Underwriting for sub performing

4 Replies

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.

@Peter Halliday

Not one answer to this in the sense of “it depends”

If you run the analysis based on the current payments coming in and your required return what is that purchase price?

If that purchase price is reviewed and you underwrite it then as a NPL and numbers don’t work then run it as a NPL to see what the target acquisition price is but if the numbers work as a non Performer and semi performer then go with that.

I would say most semi performers don’t go to foreclosure the ones I have had typically go the BK route.

Gurus and online exchanges love to put notes into two distinct categories, but the reality is that much of note investing (and much of life), is about working in the messy gray area. You can treat a sub-performer like it's a non-performer but raise your acceptable yield, or treat it like a performer and lower your acceptable yield (more risk obviously). I tend to treat them more like NPLs that have a better chance of re-performing than a true NPL. 

Every note really has two parts: the #s and the story (I didn't come up with that). Hence, like @Chris Seveney said, it depends. 

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

I agree with the others in that you have to find a hybrid model that uses performing and non performing and tailor it to your needs.