Unlocking Success In The Distressed Mortgage Market

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Today s guest is Bill Bymel Bill is the CEO of First Lien Capital LP a privately owned distressed mortgage investment platform he founded in 2021 which owns over 700 residential mortgages and REO in over 30 states with a total investment of 65 million in equity dollars Join Sam and Bill in today s episode ————————————————————– 00 00 00 Intro 00 01 11 Bill s background and experience in real estate investing 00 08 16 Bill s approach to working with distressed borrowers 00 10 18 The revolutionizing the industry 00 11 33 Challenges in the market 00 15 34 The future of the market 00 21 04 The challenges of raising capital 00 22 10 The discipline to say no to easy capital 00 22 45 Closing ————————————————————– Connect with Bill LI https www linkedin com in billbymel IG https www instagram com billbysea FB https www facebook com billbymel TW https twitter com billbymel TT https www tiktok com billbymel Book Win-Win Revolution – https a co d cMDA4ov Connect with Sam I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns Facebook https www facebook com HowtoscaleCRE LinkedIn https www linkedin com in samwilsonhowtoscalecre Email me sam brickeninvestmentgroup com SUBSCRIBE and LEAVE A RATING Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts https podcasts apple com us podcast how-to-scale-commercial-real-estate id1539979234 Spotify https open spotify com show 4m0NWYzSvznEIjRBFtCgEL si e10d8e039b99475f ————————————————————– Want to read the full show notes of the episode Check it out below Bill Bymel 00 00 00 – You ve got somewhere in the range of 250 billion still to 375 billion of defaulted mortgages Still a very small number in comparison to the market And so it has been tough but that s all changing And a one every 1 move is another 120 billion with a B of new defaults that are coming to market So we re we re starting to see that trend go in the other direction And it s like I ve just got my popcorn ready Sam Wilson 00 00 32 – Welcome to the how to scale commercial real estate show Whether you are an active or passive investor we ll teach you how to scale your real estate investing business into something big Bill Bymel 00 00 45 – Bill by Mel Sam Wilson 00 00 46 – Is the CEO of First Lien Capital L P It s a privately owned distressed mortgage investment platform he founded in 2021 They currently own over 700 residential mortgages valued at over 65 Billion in Assets under Management Bill welcome to the show Bill Bymel 00 01 02 – Great to be with you Sam Sam Wilson 00 01 03 – Absolutely The pleasure is mine Bill There are three questions I ask every guest who comes on the show in 90s or less Sam Wilson 00 01 08 – Can you tell me where did you start Where are you now and how did you get there Bill Bymel 00 01 11 – Wow 90s or less is the hard part I started as a residential fix and flip investor in the early 2000 in South Florida I ve been a broker in Florida for years I live in California now I built that up got into commercial real estate buying and selling brokering as well And then when the GFC hit I got a random call from a asset manager in Southern California that said I can buy mortgages for pennies on the dollar That was my lightbulb moment That was three months before the fall of Lehman In the summer of 2008 And from there I built I went on to say I m going to do this for a living And for 15 years I ve learned how to buy and sell mortgages work them out and really kind of created a new paradigm for how to work with distressed borrowers in the residential real estate market And I ve done this to the tune of several hundreds of millions of dollars at other institutions Bill Bymel 00 02 08 – The number two guide at a New York private equity firm And then a couple of years ago I was the baby bird leaving the nest and started first lien capital with the goal to build it to a half 1 billion company Sam Wilson 00 02 20 – Wow that s really really cool I love that So just to just to clarify you went out and worked for another firm where you kind of cut your teeth learning this business It sounds like that is a is an effective strategy to really get into what you re doing Would you recommend the path you took or is there a better better way to get it done Bill Bymel 00 02 38 – You know it s very interesting because the secondary mortgage market which is where we play that s how we access our product buying and selling right That s where big pools of mortgages are traded as well as small individual loans This is a good old boys network Right And since the 2008 recession there s been a lot more access to it There s almost like a tertiary market beyond the secondary market Bill Bymel 00 03 04 – Smaller investors trading due to the Internet due to the availability of communications That said the main secondary market remains a good old boys network So yes if you can I always a big believer in finding someone with the knowledge you seek and have them be your mentor So I met a guy named Pete Sligo back in 2010 At the time I was buying small deals and and and build trying to build up And he had just raised his first 50 million bucks And he was a mortgage note He was a mortgage investor with experience at UBS and all the big New York houses I was like This is a guy I can learn from and he could learn from me because I knew real estate and we teamed up for ten years I was his number two I did all of his Florida stuff and it was through that mentorship that I gained access to the people that you need to know how to and how to work this very nuanced business You know it s really taking a Wall Street private equity institutional world and bringing a main Street approach to it Bill Bymel 00 04 14 – You know it s kind of combining those two things in what we do So I highly recommend finding someone Sam Wilson 00 04 21 – Absolutely No that s that s great I love I love the way that you ve done that It is a good old boys network I feel like and maybe it s just because I run a podcast with 800 and something episodes but I feel like it is at this point it s become more mainstream like more people understand it I mean I don t think before and of course I was probably too young I went through the oh eight crisis I owned a business then but didn t understand kind of conceptually how all this was traded and kind of the like you said the turkey is exactly right Right But I feel like more people have an understanding of what a mortgage is now how they re bought and sold Right The we ve had just obviously up until now we re recording this June 13th 2023 But we ve just had a booming economy for a decade or more Has that has the distressed mortgage market has the pool of available loans shrunk over the last Bill Bymel 00 05 11 – Oh absolutely Absolutely It has been very difficult to be a distressed mortgage buyer the last couple of years when there s been no distress Right Right Sam Wilson 00 05 21 – So what did you do Bill Bymel 00 05 23 – You know I saw it So the way I made my mark the first two years of this So there were some unique opportunities in play with Covid when Covid shut down courts in this country A lot of the guys my competition in the business really freaked out because if you already owned an existing pool of mortgages that were nearing foreclosure And all of a sudden the courts closed that down You know now there s they re they had no timeline to exit these things they thought they were a year away from So I got a lot of deals in the last few years buying my competitors tales stuff from old funds you know buying up other people s problems you know And I have the experience and the knowledge and the comfort to to to really analyze all of those on a one by one basis So we really hit it out of the park that way Bill Bymel 00 06 14 – So part of this business is kind of shifting about shifting with where the opportunity is Prior to Covid you know there was it was scraps You know we didn t didn t grow too big So you know there just wasn t enough volume in the in the industry But keep in mind how big this the residential real estate industry is 12 trillion of mortgages in America If there s and we were at our lowest obviously our lowest default rates on record somewhere between 2 and 3 Right now So that means that you ve got somewhere in the range of 250 billion still to 375 billion of defaulted mortgages Still a very small number in comparison to the market And so it has been tough but that s all changing And a one every 1 move is another 120 billion with a B of new defaults that are coming to market So we re we re starting to see that trend go in the other direction And it s like I ve just got my popcorn ready Sam Wilson 00 07 21 – Right Which I know what you mean when you say that because we I think we we understand the pain that brings to families to the people affected by it Sam Wilson 00 07 30 – So I don t I don t hear you in any way being like oh hey I wish more people would have the stress on their mortgages We don t But at the same time you play a very vital role in just how this economy functions and you know helping help helping keep things liquid and things moving So get it both ways You re getting your popcorn now because it s like well this is kind of what we re poised for Unfortunately we re you re poised with a downturn and that s what that s where you make your money So I mean that s that s part of it But I want to find out So so you said that you know the the last decade has been tough to be in the distressed mortgage business But yet you guys what was your competitive advantage and how did you underwrite that I know I m not supposed to ask more questions at once but you got all your friends who were like dumping off their their kind of tailings of what they had going All right this is no good Sam Wilson 00 08 16 – That s no good And you said wait there s opportunity here So what was your competitive advantage there Bill Bymel 00 08 20 – Very good question So I wrote a book about this Obviously I m not obviously But you know I mentioned it to you earlier called Win Win Revolution You know that I and it s really details the paradigm by which we operate We put this paradigm into place over a decade ago and in many ways it revolutionized our industry I have competitors of mine that tell people read you know that take my book and give it to their new asset managers because the whole idea is to meet the borrower at their level You know I got it Nobody wanted to I don t didn t get into this business to become a debt collector That s not of interest to me I like real estate I know how to value real estate And I know that if a that it s a very safe investment because you re buying a note as long as it s based upon a true value of the real estate you can t lose money Bill Bymel 00 09 12 – So it s from my perspective it was the best risk adjusted return investment Now if I buy these mortgages at a discount I can now share some of that savings with my borrowers You know we turn around and in in you know instead of calling this borrower up and asking them for a payment we ask them They re flabbergasted because they get a call from us saying how do you see this resolving What would you like to see happen The first if there s an opportunity to modify someone you know in the old days we were giving huge principal reductions because people were underwater and that was phantom money to us too because we were buying the mortgages at a discount We were able like you said we provide a very vital role because as private equity we have so many more tools in the toolbox We take the first 30 to 40 of every pool we buy and and perform Those people give them modifications If someone has the ability to pay and and the intention of keeping their home we will do whatever we can to make that happen Bill Bymel 00 10 18 – And for that middle 50 where maybe they just priced out their situation has changed whatever it might be We want people to exit with dignity So we ll give people a waiver of their deficiency balances will help set them up in a new rental property rather than spend money on an attorney to foreclose I d rather pass that so that savings back to our borrowers So that s really how we revolutionized the industry And that means We do this through the help of our local real estate broker network and our mortgage brokers and people on the ground who are knocking on doors and letting people know Hey we re not Bank of America you should talk to these guys And that gives us the competitive advantage that others in the industry can t do It s just not it s such a big industry You can t most can t get that granular right Sam Wilson 00 11 07 – Most can t get that granular The I think the one the one key that gives you the margin in these deals to offer that flexibility is buying at a discount Bill Bymel 00 11 19 – Correct Sam Wilson 00 11 19 – Like you have to buy and I m telling you things you already know But you know when you re buying at a discount as you mentioned for the last decade has been tough I mean because people are bidding a lot of these pools up Am I And if I m incorrect Bill Bymel 00 11 33 – Yeah yeah No no no no So the last four years have been tough I mean you know we had a good run up until about I would say 16 is when the market you know right around the time Goldman did a deal with the with the federal government where a big settlement over the last foreclosure crisis they made a huge commitment of dollars to buying buying mortgages and part of their settlement with the federal government allowed them to buy defaulted mortgages and modify them and get a credit against their settlement So they ve been the biggest player in the market the last 4 or 5 years And then there s another woman who s bringing money in from Asia that s been overpaying for stuff Bill Bymel 00 12 16 – And there was a number of investors that were highly leveraged with very cheap capital up until a year ago that were also forcing the price of NPLs up That said they were always still creating at a discount but you d see stuff trading at you know in the 80s or 90s not enough of a discount that we could really make our our our mold So we ended up focusing on on harder to work areas like New York New Jersey Florida where there judicial foreclosure states a lot of the large institutional investors stay away from the judicial foreclosure states or will bid those down or just not bid them at all And that s where we ve been able to find opportunity and still find discounts over the last few years that Sam Wilson 00 13 03 – Yeah that makes that makes that makes a lot of sense How do you underwrite that many deals at scale if if you do it at scale Or is it an individual loan by loan analysis Bill Bymel 00 13 14 – And if so no Yeah it s a good question We have we ve developed the model for over ten years Bill Bymel 00 13 18 – It s a very it s a very it s a sophisticated yet simple discount model So think of it like this It s done on a loan by loan basis with every but and we get the data that the servicer gives us on any pool and we re able to look up it into our model And what you re in essence looking for is what am I going to get if I have to take this to a worst case scenario I have to take this property to foreclosure How long is it going to take What s going to be my cost to carry the money What s the cost to the rehab Potential rehab legal expenses the cost of insurance property taxes All of that gets discounted off along with a timeline And what you re projected yield is over that two year period let s say you know 20 15 per year And that s how the model determines what price I should what discount I should be offering on any individual low And believe it or not even with that this model like if you get an old loan that s you know that s late stage foreclosure my model might say I can pay 105 of UPB for something like that because if it s been in foreclosure for two years then you ve already got another 10 or 15 in debt that s built up above your principal balance Bill Bymel 00 14 36 – So you know it does work both ways but most of the time you know we re bidding in the 60s or 70s of of of of value Sam Wilson 00 14 45 – Do you you you mentioned popcorn earlier Are you expecting that Bid percentage to come down in the near future Yes Bill Bymel 00 14 54 – 100 So what s happened is is I ve been able to consistently find deals in a mid-teens yield while the rest of the market is bidding large pools to high single digits yields And what s happened now as a as in the last year is the adjustment in rates has happened Everyone s expectations is now shifted into double digits the regular market And so we re now looking at deals that are in the 20s minimum minimum 20 yield and as and it could get better especially if we did dip our toe into commercial stuff in commercial we should be modeling in the 30s I mean there s a bloodbath on the horizon there Sam Wilson 00 15 34 – Well certainly certainly in the office sector there s a bloodbath That s right That s right Sam Wilson 00 15 40 – So yeah that s very interesting What what is the I guess there s two questions I have attached to this What is your disposition strategy once you get the loan performing Bill Bymel 00 15 50 – Oh yeah good question We do have that s why the secondary mortgage market connections are so important So we re able to pool a report forming pools minimum about 10 Million Sometimes you get a buyer at five but the institutional guys will securitize re performers in with new mortgages as they re building these as these aggregators come back to the market once the rates seem to level off should you know then you ll see a lot more of these securitizations come back or institutional buyers are just will just buy it to clip a coupon So we re able reformers now will traditionally not sell for par but you know they ll sell in the 90s of their principal balance So if I m buying in the 60s I m taking in six months of payments and I m selling in the 90s You do the math It s actually one of the the best return across the board in our portfolios have been deals that we ve modified and resold and it s the win win strategy Bill Bymel 00 16 56 – So it s like I just love it you know Sam Wilson 00 16 58 – Absolutely Absolutely So you I guess that s the last question attached to that is the seasoning period six months 12 Bill Bymel 00 17 06 – Six months seasoning just to resell a loan and have it three months is it s of payments considers it a repay forming loan But most buyers in the market want at least a six month seasoning Sam Wilson 00 17 19 – Oh I would think so I would think so So you repackage these and you sell these off to aggregators then That s right 10 million at a time Can you take that on your fund Is their debt for acquiring debt Bill Bymel 00 17 34 – Absolutely Absolutely So it s very interesting to see how that market has changed Yeah Um those of you who have watched the news recently know the name back West Bank PAC West Bank owned two lender finance companies where they had their own internal lender finance and then they had another Capital Solutions out of DC that they had acquired a couple of years ago five ten years ago Bill Bymel 00 18 02 – They were one of the larger players in the debt on debt space So just as an FYI now they re out of it now Thank God I didn t take the line of credit they were offering me last year because it was attractive last year at a four and a half five and a half rate But that same but those are their floating rates right I would have been sitting on a on a 10 loan So now the debt the debt on debt still exists Credit Suisse is obviously most famous for it It s interesting to the names that are that were bubbled around as being problematic recently are the guys who are deducted Right um but those guys and there s a there s a number of them still out there Western alliance was another one that did you know that does lender finance there s you absolutely can do it we do we could do it We try not to leverage ourselves We try to stay all equity but we have that option And where we re at right now is that the leverage on leverage options that are out there Bill Bymel 00 19 03 – It used to be if I want private equity I d have to pay minimum 10 or so and I could get the banks for five six Now the banks are not there So for plus 450 or 500 so it s close to 10 money at the banks as well So you re you re almost better off doing now the private guys are trying to push into low single low doubles but they ll still take 10 probably if you have a relationship So you re actually better off leveraging through private equity right now Sam Wilson 00 19 31 – Right And does that come in as debt or do they come in as equity Bill Bymel 00 19 35 – All of my equity has come All my private equity money is coming as equity so far I ve got I do have it s funny my main private equity partner is a big you know billion dollar institutional group out of New York And they pursued me as debt for a year And we and I just that wasn t the kind of relationship I wanted to have So I prefer to have all equity have us all just have you know you know you know all of our we re all vested in it together Sam Wilson 00 20 08 – Pursue and that and shoot man I love the idea of limited to no debt because it just leaves it leaves the toolbox You leave every tool in the toolbox to really do what you want without constraints That s great and do what s best for the best for the fun best for the investors best on the return profile It just leaves you much more nimble Absolutely Love that Let s talk here The last 60s or so that we ve got here on the show before we get into how to how to contact you and get in touch with you let s talk about raising capital I mean it s it s something you ve got a lot of experience in What s it been like raising capital for the nonperforming loan space Bill Bymel 00 20 48 – You know I m an asset I m an asset manager by trade in a deal guy So learning to raise capital was going back to school six years ago at my previous firm was the where I had to first do it It was one of our main capital partners was starting to pull back Bill Bymel 00 21 04 – And so I had to learn how to go out and brand ourselves packaged talk to investors And it has been very educational and and wonderful and yet not easy You know the persistence is the key especially with large dollars I ve got a guy that a gentleman for instance right now multi multimillionaire I have been pursuing for five years And he s about to write his first million dollar check this week And it s persistence It is you know being you know the strategy you know perfecting our pitch for our strategy has been fine You know I think everybody who gets real estate with a little bit of nuance or a little bit of sophistication likes the uniqueness of our strategy and sees the soundness of it But you know raising capital is a whole different it s a whole different career And you know I may look back on this and say you know it was worth it because of the money And I may just say you know I like doing deals and I m going back to just doing deals Bill Bymel 00 22 10 – We ll see Right Sam Wilson 00 22 10 – Right But I think the one interesting thing in all of that despite the challenges raising capital the temptation to have your billion dollar fund or 1 billion PE firm that says hey we want to come in as debt I mean that s low hanging fruit for the guy out there raising capital And yet you had the patience and In the discipline to say no Yeah not the way we re doing business So I think that s really really cool An awesome awesome part of your story there to point out Bill if our listeners want to get in touch with you learn more about you and or get a copy of your book Win Win Revolution what is the best way to do that Bill Bymel 00 22 45 – My personal website is bill by bill bml com Sam Wilson 00 22 53 – Fantastic build by Malcolm and make sure we put that there in the show notes Bill thank you again for your time today Certainly appreciate it Bill Bymel 00 23 00 – Great to be with Sam Sam Wilson 00 23 01 – Hey thanks for listening to the How to Scale Commercial Real Estate podcast Sam Wilson 00 23 05 – If you can do me a favor and subscribe and leave us a review on Apple Podcasts Spotify Google Podcasts whatever platform it is you use to listen If you can do that for us that would be a fantastic help to the show It helps us both attract new listeners as well as rank higher on those directories So appreciate you listening Thanks so much and hope to catch you on the next episode Click here to visit this podcast episode