Win-Win Resolutions in the Current Climate with Fuquan Bilal

Proactive Workout Strategies That Protect Both Sides

When economic disruption hits -- layoffs, pandemic shutdowns, rising costs -- the investors who protect their portfolios are not the ones who wait for borrowers to call. They are the ones who get ahead of the curve with structured programs, clear servicer directives, and a borrower-first approach that still delivers investor returns.

Fuquan Bilal has been buying and resolving distressed mortgage notes since learning the business through short sales in 2011. His portfolio spans non-performing loans, re-performing assets, and real estate acquisitions. In this expert session, he walks through the specific strategies his team deployed to manage delinquency, maintain cash flow, and create borrower-friendly outcomes during one of the most challenging economic periods in recent memory -- and why those same strategies remain effective in any market disruption.

The 60-Day Deferral Program

The centerpiece of Bilal's crisis response was a proactive payment deferral program executed entirely through his loan servicer, Madison Management. Rather than waiting for borrowers to reach out, fall further behind, or stop communicating entirely, Bilal's team issued standing instructions: any time a borrower fell 60 days delinquent, the servicer would automatically reach out and offer to move the missed payments to the back end of the loan.

The critical design elements of this program:

The conditional structure was deliberate. By requiring the borrower to make the next payment before the deferral took effect, Bilal accomplished two things. First, it confirmed the borrower still had the ability and willingness to pay -- they were experiencing a temporary hardship, not a permanent inability to service the debt. Second, it prevented gaming. A blanket letter to the entire portfolio offering relief would have invited borrowers who were not in distress to skip payments strategically. The case-by-case approach, triggered only after a borrower actually fell behind, filtered for genuine need.

The result: the portfolio's delinquency rate stayed well below what Bilal had anticipated during the downturn. Borrowers who might have spiraled into deeper default were caught early, offered a workable solution, and brought back to current status with their loan terms intact.

Why Servicer Execution Requires Hands-On Management

A standing instruction to a servicer is only as good as its execution. Bilal emphasized that managing this program required significant oversight. Servicers handle thousands of loans across multiple clients. Your portfolio is one account among many, and your directives will not always be followed precisely without monitoring.

The specific management steps Bilal's team performed:

• Reviewed servicer notes on every borrower interaction to confirm the deferral offer was communicated
• Requested copies of letters sent to homeowners to verify the correct language and terms were used
• Flagged borrowers who fell past 60 days without receiving outreach, indicating the servicer had missed the trigger
• Held regular meetings with the servicer to reinforce the program parameters and review execution

This is a recurring theme in note investing: the servicer does not work for you in the way an employee does. They process your directives alongside hundreds of other clients' instructions. The investors who get the best outcomes from their servicers are the ones who train them on their specific goals, monitor compliance, and intervene when execution falls short.

As Bilal put it: "You have to get with your servicer and make sure that you train them right and they stay informed on what your goal and mission is."

Monitoring the Senior Lien to Protect Second-Position Investments

For investors holding second-lien positions, the biggest risk during an economic disruption is not default on your own loan -- it is the borrower defaulting on the first mortgage. If the senior lien forecloses, the second-lien holder can be wiped out entirely.

Bilal's team addressed this by actively monitoring the status of borrowers' first mortgages. They researched which banks held the senior loans, identified what hardship programs those banks were offering, and then proactively shared that information with borrowers through the servicer.

This approach mirrors a strategy used during the Hardest Hit Fund era, where note holders essentially acted as financial advisors to their borrowers -- educating them on government programs, principal reduction options, and lender-specific relief programs they might not have known existed.

The logic is straightforward: if your borrower loses their home to a first-mortgage foreclosure, your second lien is worthless regardless of whether the borrower was current with you. Helping the borrower stay current on all obligations -- not just the one owed to you -- directly protects your investment. Bilal was even prepared to assist borrowers with loan modifications on their first mortgages if necessary, though it never came to that.

Borrower Outreach Without Direct Contact

Regulatory pressure has made direct investor-to-borrower communication increasingly risky. Bilal's team learned this through experience -- legal disputes arising from direct borrower contact convinced them to route all communication through licensed servicers and collection agents.

That constraint, however, does not eliminate the need for proactive outreach. The tools Bilal's team uses:

Servicer-initiated outreach. All letters, calls, and offers go through the servicer. The investor provides the strategy and the servicer executes the communication. This keeps the investor compliant while still allowing customized, proactive contact.

Licensed door-knock agents. For borrowers who are unresponsive to letters and calls, Bilal's team deploys licensed door-knock collection agents to visit the property in person. These agents can photograph the property condition, confirm occupancy, and attempt to establish communication with the borrower face-to-face. This tactic resumed once initial pandemic restrictions eased and has become a standard part of the outreach toolkit.

Web-based intake forms. A complementary approach discussed in the session involved creating an online form where borrowers could submit their hardship details, available down payment, and affordable monthly payment amount. Many borrowers are more comfortable completing a form on their phone than calling a law firm or servicer phone tree. This lowers the barrier to engagement and starts the resolution conversation without requiring the borrower to navigate a complex phone system.

Targeted outreach, not blanket campaigns. A key principle across all of these channels: outreach was targeted to borrowers who were actually delinquent or showing signs of distress. Mass mailings offering relief to the entire portfolio -- including performing borrowers -- risk incentivizing strategic default. By keeping outreach case-by-case, Bilal ensured that only borrowers with genuine hardships received workout offers.

The Go-Giver Mindset and Why It Produces Better Returns

Bilal was candid about the tension between profit maximization and borrower-first resolution. Early in his career, the focus shifted from helping borrowers to chasing the highest possible yield. The pivot back to a "go-giver" approach -- prioritizing borrower solutions over maximum extraction -- produced better financial outcomes.

The reasoning is not altruistic. It is structural:

Borrower workouts are more profitable than foreclosure. Exiting through the borrower -- via a modification, discounted payoff, or repayment plan -- avoids the legal costs, timeline risk, and carrying costs of foreclosure. Bilal noted that his team stopped selling assets for an extended period because workout resolutions were consistently more profitable than liquidation.

Losses are tax-deductible. When a resolution does not produce a profit -- for example, a short sale or a deed-in-lieu where the property value falls short -- the loss can be written off against ordinary income. The downside is capped while the upside on successful workouts can be substantial.

Equity grows over time. Properties that were underwater at the time of note acquisition have appreciated significantly in many markets. Loans that appeared to have negative equity now sit in positive territory, giving both the borrower and the investor more options for resolution. Bilal emphasized that note investing is a long-term game, and patience often converts apparent losses into profitable exits.

Negative equity does not mean zero value. Research indicates that approximately 77% of borrowers in underwater situations still intend to pay their mortgage because they want to keep their home. A second lien with no current equity still has value if the borrower is willing to pay, if the market is appreciating, or if a modification can be structured to capture future equity gains.

Structuring Modifications and Pricing Considerations

When restructuring a non-performing loan into a performing asset, the terms of the modification directly affect the note's value -- both as a held asset and as a potential sale to a re-performing loan buyer.

Bilal highlighted a common pricing trap: setting modification payments too low to make the note attractive to secondary-market buyers. A loan modified to $200 per month may get the borrower performing, but if the unpaid principal balance is high relative to that payment, the cash-on-cash yield for a potential buyer is unattractive. In some cases, the note would actually be worth more as a non-performer (priced on liquidation value) than as a re-performer (priced on cash flow).

The key considerations when structuring a modification:

Bilal noted that bifurcation was relatively rare in his portfolio -- perhaps five loans total -- but it is a valuable tool when the gap between the amount owed and the borrower's ability to pay is too wide for a standard modification to bridge. In those cases, the borrower makes affordable payments on one portion of the balance while the remaining amount is deferred, often with a balloon payment due at the end of the term or upon sale of the property.

Charged-Off Loans and Arrearage Documentation

A related pricing issue arises with charged-off loans. When a bank charges off a loan, the borrower stops receiving statements, and interest stops accruing on the balance. An investor who acquires a charged-off note cannot retroactively accrue interest for the period when no statements were sent.

However, once the investor places the loan with a servicer and begins sending statements, interest accrual resumes. And once a modification agreement is signed that documents the total balance -- including any arrearages captured in the repayment terms -- that documented balance becomes the basis for pricing.

This matters because some investors undervalue the arrearage component when pricing loans. A note with a $30,000 UPB and $20,000 in documented arrearages captured in a signed modification agreement is worth more than a note with a $30,000 UPB alone. The modification agreement converts what was previously an uncertain claim into a documented, enforceable obligation.

REO Disposition: The Final Exit

When workout strategies are exhausted and the investor takes back the property through foreclosure or deed-in-lieu, the asset becomes real estate owned (REO). At that point, the investor faces a secondary decision: sell the property as-is, rehab and flip it, or finance it to a local investor.

Bilal's background in real estate -- he started flipping properties in 1999, well before entering the note business -- gives him an advantage at this stage. Having the capability to rehab and sell properties in-house means he can handle whatever outcome the workout process produces. This vertically integrated approach (note acquisition, workout, and if necessary REO disposition) reduces reliance on third parties and captures margin at each stage.

For investors who do not have rehab capabilities, the REO stage is where partnerships and local market knowledge become critical. Selling the property to a local investor on seller financing terms is another option that can generate ongoing cash flow rather than a one-time sale.

Key Takeaways for Note Investors

The strategies Bilal outlined are not exotic or complex. They are execution-intensive -- requiring clear servicer directives, consistent monitoring, proactive borrower communication, and a willingness to prioritize long-term outcomes over short-term extraction. The principles apply in any market disruption, not just the specific conditions of a pandemic:

1. Get ahead of delinquency. Do not wait for borrowers to call. Establish servicer protocols that trigger outreach at 60 days past due -- before the situation deteriorates further.

2. Make deferrals conditional. Offering relief without requiring the borrower to demonstrate continued ability to pay invites gaming. Require the next payment as a condition of deferral.

3. Monitor the senior lien. If you hold second-lien positions, the first mortgage is your biggest risk. Help borrowers stay current on all obligations, not just yours.

4. Route everything through the servicer. Direct investor-to-borrower contact creates regulatory and legal risk. Use licensed servicers and collection agents for all communication.

5. Manage your servicer actively. Standing instructions are not enough. Review servicer notes, request copies of borrower letters, and hold regular check-ins to ensure your directives are being followed.

6. Structure modifications for resale value. If you may sell the re-performing note, set payment terms that produce an attractive yield for the next buyer -- not just the minimum the borrower can afford.

7. Play the long game. Properties appreciate. Borrowers recover. Loans that look unprofitable today may produce strong returns over a multi-year horizon. Patience and a borrower-first approach often outperform aggressive collection tactics on a total-return basis.