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Why Invest In Performing Notes?

Performing Mortgage Notes are alternative real estate investment opportunities with high availability whether the market is strong and wanes or when the market is suffering.

Although they have some sensitivity to interest rates, residential mortgage notes are non-correlated with stocks or bonds and are therefore not affected by the performance of those two asset classes. Mortgage notes produce income from the underlying mortgages, and the investor also benefits from the “collateral gap” between the amount paid to purchase the note and its value when the note is paid off or refinanced, or if the home is sold. The mortgages are typically purchased from lenders at a discount.

A whole performing mortgage note allows the seller/note holder of existing cash flow to sell the entire remaining balance/remaining payments owed to said holder, to a third-party buyer for a lump sum of cash.

If a private asset holder decides to sell the entire loan, this is considered a full purchase buy-out. This takes all of the responsibilities out of the hands of the seller/holder and transfers the payments to the third-party investor.

The seller can completely walk away from the loan-servicing responsibilities, money in hand.

The asset seller will never receive the full amount owed to her/him if they elect a full purchase buy-out due to the many risks associated with the servicing and maintenance of a mortgage note such as:

  • Risks of non-payment,
  • Risks of declining property/collateral values
  • Risks of foreclosure, etc.

A buyer has to calculate, predict, and off-set some of those risks when initially pricing a loan for the acquisition. This is why a borrower’s credit score and current property value (not sales price, equity in the property, or down payment collected by the holder at the origination of the loan) are so important.

In this economy, 4 out of every 10 private loans on the secondary mortgage market do, in fact, go into foreclosure (for whatever reason). This is where the mortgage note discount comes into play. When opting for a full purchase option, the discount is always steeper than the discount associated with a partial purchase note due to greater risk for the note investor.

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