The market opportunity for this business developed during the last several years as the number of defaulted mortgages increased. Banks of all sizes have been actively selling off large pools of defaulted notes at substantial discounts. As a private investment company, NPL can provide creative solutions not offered by the banks. NPL will purchase the notes at significant discounts and pass some of the discount to the home owners. A win-win solution is created where the homeowner can stay in their home with reduced payments, and NPL makes an above average return.
There is a high level of perceived risk in purchasing defaulted first position mortgages that NPL can reduce to make the reward and profit above average. Homeowners who are not paying their first mortgage have “emotional equity” and are highly motivated to negotiate a workout so they can stay in their home. NPL will purchase notes that can be up to three to four year’s delinquent and the homeowners are past their “difficulty,” which was usually one of four events: job loss, divorce, death of spouse, or illness. The homeowners are now able and willing to start paying again.
When NPL purchases non-performing notes, it makes direct contact with the homeowner to modify their existing loan via a workout agreement. The notes are now a performing asset and can be held for monthly income or sold through the secondary market to other note investors.
A pool of notes can generate exceptional cash flow within twelve months of the purchase. In addition to the monthly cash flow and profits from the sale of re-performing notes, there is a great opportunity to generate profits over the next three to ten years from cash-outs.
Traditional cash flow investments, such as bonds or newly originated mortgages, do not have the opportunity to create equity, and ultimately large profits.
Because NPL will buy notes at such a large discount to face value (typically at 45-55% discount) there is huge potential to generate profits when a homeowner sells their property or refinances.
Most homeowners will have the required equity and/or credit score to refinance or sell within three to ten years. The profit potential is the difference between the unpaid principal balance on the loan and NPL’s purchase price. NPL’s opportunity for cash-outs during the next three to ten years should increase as home values increase and the principal on the first mortgage is paid down.
This business is similar to investing in traditional residential real estate. However, instead of buying a house, rehabbing it, and then keeping the house as a rental for cash flow or flipping it for a one-time profit, NPL buys a note, or the “paper,” rehabs the note, keeps it for cash flow, or flips it for a one time profit. The primary exit strategy is through the homeowner via a loan modification or workout agreement .The secondary exit strategy is through the house via foreclosure.
It’s a great business – we never need to worry about a contractor showing up or a call in the middle of the night because of a leaky toilet or roof.