Two Distinct Categories of Non Performing Notes

[Don Konipol]

In the commercial mortgage space we have found that NPN investments can be divided between (1) purchasing NPNs in which we’ve had no or minimal contact with the borrower, and (2) purchasing NPNs in which we’ve worked out details of a restructuring with the borrower prior to purchasing the note Although the following is in no way a scientific, statistically verifiable conclusion, here is what we’ve concluded through empirical evidence 1 - purchase discounts from UPB do not differ either way 2 - having borrower agreement before note purchase results in much greater chance of creating a reperforming note 3 - having borrower agreement before note purchase results in much less chance of having to foreclose 4 - having borrower agreement before note purchase results in borrower seeing us as an ally not as an enemy Aside from 1 above, the results are exactly what you’d expect. Our conclusion is also not surprising; if you want a high yielding performing note then negotiate a deal with the delinquent borrower before you purchase the note (if you can’t then don’t purchase the note!); if you wouldn’t mind or want to eventually own the real estate then purchase the NPN ‘blind’. I would welcome any comments