This week Bruce is joined by Jon R. Duario. Jon is the chairman and chief exective officer of Kondaur Capital. He founded Park Place Capital in 2001, and sold it to Ameriquest Mortgage Company in 2002. After the sale, the name of the business changed to Sprint Funding Corp, and Jon remained as president through May 2006. He received his Juris doctorate and Masters from UFC, and his BA Cum Laude from Harvard. He is also a fifth degree black belt in Tae Kwon Do.
During the boom years, when stated income and subprime loans were being frequently approved, Jon had a feeling that someone was going to be damaged. He was concerned about what the effect would be on default ratios and loss severities. Nonetheless, his company originated those loans because they were being paid well to do so. Most loans at that time were being securitized.
During that time, Encore Credit Corporation was one of the nation’s largest subprime wholesale originators. They were selling those loans at a substantial profit. Encore formed a real estate investment trust called ECC Capital Corporation.
Jon had a good understanding of what CDOs and credit default swaps were during the boom. However, it was difficult to track cash flow and how each obligation worked.
Jon never placed bets against the outcomes of certain loans. He could not have imagined the magnitude and speed at which the real estate market collapsed. Had it no collapsed at that speed, those shorts would not have been worth much. There was a 7 day period where they went from being worth very little to being worth a fortune.
Kondaur Capital opened in July of 2007. It currently has a little less than 500 employees. The company is known to be the premier purchaser of non-performing loans secured by 1-4 family residences. Kondaur Capital is the country’s largest buyer of those loans. Not many large companies desire to participate in Kondaur Capital’s sector, because it can be difficult to do business profitably. It can be challenging to earn a profit from these non-performing loans because it is difficult to estimate the current underlying value of the home, what the value would be if you took title to that home, and how to effectuate a liquidation of that asset in accordance with the regulations for this industry. Earning a profit from this business model takes more than just the ability to write a check.
Jon would define a sizable portfolio as several hundred loans, and he purchased a portfolio that large in 2007. It can be difficult to predict what a house will sell for 6 months after the purchase. You must accurately predict what the liquidation value of the asset would be at the time of its liquidation. Kondaur Capital is very good at doing this. His predictions are typically off by less than 1%. Kondaur Capital is very effective at spending the appropriate amount of time and effort to analyze the collateral and the borrower. 60% of the time, Kondaur Capital pays borrowers a substantial amount of money for a deed in lieu of foreclosure, so that they can accelerate the title process. With rare exception, they never put a house on the market unless it is in perfectly livable condition. All utilities are sold in working condition, the walls are painted, and the roof will not leak.
Sizable portfolios in 2007 were rare. Most sellers at that time were warehouse lenders. The warehouse lender did financing to loan originators. The loan originator went out of business or was unable to sell the loans. The warehouse lender would then seize those loans as collateral. In 2008, many of those warehouse lenders cleared their inventory, and then Jon began buying from Wall Street firms. Wall Street firms had a lot of loans at that time because the securitization market was disappearing. In 2009, the Wall Street firms got rid of their inventory, and most of Jon’s purchases came from large regional banks. In 2010, the availability of loans increased substantially. Potentially $20-25 billion worth in unpaid principle balance on loans. Most of these loans were still coming from large regional banks, but Wall Street was involved as well.
Bruce knows an agent who had 1,000 REOs in 2008, but his business has decreased by 90% this year. On the other hand, Jon had a large amount of business in 2010. The lenders seem to be making a new decision to not take properties down the foreclosure route. Jon believes this may be partially due to the fact that the number of Realtors has increased. Jon has literally 1,000s of Realtors contacting him now for business. Also, in 2009, the government began delaying foreclosures. Joe believes lenders do not need the government to tell them whether or not a modification is the most valuable decision to them. The value of a modified loan is what a ready and able buyer would pay for that loan at the time of modification. There is no need for complex valuing formulas. There has been a tremendous delay in foreclosures, and there is a large amount of shadow inventory. Jon believes there are millions of REOs waiting to come onto the market.
Bruce thought that banks were not making individual decisions, but that their decisions were being dictated by government policy. There are two key parties involved with the loan: the owner and the servicer. There are often conflicting interests in regards to who services the loan. Many servicers do not do an individual loan by loan analysis. Kondaur Capital does look at loans individually, which makes it unique and elite. Kondaur Capital asset managers have a maximum of 55 assets. Many servicers have assets in the hundreds, so they are making decisions for a pool of loans. Jon believes that every loan, borrower and house is unique, and should be treated as if they were.
In the 90s downturn, some lenders were not interested in foreclosing. The FDIC then intervened and demanded that the lenders file for foreclosure after 90 days. This is what helped Bruce to realize that our recent problems were very different. Our current lenders were being told to do whatever is necessary to survive.
The government is trying to keep borrowers in their homes. It seems that politicians are now more focused on getting re-elected. Jon believes this is influencing our leaders’ decision to protect homeowners regardless of delinquency.
The pools Jon invests in spread across the country. Kondaur Capital is the nation’s largest and most efficient buyer of pooled loans.
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