Non-Perfoming Notes 100% UPB

17 Replies

I have been searching the fci exchange and have come across a couple of non-performing firsts that are selling are over 100% upb .I see that the note is at 8.5% ,the original balance was at over $200k and it is now around $50k The property is worth around $100k Why would anyone buy this note and why would anyone give such equity to the original owner?

With a good payment history mSny would be happy with a 8.5% return, on a relatively safe investment (50% ltv).  Not sure what you meaning by"give such equity to the owner", I assume the loan has been simply paid down to that level.

the principal on the note is $50k I assume that is what the owner owes on the note.It appears to be the original owner so there equity position would now be 50$k. MV $100k - note balance $50k = plus $50k

FCI is an exchange so folks selling notes can price them any way they want. There always seems to be NPNs priced at 100% of UPB. I think the idea is that if the note is below collateral value the buyer could foreclose and acquire the property under FMV. Not a good strategy IMO.

If the note is below collateral value you could foreclose but since in this case the home owner has the same advantage.If the home owner owed more then collateral value then it would be worth looking into It just makes no sense that the home owners note was reduced way below market value unless there was a large cash payment. What other strategy can you use for non nonperforming notes other then work out or foreclosure?  

@Mike, why would that not be a good strategy to you? Just curious.

@Steven, it sounds like it could be a play based on state, condition, occupancy, and a few other things to factor. Notes have a lot of moving parts, and any slip-ups can cause you to loose some or all of your $$$, or make 20-200%.

Mike is correct about the exchange, many people are selling overpriced notes with a lot of baggage, and I wish them well if we can't come to an agreement. Everything is up for negotiation, and the tough part is its hard to get with the owner, especially if they don't log in to answer your questions; stinks you can't contact them directly, though some of my note investor buddies have had good luck on there; i have not, yet. 

@Account Closed Geeze, sorry I read Performing Note. Yeah, 100% UPB makes no sense. Maybe they're hoping someone thinks they can pick up a $100k property for $50k, when in reality they'll likely just get paid off. Of course their value should be treated as suspect.

Well it actually does make sense folks.  

A mortgagee is entitled to all the interest, fees and advances made to enforce the note along with the unpaid balance.  

At 50% LTV (loan to value) we have 50% of the property's value to use to recover the total due. Principal is discounted when the collateral can not afford the recovery of those advances, fees, interest and principal.

FMV: $100
UPB: $50
Interest Arrears:  $15
Fees/Advances:  $5

So the mortgagee's reserve bid would be $70.  

As an investment you would earn the ongoing interest accrual and any advances and fees applied to the account prior to your purchase would be a windfall to you.  So if you only capitalized $2 of the $5 the $3 is all return to you.  Additionally if the loan has already accrued a year of interest that would benefit you as well.

There are two other things to bear in mind.  A loan can be deemed non-accrual.  Interest stops accruing and being charged.  It can happen but I have not seen it happen all that much.

Next, some notes have a "Default Interest Rate" which is a rate in premium to the note rate if a note defaults.  Usually the default rate only kicks in after the mortgagee accelerates the balance due.      I have owned notes with default rates as high as 18%.  Usury may apply on a state by state basis and other factors.  

Moral of the story, there are justifications for selling a defaulted note for 100% of the balance.  

@Christopher Winkler

To answer your question of why I would not consider purchasing an NPN at par, the simple answer is because I know I will spend money to collect on the debt, and that puts me above par. Why is that bad if the total investment is far less than FMV? Because I don't own the property and I cannot assume that my attempts to acquire the property will succeed. If you pay more than the total debt (purchase price plus expenses) and the loan is paid off, guess what.. you lose money.  If the property has equity, there is significant motivation for the borrower to do what they need to do to avoid losing it.  They could sell it or call their rich uncle Bob to come in and bail them out.

That said, Dion's point is valid.  One must consider the entire debt here.  If there is a ton of accrued interest etc. which puts the total debt comfortably above the purchase price, then it might be an OK deal.  Just keep in mind that you can burn through a lot of cash trying to get to a foreclosure, especially when there is significant equity on the line.

I just received the title report and it seems very strange The original mortgage was assigned to the note buyer There are some sewer and trash liens,all taxes are current but the note that i am researching on FCI is not recorded. So as far as the report the original mortgage of $200k  is recorded and assigned  but not the 8.5% $55k  note that is for sale Has anyone encountered this ? 

Trying to sell an unrecorded note and DOT? Now it sounds like a scam, or the title search missed it.

NPN also need active collection efforts to keep the note from becoming stale and un-collectible. If the DOT wasn't filed, it's an unsecured debt, perfection of the lien is required and a Recorder may reject recording stale documents.

Mike, in you last post, costs or advances go to the payoff, added to the note UPB, so those would be recovered if the borrower went to his rich uncle.

State statutes often dictate non-accrual status, so be careful assuming you'll be collecting interest in arrears. Notes may go to the highest lawful rate by statute after default as well.

Sorry, but I'd never buy a note where I did not direct contact with a holder/servicer, I wouldn't have any idea what they may have done or did not do, and a broker's warranty usually isn't satisfactory.  :)

It sounds like Steve misunderstands what gets record and what does not.

Mortgages and Deeds of Trust (Security Instruments) are what is recorded.  Those are the pledge of property to illustrate to the public that an interest in the real property has been given.  

Promissory Notes are the IOU the contract of debt which is secured by the security instrument.  Notes are not typically recorded in public record. 

In this case, it could be the original loan for $200k is the mortgage you see and the 'new' note is a modification of the old loan.  That modification agreement should be recorded though sometimes they don't get recorded and remain in file.  To enforce the remedies in the loan post an agreed modification you will be forced to record the agreement.  

When you buy the note the mortgage or deed of trust follows it.  

If there is no modification of the $200k loan then you have a unsecured note.  Meaning it is not attached to the property at all.  Anything is possible but I would not default to this idea out of the gate.  The first set of ideas I mentioned are the most likely.  

I am not exactly clear on what you mean when you say "...the original mortgage was assigned to the note buyer..."  aren't you or wouldn't you be the 'note buyer' therefore you mean the current 'note seller'?  

The Seller of the note would be the last party in the chain of assignments and indorsements.  Assignments of Mortgage is a transfer in title and an indorsement is a transfer in equity.  

@Steven Picker

 So, at best it's a second (if there is an unrecorded mtg that can be recorded), with a first mtg that seems to be upside down.  Now it makes perfect sense why they want 100%:).

here is the note for sale

1st Mortgage/Deed of TrustAmortization Type:Fully AmortizedLoan Type:ConventionalOriginal Balance:$204,000.00Current Balance:$53,946.33PI:$421.60Total Payment:$421.60Note Rate:8.500%Sold Rate:8.500%Total in Trust:- - -Unpaid Interest:$0.00Unpaid Late Charges:$5.00Unpaid Charges:$0.00Prepayment Penalty:NoRate Type:Fixed RateBalloon Payment:NoLoan Terms Modified:NoRegistered w/MERS:NoOn Forbearance Plan:NoIn Foreclosure:NoIn Bankruptcy:No

Seller Comments:CLTV is approximately 60%

Now its getting confusing with people saying its a 2nd. If the current balance is $50k, then its still the same note and its been paid down that much and not a 2nd. You can pretty much figure it out if you can see when the note was originated, and when the last payment date was, and extrapolate out what the balance would be on the date they stopped paying with a 10bII calculator. 

Then you have as Dion says, all the accumulated interest & penalties. 

Steven, are you saying the mortgage has been assigned to the seller? Did you run a full title report or an O&E Report? If its showing up on there, its been recorded and they are the current note and mortgage owner. You can try to see if the county has it recorded online to confirm.

Typically we buy underwater notes with $100k of UPB and $50k of value. We would pay up to 1/2 or a little more, as its the value of the house that can be foreclosed on and make a great profit.

In this case, its flipped, and you have a lot of equity. The owner has a lot to loose if he does not work it out and you would want to start foreclosure right away, then try to work it out. If he does not want to work it out, and you get the property, you make a nice return.

Thus, it is worth paying 75% or even more since you have the chance to take title, though he will fight it to not loose his equity & you have to determine if its worth paying a higher price for it.

Let us know how it goes!

I can shoot you the title report if you want to take a look I drove the property today and it is in a c section of town looks a little run down but people are still living there I think they must have divorced because thee is a quit claim deed filed 2 years ago I doubt that the mortgage has been paid down that much it must be a mod but why is it reduced so much