Earn Money and Do Good with New Platform AHP

The best lending platforms have a win/win or win/win/win scenario built into them from the beginning.  Prosper lets borrowers consolidate credit card debt. Instead of paying 16% to these credit card issuers they pay 7 or 8% to us. Prosper wins by originating the loan. Borrower wins by saving 800 basis points interest. Us lenders win by earning the 7-8% in interest. This type of win/win/win guides the best platforms.

More platforms are coming online and more are available for retail investors to invest in than ever before.

New Regulation Makes Crowdfunding Easier

Reg A+ is big news in the crowdfunding world. This variation on SEC Regulation A allows more platforms to crowdfund with money from both accredited and unaccredited investors.

Reg A+ is part of the JOBS Act that was passed a couple years ago. It adjusts the investing rules allowing non-accredited investors (like you and me) to invest in a p2p lending platform with less onerous filing requirements for the platform itself. Platforms don’t have to go through the very long and very expensive S-1 regulatory filing system that Prosper and Lending Club had to do.

So far 16 companies have taken advantage of Reg A+ including a new innovative platform where we can do well and do good at the same time. Not all of them are investment platforms either, check out this list . There are 3 real estate related platforms on this list including Fundrise who I have discussed here previously and I’m a fan of.  And our mystery platform…..

New Platform Helps Homeowners and Makes Money

When you think of a distressed debt buyer, what comes to mind? Specifically, what about buying lots of defaulted mortgages? Do you think of big hedge funds and Wall Street?

That’s what I think of.

There’s a new player on the block in crowdfunded real estate and buying defaulted mortgages with a very important new twist.  Let me explain.

In a typical scenario, a bank holds a $100,000 mortgage where the homeowner is paying $800 per month.  The homeowner can’t pay for some reason like job loss or death of a spouse and now the mortgage is in default.

Most states require a foreclosure go through the judicial system, which can drag it out for months or years waiting for the judge to sign off on it. In the meantime, the homeowner doesn’t pay and this bank holds the note that is not performing. No maintenance is going on in the home and the home is now worth $50,000 so the bank is under water on it.

This new platform buys this defaulted mortgage for $20,000, which the bank is happy to get for this non-performing mortgage. So far that’s no different than if a hedge fund bought blocks of non-performing mortgages right?

Like I said, there’s an important new twist….

Work With the Homeowner

Here’s the twist. This platform goes right back to the homeowner and says ‘Mr Homeowner, you have this $100,000 mortgage on your house and you couldn’t pay. Obviously something happened to make you unable to pay it since everyone needs a place to live. Now if you show us that the reason you fell behind on your payments is taken care of (like a 9 month job loss and now you’re working) we are going to let you stay in your house.’

Not only are they going to be able to stay in the house, our platform does something else. Instead of that $100,000 mortgage at $800/month, they drop the mortgage balance down to $50,000 and the payment to $500/month to make it more affordable.

Why would they do such a thing? Cause they want people to stay in their homes. In fact, the name of the platform  is American Homeowner Preservation or AHP

But this isn’t a charity. This is a business. AHP wants to make money by doing well and by doing good.

And you and I can get in on this, earn 12% and do so with a minimum investment of $100.

Now if the homeowner is unable or unwilling to stay in the house, they are offered some cash to move and AHP takes the deed to a $50,000 house that was bought for $20,000. While not the primary objective, this is a successful transaction too.

Back to the homeowners, let’s see how everyone did.

The Score

There’s a number of players in this transaction so let’s see this deal from the perspective of each one.

Borrower: They get to stay in their home. They are not foreclosed upon. Their mortgage balance was written down by $50,000 and their payment reduced by $300/month. An overwhelming win for them.

And if they can’t stay in the house, they are offered some cash to start over.

Bank: They get out from under a defaulted mortgage. They thought they were going to lose even more money but instead got $20,000. A great result for them, and they do the worst out of everyone here.

Platform lenders/investors: Per the description of How it Works at AHP Investors earn a flat 12% interest. Then they are distributed back their invested capital. Only then are profits distributed to the company. But your (and my) money are now invested in a $50,000 mortgage that is paying that was purchased for $20,000 so there’s $30,000 of built in equity into the note our money helped to purchase. Pretty sweet, huh? That built in equity makes it much more likely we can get our 12% and our principal back.

AHP (the platform): Only after the platform lenders are paid their invested capital and interest does AHP participate in any profits. However, after the lenders are paid, AHP keeps all the profits. But that doesn’t seem so bad, does it? Especially if we get paid first.

Conclusion

As you can see, this is the ultimate win/win/win/win or at least win/win/win. Maybe the bank didn’t do so great but they could have done this themselves. The bank could have avoided all that but chose not to so they get what they deserve. Actually, they get better than they deserve since they lost less money, but that’s OK.

American Homeowner Preservation, known as AHP, lets us do well and do good at the same time. We can make 12% on our money and help keep homeowners in their homes while we do it. We even get to help stick it to the bank a little bit and I have to admit I like that too.

I’m strongly considering adding them to my p2p lending portfolio and adding regular coverage of them here too since anyone can invest thanks to their Reg A+ offering.

What do you think of this idea? I mean I can’t be the only one that thinks its awesome, can I?

 

About the author

Stu

Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending.

Check me out on Twitter, LinkedIn and Google+

4 thoughts on “Earn Money and Do Good with New Platform AHP

  1. I’m a little skeptical. Here’s some critical thinking.

    The banks have had eight years to do this on their own. Why will they now agree to write down a non-performing mortgage by way of an outside third party when they haven’t had to mark-to-market their losses in all this time? And does AHP even have the credibility and clout to have the necessary high level access to purchase non-performing mortgages?

    A $800 to $500 reduction is reasonable but that example would be for below market properties, i.e. Section 8 housing and mobile homes. Mortgage payments are not going to be anywhere near $500 to former subprime and NoDoc borrowers who bought overpriced single family, subdivision homes even after a 50% reduction in amortized balance owned. It seems to me all that will ultimately happen is that the REO inventory will shift from the banks to AHP. Unless AHP has a proven plan in place to fix up and wholesale flip the resulting REOs, the inventory will just build up as technological unemployment continues to spread.

    And I don’t see any indication this will ultimately be a profitable business venture as opposed to acting as public benefits corporation. If I want to support charity, I donate specifically for that purpose.

    • Thanks for your comment.

      I think the idea of banks acting logically is an assumption I would never make. If they did then the whole marketplace lending industry wouldn’t exist cause banks could do all this lending themselves. Yet they don’t and that hole in the marketplace is where the Lending Clubs of the world come in.

      The mortgages AHP buys are normally lower income homes or starter houses so they are not doing this with $500,000 homes.

      The one logical thing that a bank does in this circumstance is look to sell fast as these non-performing notes are a liability for them and limit their lending capacity until they get off the books.

      You make some good points on the shift of REO inventory. Perhaps AHP CEO Jorge Newbury will chime in with a couple of additional points.

  2. AHP has been purchasing nonperforming mortgages since 2011 and we have purchased directly from Citi, Banco Popular, GMAC, Aurora Bank, FDIC, Caliber, Impac, and many others, including some of the largest hedge funds in this space. We do have the access and relationships to purchase these mortgages. I appreciate the concern, though, as this is a somewhat inefficient and opaque space.

    Banks routinely sell distressed assets and, ver the last couple of years, there has been a purge of nonperforming mortgages from banks and HUD, FNMA, and FRMC. Groups like Citi, which previously would sell directly to AHP, now want to sell in much larger trades, often around 100MM spend or more. Thus, these trades go to larger hedge funds, some of whom will cull out the mortgages secured by lower-value homes(sub-75K value, and often sub-50K) and sell to AHP.

    Larger funds often see limited value in expending resources on these assets. Yet, behind each mortgage is a family. If they owe 100K and the home is currently worth 50K, we can likely acquire that mortgage for 15-20K and share the discount with the family. The results are transformative. To date, we have helped almost 750 families stay in their homes with sustainable solutions and aggregate payment savings of over $3MM annually. We have helped put a similar number of vacant, unwanted homes back into service. Collectively, we have extinguished over $78MM in negative equity.

    There are millions of families in homes worth less than 75K, and many less than 50K. This includes some mobile homes and Section 8 rentals, but the majority are owner-occupied traditional homes which just happen to be located in low- and moderate-income communities. Even eight years after its start, the housing crisis is still in full bloom in these neighborhoods: 53% of homes with values under 50K are severely underwater, which is to say that the principal amount of the mortgage is more than 125% of the value of the home. In comparison, 5.7% of homes valued at $1 million and up are seriously underwater.

    To compound the challenge, low-value homes are generally falling in value while all other price categories have improved. According to RealtyTrac, between Q3 2015 and Q1 2016, the number of underwater homes with values under 50K increased by 13.4%. All other value categories showed decreases, with the percentage of underwater homes generally dwindling as values increase.

    At the prices we pay, we can still typically generate a gain selling our REOs to investors who buy, renovate, and sell or rent. We are not in the business of renovating homes, an endeavor made more difficult as our assetsare located all over the USA. Local investors are better-equipped to take this work on. Thus, we sell REO fast and at competitive prices, typically through local real estate agents.

    I appreciate the concerns and welcome additional questions.

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