Note Investors how do you calculate your returns?

Question

I am surprised how many Note investors are still bidding at a % of UPB/BPO and even Yield.  I understand why some bid via yield a little more however how many investors are going to hold a note to Maturity?

Regarding Bidding based on % OF UPB/BPO - I know the math is simple, however this equation misses a lot.  This removes some of the key items that separates loans from each other, (Interest Rate, Term, balloon etc).  We showed a video on interest rate of the note and the remaining term.  What are other's thoughts /questions regarding this.

Chad U. · Answer

Are you referring to performing loans or non-performing loans? There is a big difference and how each of these should be bid.

For non-performing loans , my pricing modeler takes numerous factors into account and takes both a risk-adjusted approach and a weighted exit scenario probability. I can enter a minimum return desired for each exit scenario and also apply a range of probability of that playing out. I also want a minimum overall return on investment based on all these variables . To achieve this it applies a nonlinear regression analysis to come up with an overall expected return. This can be applied to One loan or an entire pool of loans to give and overall projected portfolio return .

Of course with any model, many assumptions are made that go into it , therefore the projected returns could be way off by several factors if one of the variables is way off. The most important of which is the value of the property.

For performing loans the main factor is desired yield , however it also ensure that if the loan were to go to foreclosure it also ensures you can least recoup your investment .