Underwriting for sub performing

[Peter Halliday]

I understand how to underwrite a performing note. I also understand that underwriting a non-performing note is about checking the return against several possible exits. And you create an offer based on the likelihood return give the exits possible and their likelihood.

I saw a loan the other day that was listed as performing, but was sub performing. They borrower mostly consistently paid, but not the full amount. I’m wondering if people usually build a different mode entirely for sub performers like this, or if they build a non performing model that can handle it.

[Chad U.]

If you have the pay history, take the average number of payments in any given year then multiply the inverse of that by your desired yield. 

For example, if you are looking for a 10% yield and there are eight out of 12 payments made on average every year then price it at a 15% yield.  If they reinstate on the arrears that they are behind on, that is an added bonus