PERFORMING NOTE OUTCOMES

6 Replies

Curious about realistic expectations for outcome of a performing note. Example - A note modified a year ago to lower payment and get borrower making regular payments again. New 15 year amortization at 10% and approx 165 payments remaining. LTV of 55%. P&I payment approx $425 per month.

In your experience, what is most likely scenario of this note? Borrower pays to end of note? Home is sold in 4-5 years and note paid-off? Borrower refinances to a lower rate after 4-5 years and pays-off? Borrower stops paying or falls behind again?  Note holder sells the note after 1-2 years? 

Just looking for thoughts based on past experiences.

I got into notes about 3 years ago. All my performers are tied to my Self-Directed IRA so I'm sitting on them until I'm 65 if need be-haha. I think all of your scenarios could potentially happen. Recently, I have had my borrowers starting to pay down their principal which works well for me too since that will be cash I can leverage to purchase other performing notes.

I'm not sure if that helps your question at all, but I think

@Martin Saenz or @Masaki Maeda might be able to help you with more details on their experiences.

Originally posted by @Robert Harpster :

Curious about realistic expectations for outcome of a performing note. Example - A note modified a year ago to lower payment and get borrower making regular payments again. New 15 year amortization at 10% and approx 165 payments remaining. LTV of 55%. P&I payment approx $425 per month.

In your experience, what is most likely scenario of this note? Borrower pays to end of note? Home is sold in 4-5 years and note paid-off? Borrower refinances to a lower rate after 4-5 years and pays-off? Borrower stops paying or falls behind again?  Note holder sells the note after 1-2 years? 

Just looking for thoughts based on past experiences.

 I don't think there is "most likely scenario".

Each note has its own history, behavior and performance.

All of the scenarios you mentioned can happen and I run into all of them during the years I am investing in notes, and note status can change on daily basis (a borrower that is working, healthy or married today might change status tomorrow).

The tip I can give you is that when you are doing due diligence prior of investing, you should take worst case scenarios and check what will be your profit in such scenarios.

If you are well protected and have multiply exit strategies, you will be able to earn even in such scenarios, and of course earn much more in more optimal scenarios.

I can tell you 3 things about the note you mentioned - 

- I like it is a medium term note (13.75 years, not the 20 or 30 years note)

- The LTV is very good, so you have good protection here

- I think I have read somewhere that statistically there is a higher chance that a note that have once been non-performing will become non-performing again in the future (not sure if this is correct).

Good luck,

Eran

Originally posted by @Brian Mcmenamin :

I got into notes about 3 years ago. All my performers are tied to my Self-Directed IRA so I'm sitting on them until I'm 65 if need be-haha. I think all of your scenarios could potentially happen. Recently, I have had my borrowers starting to pay down their principal which works well for me too since that will be cash I can leverage to purchase other performing notes.

I'm not sure if that helps your question at all, but I think

@Martin Saenz or @Masaki Maeda might be able to help you with more details on their experiences.

Not sure I understand what do you mean by "recently your borrowers started to pay down their principal".

Borrowers should pay P&I (principal & Interest) month by month (not to mention T&I - Taxes & Insurance).

This is what loans are about.

BTW - What is so powerful in amortized loans is at the beginning of the loan most of the monthly payment is going to the interest and not the the principal, what cause your UPB to stay high in the first few years (depends on loan terms & interest of course) and give you another exit strategy (selling it as performing after 1-2 years of consistent payment).

This is what so good in "being the bank".

Eran

 

Originally posted by @Eran Lifshitz :
Originally posted by @Brian Mcmenamin:

I got into notes about 3 years ago. All my performers are tied to my Self-Directed IRA so I'm sitting on them until I'm 65 if need be-haha. I think all of your scenarios could potentially happen. Recently, I have had my borrowers starting to pay down their principal which works well for me too since that will be cash I can leverage to purchase other performing notes.

I'm not sure if that helps your question at all, but I think

@Martin Saenz or @Masaki Maeda might be able to help you with more details on their experiences.

Not sure I understand what do you mean by "recently your borrowers started to pay down their principal".

Borrowers should pay P&I (principal & Interest) month by month (not to mention T&I - Taxes & Insurance).

This is what loans are about.

BTW - What is so powerful in amortized loans is at the beginning of the loan most of the monthly payment is going to the interest and not the the principal, what cause your UPB to stay high in the first few years (depends on loan terms & interest of course) and give you another exit strategy (selling it as performing after 1-2 years of consistent payment).

This is what so good in "being the bank".

Eran

 

If he is holding the note, chances are Taxes and insurance aren't being paid to him. Same with Refi, chances are you won't have escrow with a refi company and you will have to pay taxes and insurance on your own.

 

Originally posted by @Simon W. :
Originally posted by @Eran Lifshitz:
Originally posted by @Brian Mcmenamin:

I got into notes about 3 years ago. All my performers are tied to my Self-Directed IRA so I'm sitting on them until I'm 65 if need be-haha. I think all of your scenarios could potentially happen. Recently, I have had my borrowers starting to pay down their principal which works well for me too since that will be cash I can leverage to purchase other performing notes.

I'm not sure if that helps your question at all, but I think

@Martin Saenz or @Masaki Maeda might be able to help you with more details on their experiences.

Not sure I understand what do you mean by "recently your borrowers started to pay down their principal".

Borrowers should pay P&I (principal & Interest) month by month (not to mention T&I - Taxes & Insurance).

This is what loans are about.

BTW - What is so powerful in amortized loans is at the beginning of the loan most of the monthly payment is going to the interest and not the the principal, what cause your UPB to stay high in the first few years (depends on loan terms & interest of course) and give you another exit strategy (selling it as performing after 1-2 years of consistent payment).

This is what so good in "being the bank".

Eran

 

If he is holding the note, chances are Taxes and insurance aren't being paid to him. Same with Refi, chances are you won't have escrow with a refi company and you will have to pay taxes and insurance on your own.

 

Yes, of course, T&I is not being paid to you, it is being paid to escrow account which use them to pay Taxes & Insurance.

For some notes the borrower is obligated to pay escrow on monthly basis, for some not and just pay them on yearly basis, and in some the note holder is responsible to pay, it depends on loan terms.

 

Originally posted by @Eran Lifshitz :
Originally posted by @Brian Mcmenamin:

I got into notes about 3 years ago. All my performers are tied to my Self-Directed IRA so I'm sitting on them until I'm 65 if need be-haha. I think all of your scenarios could potentially happen. Recently, I have had my borrowers starting to pay down their principal which works well for me too since that will be cash I can leverage to purchase other performing notes.

I'm not sure if that helps your question at all, but I think

@Martin Saenz or @Masaki Maeda might be able to help you with more details on their experiences.

Not sure I understand what do you mean by "recently your borrowers started to pay down their principal".

Borrowers should pay P&I (principal & Interest) month by month (not to mention T&I - Taxes & Insurance).

This is what loans are about.

BTW - What is so powerful in amortized loans is at the beginning of the loan most of the monthly payment is going to the interest and not the the principal, what cause your UPB to stay high in the first few years (depends on loan terms & interest of course) and give you another exit strategy (selling it as performing after 1-2 years of consistent payment).

This is what so good in "being the bank".

Eran

 

I believe he meant the borrowers began paying extra principal each month. 

This is great when it happens because your yield to maturity really spikes, because whatever discount you purchased the loan at is being caputred a lot faster than if they just paid the normal P&I every month.