months

CF2 = -$390.76

N2 = 60 months.

Your internal rate of return (IRR) would be 2.06 per month or 24.68% annual.

Now the problem, is that you can’t really structure a deal where the wrap is shorter than the underlying loan, so what you do is run an amortization schedule to find the point where the mortgage balances are nearly equal (i.e. wrap is just a little larger than the first). At that point, you need to either lower the payment to extend the wrap to equal the length of the first or increase the amount being paid on the first to amortize quicker to meet the time of the wrap.