Recognising Time for Capitulation

2 Replies


I've got a number of notes, most of which are (so far) going reasonably well, however, I've got one that is just lagging the rest - it was a non-performing 2nd and the 1st has got in the way, making a short term foreclosure or work out unlikely.  To be honest, it's the last of my non-performing notes and as soon as I started buying performing notes I released my preference for performers.   I was in cheap and at this point I'd be happy to just get this off my books - though when I'm less fed up with dealing with it, I don't want to pass up maximising my return. 

Enough NPNs don't pay out that people must have a rule of thumb regarding when to walk away - what are your thoughts?  It costing me $40 a month to hold it, I'm in for $4,000, plus some future legal if I hold it.  Are there some good rules of thumb for when to capitulate?  I'd rather focus on the performers (and if you get into the note game at some point @Dion DePaoli will likely tell you of the benefits to performing - he's right), but I'm having trouble knowing when I'm cutting my losses (ok) versus quitting on a note (not ok).


Hey Sean,

Glad things are going well.  It is tough to comment on 'if' you should write off the loan with the little overview you gave.  That said, the conclusion can come pretty straight forward.  No equity to latch on to.  First lien is foreclosing.  Loss mitigation met with little to no response.  All point to a decision of do not throw good money after bad.  

What we do not know or can not ascertain is "IF" the loan has any chance of reinstatement in the first lien or if the first lien mortgage debt service can be manageable by the borrower so that eventually they can address the debt service on the second lien. 

If that is the picture developing then there is not much you can do.  With servicing 10%+ of your cost basis and foreclose adding 25%+ to your cost I would not look for an omen.   Chances are you should cut your loss.  (Bare in mind, a bank already did)  

From a last line recovery stand point, you may want to look at a deficiency judgement once the first lien finishes a foreclosure.  That can aide you in recovery of the investment cost.  It can also take awhile to recoup but something is better than nothing.  

Good luck.

Id agree with Dion. The only other thing to try is to see if you can manage a short sale with the homeowner and take that to the first - that sometimes works. The homeowner may prefer a short sale on his credit vs a foreclosure...but you just never know. 

You could also de-board it from the servicer and self-service (if its allowed in your state). Then just sit on it with no cost and monitor the foreclosure.  You may collect something 

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