Forgiving Past Due Amounts

4 Replies

I have a question I need some help with from the more experienced Brokers, Mortgage Bankers and Real Estate Professionals in the forum.

I have a client that is considering purchasing non performing notes from some of my lenders I work with for a substantial discount on the unpaid balance.

They want to then go back to the noteholders and forgive the past due amount and restructure the note at a higher interest rate for forgiving the past due amounts.

While this is a really sound idea, I am curious to know if it is legal, or furthermore, if there are any issues with them selling off the notes at a later date as performing once they are restructured.

Just curious to know if any of the others have any experience with this. I know banks use this all the time, but I haven't heard of private investors doing it.

Yes it is legal.

Hypothetical case:

Suppose a guy has a mortgage for $100,000 and he's
behind in his payments.

The bank sells the mortgage for 60 cents on the dollar
to a private investor: $60,000

Now the investor can approach the home owner and say,
"Look. I'll forgive your late payments and fees, and forgive
the past due amount even. I'll restate the mortgage to
$90,000. You've had a rate of 6.5% but now because of
the risk it will be 7.8%. OK?"

Because of the lower principal amount, the monthly payments
might even be lower than before.

After 6 months of performance, the investor can sell the
note as a performing note for way more than 60 cents on
the dollar.

Thanks a bunch Wesley.

I have a line for a $2.2B LOC and I am considering using this model internally with my lenders to streamline our ability to focus on becoming an asset management company instead of a wholesale outlet for our lenders.

Thanks again.

Laws differ from state to state, so I would check with your State's Authority on Mortgage Lending.

Assuming that you would be recording a new security instrument, it sounds like you would be REFINANCING those non-performing notes. I've never heard of amending an existing recorded note, but that doesn't mean that it can't be done.

If you are going to create a new instrument, in order to sell it at a premium, it needs to be seasoned in order to show performance. Any investor that is going to be buying a note from you will want to see your borrower's credit report, and they will see that this person was behind and you bailed them out. I'm not sure exactly how the market looks like for notes like that, because I'm not in that business, but I'm guessing that you would need to service it for six months or so to be able to show performance. If that is not the case, please, let us know.

In the cases I know of where people do this,
they do it in bulk. They buy $100 million in face
value of loans, refi most, foreclose the rest,
and then resell the performing notes in bundles
of $100 million to the Fannie Mae market.

Don't know of any onesies or twosies done this way.