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There are billions of dollars worth of outstanding, distressed debt. Whereas a few years ago, banks would have been more inclined to foreclose on a non-performing residential real estate, they are now choosing to sell the note.

Why? Banks are in the business of lending money, not owning and operating real estate. By selling the note rather than going through the expensive and sometimes drawn out process of foreclosing, a bank stays out of the chain of title, doesn’t become liable for the property’s environmental conditions and doesn’t have to worry about the time—and expense—of other property management and ownership issues. Add in the cost and effort of marketing the property to potential buyers following the foreclosure and the numerous existing properties already being carried on their books, and you can see why banks were looking for an alternative to foreclosures. Note selling has provided that alternative investment avenue.


What is a Non-Performing Note?

Non-Performing Notes are bank originated loans that are no longer performing according to the terms they were written, thus are not producing a cash flow. The non-performing notes that National Note Group deals with tend to be promissory notes that have an underlying mortgage or deed of trust that secures the loan by a collateralized property, also known as secured loans.

Why would a Note Buyer purchase a 
Second Lien Mortgage Note?

For buyers, the benefit of purchasing a non-performing note is clear: the chance to get the loan and underlying property at a steep discount from its original price. After purchasing the note, the buyer has options that range from negotiating a new loan with the borrower to foreclosing on the property itself.
  • Pricing Advantage: greater discounts are offered on second lien mortgage notes, which can lead to greater monthly cash flow and profits.
  • Diversification: The purchase price per note is lower, which allows the spreading of risk over a larger pool of notes than buying first lien position paper.

  • Competition: The current pool of capital available to be invested in distressed second lien mortgages is too small for large investment companies, thereby providing better pricing economies to niche players and participants.

  • Opportunity: Our belief is that homeowners who are paying their first lien mortgage on time, have “emotional equity” and are highly motivated to negotiate a workout on their second lien so they can stay in their home.

  • Portfolio Diversification: Our fund offers an alternative investment vehicle with access to a non-traditional asset class that will safely boost your returns while diversifying your investment holdings with a low correlation to traditional investments, such as fixed income and equities.

  • Monetary Velocity: Low operating expenses allow for the reinvestment of positive cash flow profits back into the fund, fueling additional exponential growth opportunities.

Second lien mortgage notes are riskier than first liens mortgage notes, which is why they can be purchased at a lower cost. The fact that they are purchased for a large discount gives the note buyer leverage. It's important to note, when entering into a second lien mortgage note position to make sure that your original investment is adequately covered by the equity of the property. This will give you more negotiating room if your exit strategy is a short sale or if you need to foreclose on the property to recover your funds. A note buyer that picks up a note at a low cost can also present a tremendous opportunity for the homeowner. The homeowner can benefit if the note buyer accepts a loan modification by reducing the interest rate and/or principal.

If you wish to learn more about non-performing notes you can visit our website.