What Strategies Do You Use to Value & Sell Performing Notes?

Question

Hi BP Community,

I’ve been focusing lately on buying and selling residential mortgage notes, particularly first-position, performing notes. I'm curious to hear how others in this space are valuing and exiting notes.

A few discussion questions:

• What metrics do you weigh most heavily (LTV, payment history, discount rate, etc.)?
• When do you decide to hold a note vs sell it?
• For those who sell, how do you find buyers and structure closing?

What metrics do you weigh most heavily (LTV, payment history, discount rate, etc.)?

When do you decide to hold a note vs sell it?

For those who sell, how do you find buyers and structure closing?

Happy to share what I look for as a note buyer too, if that’s helpful for others.

Doug Smith · Answer

If it's performing and properly leveraged (meaning the LTV isn't too high), we'll price it like a bond. You could use a financial calculator, but if you have an amortization calculator (entering three of the four variables - payment, rate, term, present value - to get the 4th), then it's a matter of entering the remaining term in the "term" box, the yield you want to get (not the current rate, but the yield you want) in the "rate" section, and current monthly payment in the "payment" section. The "present value" that pops up is what you would have to pay for the loan to get the yield you want. You might have to monkey with manually entereing a PV and using trial and error to get the payment, but that's how someone without the fancy tools can back into a buy price for a well-performing note. Good luck to you!

Chris Seveney · Answer

LTV is critical in performing notes. When I see people buying newly originated paper at 90% LTV or greater for a 10-12% return I shake my head. Way too much risk for that type of return.

Regarding structuring closing, we use third party custodian for collateral so we execute LSA and then send all collateral to the end buyer. Typically we do this with scanned versions and not send the original unless its an institutional client that also ahs a custodian and get bailee letter.

Victoria OHare · Answer

Makes sense! Thanks for sharing your process — evaluating LTV, payment history, and costs upfront is key. If you ever consider selling to an institutional buyer, we’d be happy to make it straightforward and hassle-free.

Dan Deppen · Answer

Based on LTV, payment history, equity, etc I'll decide on a rate of return I need to justify the risk level. Then I'll consider my upfront costs (due diligence, recording, loan boarding, etc) and ongoing costs (loan servicing) and back into a price.

I don't sell often but if I do I want to sell to an institutional buyer. I've sold to individuals but they often have unrealistic expectations and can be a PITA.

What Strategies Do You Use to Value & Sell Performing Notes?

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