If you've ever financed a home using a bank loan, chances are you've received the unexpected "goodbye" letter from your current loan servicer followed by a corresponding "hello" letter from a new servicer. This almost always means your home loan has been sold. It's a common occurrence in the mortgage industry. In fact, home loans that run their full term (e.g., 30 years) can change hands multiple times over their lifetime.

Home loans originated by institutional lenders like banks always consist of a promissory note (or just "note") and either a mortgage or deed of trust, depending on the state. The note is the promise to pay which spells out the specific terms of the loan (amount, interest rate, payment amount, duration). The mortgage, or deed of trust, is the "security" instrument which legally binds the property to the note. It's this document, recorded at the county court house, that gives the lender the right to foreclose and take back the property if the borrower defaults on their obligation to repay the loan. Since we only deal in secured notes, any reference to a "note" in this discussion refers to a promissory note along with its corresponding security instrument.

Banks and other non-bank loan originators commonly package up their loans and sell them in bulk to hedge funds and other large buyers. These "pools" of loans are priced based on the quality of the "paper" (a slang term for mortgage notes). Pools are often broken up and re-sold in smaller pools to other buyers down the note food chain. CaMc2 Investments, LLC has relationships with various entities along this chain from which we source some of our note inventory. The notes may be offered to us individually or in relatively small pools known as "tapes." We also source note inventory directly from private individuals or small businesses who have seller-financed properties and are currently receiving payments from the borrowers.

Notes generally fall into one of the following categories based on the borrower's payment history:

• Performing - The borrower is current on their payments. Notes that have been performing over their entire life command the highest price when sold because the risk of default is considered low.

• Re-performing - The borrower was at one or more times in the past in default but is now current with their payments once again. It's possible that changes to the loan terms were needed to achieve re-performing status. These loans sell at a modest discount since the risk of default is considered somewhat higher.

• Sub-performing - The borrower has a spotty payment history, perhaps getting behind frequently but then catching up to avoid going into default. The discount on these notes will generally be greater since the notes require more attention to remain performing.

• Non-performing - The borrower is in default on the loan. They are at least 90 days delinquent but are often a year or more behind on their payments. Arrearages (past-due payments plus penalties) have grown and it's unlikely the borrower will be able to regain their footing without some assistance. The discounts on non-performing notes are much higher since the outcomes aren't as predictable.

CaMc2 Investments, LLC will consider all four categories when the price is right. However, our business model focuses primarily on purchasing performing notes for consistent returns and non-performing notes at significant discounts for increased profit potential. Performing and non-performing notes have different risk-versus-reward profiles.

Now let's look deeper into how notes are evaluated and what happens once we've made the purchase. Differences between how we handle performing and non-performing notes will be pointed out when appropriate.

CaMc2 Investments, LLC periodically receives "tapes" of both performing and non-performing notes from our various institutional sources. A tape may contain a handful, dozens, or even hundreds of notes. The institutional seller may allow anywhere from a few days to a few weeks to place bids on individual loans or, in some instances, the entire tape. We also source performing notes from private individuals and small businesses using various direct marketing strategies. Independent of the source, the process of evaluating notes to determine what bid price, if any, we should submit is known in the industry as "due diligence." An initial screening round of due diligence will be performed before the bids are submitted. If our bid(s) are accepted by the seller, a second and more detailed round of due diligence is performed before the actual note purchase occurs.

Here are some of the key elements of the note due diligence process:

• Value - Determine the "as-is" value and, for non-performing notes, an estimate of the after-repair value (ARV) of the property. Local real estate agents can be used for drive-by valuations as well as information on the neighborhood (e.g., crime, schools, desirability). Research on comparable property sales in the subject property's neighborhood also proves invaluable in this valuation phase.

• Occupancy Status - Determine if the property is occupied or vacant. Occupancy can usually be assumed for performing notes. For non-performing notes, this information is important when assessing the likely exit strategy and can also provide important information about the condition of the property. For example, a vacant property may be a more likely target for vandalism.

• Title Review - Perform a thorough title search on the subject property to ensure that there aren't any unanticipated liens or encumbrances that would cloud title. Many of these liens can be "cured", but it's important to know what you'll be dealing with before purchasing the note. Phone calls to city and municipal entities are also made to uncover any liens that don't get recorded at the county level.

• Bankruptcy & Taxes - For non-performing notes, research is performed to determine if the borrower is currently in bankruptcy. For both loan types, the county is contacted to determine if any delinquent property taxes are owed, and if any tax liens or tax deeds exist on the property.

• Legal & Workout Costs - For non-performing notes, estimate the legal and other professional costs to resolve any deficiencies. These costs will vary by state, and may include foreclosure costs, holding costs, and other miscellaneous expenses. For performing notes, purchasing at an appropriate investment-to-value (ITV) ratio will help to insure that legal costs can be covered should the borrower ever default.

• Document Review - Perform a comprehensive review of the note's historical document package (i.e., "collateral") to ensure that the note can be enforced in court, if needed. In some cases, the note seller may need to correct deficiencies prior to purchase.

• Exit Strategy - For non-performing notes, calculate the return-on-investment (ROI) for the most likely exit strategies to determine if the margins are consistent with the company's objectives. Our ROI calculator is constantly being improved to better forecast the outcomes for the various exit strategies. While there typically isn't an exit strategy planned for a performing note, it's still important to review the ROI in case the holder might ever need to sell the note or should the borrower choose to pay the note off early (e.g., property sale or refinance).

Based on what we find in the second round of due diligence, we will either stay with our original bid for the note or ask the seller for a greater discount. Once an agreement on the price is reached, the funds are wired and we now own the note(s). For performing notes our work is almost done, but for non-performing notes the real fun has just begun.

Performing notes are one of the best investments available since they provide consistent monthly cash flow secured by the underlying real estate. After purchase, performing notes can be boarded with a licensed loan servicing company who handles virtually all of the required loan maintenance duties including borrower payment collection, property tax escrow and payment, homeowner's insurance escrow and premium payment, and any necessary borrower outreach (e.g., late payment reminder calls). Loan servicing companies will even provide the note owner with year-end tax reports detailing the principal and interest collected on the loan. The performing note owner can simply watch the payments roll into their bank account or self-directed IRA every month. Of course, there is always some risk that the borrower will default on the loan. However, this risk has been reduced considerably by proper due diligence and a typically appreciating property value. It's unlikely the holder of a performing note will ever want to sell (monthly payments are intoxicating), however, it's good to know that the market for quality performing notes is typically strong should they ever need to for any reason.

Each non-performing note is unique and requires a uniquely-designed workout plan. Some borrowers are elated to finally talk to someone who really wants to resolve their problems, while others stick their head in the sand and refuse to play at all. Our experienced special servicing vendors have dealt with every kind of borrower and often produce outcomes that surpass our expectations. One of the benefits of non-performing note investing is the wide array of possible exit strategies. Here are a few of the most common:

• Loan Modification - When the borrower is cooperative, we can often find a solution which works for their financial situation. Since we've purchased the note at a significant discount, we have flexibility to adjust the terms of the note to better accommodate their ability to pay. This is our preferred outcome because it leaves the homeowner in their home and creates an ongoing stream of monthly payments to us and our investors.

• Deed-In-Lieu - When staying in the property just doesn't make sense for the borrower, the gentlest outcome is to have them sign over the deed "in lieu" of foreclosure. This saves the borrower a painful foreclosure and preserves their credit.

• Short Sale - When the market value of the property is sufficient, it sometimes makes sense to allow the borrower to sell the home on the open market at a price less than what they owe on the note. This can still be profitable for us since we purchased the note at a discount to the amount owed.

• Foreclosure - While this is generally the most expensive exit strategy, it can often be one of the most profitable depending on the home's condition and the current real estate market. Properties taken back through foreclosure can be wholesaled as-is to other investors, rehabbed and sold on the open market, rehabbed and kept as a rental, or owner-financed to a homeowner who wants to do the rehab themselves. The possibilities are virtually limitless.

Our objective is to keep the homeowner in the home when that's what they want and when it makes sense financially. As you can see, however, there are several other valid and profitable alternatives available for non-performing notes.

You may be exhausted by all this information, but we hope it's piqued your interest enough to take the next step. CaMc2 Investments, LLC offers several ways to participate in note investing depending on your specific investment goals and risk profile. Perhaps you'd prefer purchasing performing notes in your own account for monthly cash flow. Maybe investing as a private lender or joint venture partner in a non-performing note deal suits your fancy. Or it may be that you just have questions about what you've read here. The first step in every case is to reach out to us so we can schedule a phone call to better understand your financial situation and to determine if this type of investment is right for you. So please Contact Us and check the option to reflect your interest in investing. We will reach out to start the conversation.