Kristin Scott is, on one hand, the owner of Monday Morning Marketing Corp. in Philadelphia, a woman who consults with small business owners, either those just starting out or those without dedicated marketing departments.
On the other hand, Scott is also a regular investor, who expresses sentiments many regular people can identify with: "I'm sick of the stock market and brokers who have no real skill in helping investors beat the market."
Furthermore, she's a person who wants to feel good about what she's investing in. While doing marketing for an IRA administrator two years ago, she met Peter Andrews, founder of New York's Dreambuilder Investments LLC and David Van Horn, president of Partners for Payment Relief in Media, Pa. Dreambuilder is a private mortgage investment company that scoops up and manages defaulted residential mortgages across the nation, helping homeowners resolve mortgage difficulties and offering their lenders an alternative to foreclosure. Partners for Payment Relief has a similar mission.
Unlike banks, which foreclose on residential properties, these two companies find ways to keep homeowners in their homes. For Scott, the meeting with the two entrepreneurs at an investor conference suddenly opened her eyes to a way of both feeling good about her investments and finding a good return.
Of course, people who default on their mortgages once might do it again. But it's also likely that, having faced the threat of homelessness once, they could find a way instead to meet revised mortgage terms negotiated with companies like these two.
For people like Scott, this might well seem like a sort of socially responsible investing, which indeed it is. "I can invest," she says, "in a company that buys nonperforming mortgages from banks at a deep discount, then contacts the homeowners to work out a payment they can afford under revised terms so they can stay in their homes. I don't want to be a note buyer because I don't want to work [directly] with homeowners or end up with foreclosed property."
Scott invests primarily with Partners for Payment Relief since the company makes more modest demands for the net worth and liquid resources of its investors. "By investing with Dave," she says, "I give him the money he needs to buy mortgages through an investment pool that runs for two years and throws off interest income at the rate of 15%-19% annually. I've been invested about one and a half years and see that 15% to 19% return come into my account every month." She uses her self-directed IRA to make her investments.
Partners for Payment Relief is only one and a half years old, but Van Horn has a diverse real estate background, having worked as a realtor for 22 years, having been a partner in a title company, and having now done mortgage pools. "My customers are both homeowners and investors," he says.
Those who work with the company have three choices of investment vehicle. In one scenario, Partners for Payment Relief takes a nonperforming asset and makes it perform with the home owner still in the house. The company then sells the newly performing note to an investor. In the second vehicle, the investor takes a passive interest in LLC shares of a mortgage pool that generates 15% to 18% in annualized interest paid monthly, usually for two years. In the third scenario, the investor is assigned collateral, signing a promissory note with Partners for Payment Relief tied to one asset. The company then pays a generous rate of interest on the note for one year, and if the home owner sells or refinances his property during that time, the investor gets paid off.
Van Horn buys the mortgages directly from banks or loan servicing companies at prices that depend on the real estate values. "If real estate values are up, the cost of the notes is up," he says. "Four years ago, our suppliers were buying loans for 15 to 20 cents on the dollar. Today it's 3 to 5 cents. So the product's gotten cheaper, but it might take longer to exit a loan today."
So what does Van Horn pay?
"We pay 10 to 20 cents [on the dollar] from our best suppliers," he explains. "One of our last packages involved 70 loans for $260,000 with a total face value of $1.7 million; we expect to recoup $800,000 to $900,000. Some companies allow cherry-picking, some insist on investing in a pool."
Van Horn buys mostly delinquent second mortgages because no one else wants them. Also, he wants to spread the risk around.
"We can buy a first mortgage for $200,000, or we can buy ten or more second mortgages for that money." These properties must, of course, have enough equity coverage for both the first and second mortgages.
Let's follow the path from a distressed mortgage's original issue to its renegotiated status. Suppose both a first and second mortgage were issued for a total of $300,000 in 2005 with a 5% adjustable interest rate on the first mortgage and a rate in the neighborhood of 7%-17% on the second one. Let's also assume that both mortgages adjusted radically upward in 2008, and that the home owner defaulted on his second mortgage, which is $100K.
"First," says Van Horn, "we need to be aware of what the first mortgage is doing because we have to protect our interest. If, for example, the property is worth $300,000 and we paid $25,000 for the $100,000 second mortgage, one thing we ask the home owner is whether they've tried to modify their first mortgage. In fact, we'll assist them in doing so by talking to the first holder and helping them renegotiate the payment, the rate or the time period.
"If the home owner is delinquent on both loans and foreclosure is under way," says Van Horn, "we can try to buy out the first at a discount and then foreclose against the home owner while allowing him to stay in the home and pay rent."
If the home owner can't afford the home under any circumstances, he says, the company might find the person a new property. "Our main question, though, is what does the home owner want to do?" Van Horn says. "Then we see if we can create a win-win scenario that works for both of us by sharing our discount with the home owner. Foreclosure is a last resort."
Peter Andrews, founder and CEO of Dreambuilder, got his start in the field in late 2002 after a career selling technology solutions to Goldman Sachs. "I really liked the idea of note investing because the entity taking the hit is the bank," Andrews says. "We serve this lender by taking toxic assets off their books in what becomes a win-win with the borrower."
While Partners for Payment Relief is more likely to create a mortgage pool for its smaller investors, Dreambuilder can create single-note deals for accredited investors, Andrews says.  "We might have had a client with $100,000 to invest and we'd buy, say, three loans having a combined face value of $300,000. Those clients received a 15% to 20% return, and after two years they got their principal back. Or they could renew the deal. New investors are shown how to buy loans for their own portfolios."
There is a fear, of course, that distressed mortgage investing is a temporary phenomenon that will evaporate after the economy improves. But regardless of what happens to supply, says Andrews, the dearth of firms that can really design these types of programs ensures that companies like his and Van Horn's will thrive.
"There simply aren't enough people willing to sit down with a borrower for an hour or more to understand what they want to do," he says. "So we think there will continue to be supply-but a lack of capability."

An independent advisor since 1981 and journalistic voice since 1993, David J. Drucker, MBA, CFP® is a frequent speaker at industry events.  To learn more about his availability for your next event, contact him through