Why 50/100 On A Defaulted Note
I have shopped some notes, and basically have been told 50/100 for the non-performing paper.
If the LTV is low say at least <60%, the note yield is high (double digit) and maturity is near, why such a steep discount?
In this case there is a BK order to pay so there's no risk of BK.
Are people just being greedy?
Yes, it is greed, plus this is usualy an institutional game. Take the Bank in Plano Texas who paid 18% of face for non performing, notes secured by trust deeds here in california. Best part of all is that they bought with no cash, just executed the note which was accepted by a government agency and the note assigned to them. They then put it in foreclosure only to have a second trust deed cure the default, bring the note current and foreclose themselves. See what a really good spike in real estate can accomplish. I am thinking of changing my name from Lucius to the Bank of Beal in Plano Texas. I am willing to cross party lines for that kind of a deal. I think I can work on the accent and play pretend Texan. Might even start a war with some dumb little arab country if I can get deals like that. Am I bitter. No, I never wanted to be a bank, just have the money!
Cheers Lucius
Notes in default may never be cured. It might get wiped out. The legal process might be drawn out. The owner of the note might have restrictions on if they can hold defaulted notes. There could be reasons why the borrower can successfully claim the note is invalid or otherwise not fully enforceable.
Or it could be a great deal and worth jumping on if you do the work.
Think of a different example. A trashed, run down property is many times discounted more then the costs of the improvements. Then there are places that look OK but have a structural problem that is going to require more then they are worth.
Know what you are doing before you start of use the law of averages so you can just write off the duds.
Coming back to the specific note. Where did you find it? What do you know about the seller? That might explain the reason the note is being sold. The issue might be the note owner and not the note.
John
[addsig]
It's a commercial note from a commercial semi-hard money lender here in CA.
I found the note listed in the daily NODs report I get
The borrower, signed a personal guarentee and then sold the property to an LLC controlled by what looks to be his son.
Seems to be a family property owned from Grampa in the 40s, to dad, now to son.
The note is cross-colateralized by 2 parcels of ight industrial. 3.41 & 1.23 acres. One is basically a parking lot, the other is approx 5000' 1 story brick building w/ large parking lot.
There is a large amount of back taxes~300K
I cold called the lender and asked if they wanted to sell, they said yes, and I would need to sign an NDA to get the payoff and loan details.
The lender was given a judgement by BK court, so BK doesn't see to be a risk. the note is 1st on both parcels.
I would expect to get indemnification for a bad note from lender, although if it was invalide, you'ld think he would have challanged it in BK.
There a rail line adj to the property, and industrial condos or warehouse space was the thought.
Fifty cents on the dollar seems to be the normal starting point on defaulted www.paper.Much of it goes for much less. Sometimes a dime. Could be worse: unsecured paper often trades for pennies.
Sounds like a great deal by the way.[ Edited by commercialking on Date 06/22/2004 ]
good point commking-----to ans next question--NDA should stand for non-disclosure agreement--
I am having problems w/ seasoning w/o adding the complexity of the quit claim deed.
I would have to say, for this market, this loan is a scary one, unless personal sitaution requires it.
Rates could be raising soon, which looks likely, and stick her with a higher rate. Also if she makes the min payments, she is riding on the fact that the house will go up, otherwise she would be in trouble and owe more then what the house is worth.
Now the pros are, if you are self employed and income varys, this would allow bad months be eaiser. also money can be funneled elsewhere, sounds like it maybe good for an investor. Also i believe, dollar for dollar what is paid is tax deductacble.
This loan is great for those who can get into a home due to DTI problems, or cnat buy the first home, but are ready else wise. gloomy day for the persons whose property values drop 15% in3 years, not so bad if your 35 and been renting your whole life.
hope this help
Whether it is good or bad depends on: what the max percent it can go to (cap), how often is it adjusted (monthly, quarterly, annually, etc.), what her other choices are (fixed or not buy?). Over two-three years, she is unlikely to get caught with a too high interest rate if there are reasonable adjustment windows. I would say that she needs to do a cost benefit analysis with her specific options and plans.
My sister would like me to add it is a PORTFOLIO LOAN.
Thanks
All your questions were already aswered. Please read my post above.
there are all sorts of calculators on the web for checking out these different situation, some ever factor in tax bracket.
w/ the flex or option arm, watch out for the negative amortization when making the minimum payment.
personally, in the past I have never kept a mortgage for more than 3 yrs. Yet I would always pay for a 30-yr fixed. I ended up wasting alot of interest.
I now have a 5/1 arm int only for my primary residence and w/ the appreciation rates in CA over the last several years, I feel just fine not building any equity in my house. I have made better use of the $$ doing investments.