On our live YouTube show, be.the.bank we sometimes review loan-sale case studies (but mostly non-performing mortgage note resolutions). In episode #1, our second case study took a close look at the investor sale of a non-performing senior lien secured by a single family residential (SFR) property. In this case, the new investor was better suited to help the borrower sell the property or acquire the deed in lieu of foreclosure. There are so many different strategies for investing in mortgage notes, it’s great to have partners that specialize in other exits.
|Fair Market Value||$28,500|
|– % of Equity||= 38.7%|
|– % of UPB||= 12.9%|
purchased March 2019 & exited March 2020 = 12 months
Borrower Outreach Unsuccessful
Although we prefer to work with our borrowers to help resolve a non-performing loan, in this case we were not able to get in touch with the homeowner to ask our three questions (what happened, where are you now, what do you want to do? learn more in our free course).
We did our best to locate the borrower through online research, skip-tracing and even a door-knocker, but despite multiple efforts we failed to get in touch. Without a cooperative borrower to work with, our exit strategies were limited to initiating foreclosure or marketing the asset for a non-performing loan (NPL) sale.
Our due diligence did uncover that the borrower was behind on their property taxes for several years, with an unpaid tax bill of over six thousand dollars. This was not a good sign. Delinquent taxes often meant that the borrower has no interest in continuing to own the home, this is very likely a decision by the borrower to pursue a “strategic default” – stop paying on their mortgages, taxes, etc because the property is significantly underwater. This decision makes sense when a property is worth less than half of what is owed on the mortgage.
Negotiating the Non-Performing Loan Sale
Despite the fact that the borrower was significantly underwater (almost 300% CLTV – combined loan to value), an investor can purchase the mortgage note with equity above their invested capital. When buying & selling 1st position loans, investors typically value the asset using a discount to the fair market value (FMV) of the property, net of delinquent taxes. In this case, there was over $20k of property value in excess of the $6,533 in unpaid taxes, so the note investor put a value on this loan of $15,000 (68% of the positive equity in the deal).
Non-Performing Mortgage Note Sale
There are a few steps to find a buyer, negotiate & sell a non-performing mortgage note:
- Prepare Data-Tape with updated loan information
- Market “masked” loan data to potential buyers – sanitize personally identifiable borrower information
- Submit non-disclosure agreements (NDA) for execution with interested buyers
- Share complete Data-Tape with vetted buyers (NDA signed)
- Request Letter of Intent (LOI) with indicative offers & contingencies
- Accept best offer after initial negotiations (subject to buyer due diligence)
- Review buyer due diligence results and finalize pricing & Loan Purchase Sale Agreement (LPSA)
- Close the deal! Prepare AOM/allonges, initiate servicing transfer & ship collateral
After a relatively short due diligence period (less than a week), our note buyer was ready to fund the trade. Because the seller data presented in the beginning of the process was accurate, the buyer’s research was just a matter of verifying the information on hand. They decided to move forward and purchase this non-performing 1st mortgage at the indicative price level (when due diligence doesn’t match the seller data, buyers fade their pricing to reflect new findings).
See below for a time-stamped video presentation of case study #2 in the premier episode of our YouTube series: