Distressed mortgage notes are notes in which the borrower has stopped paying on time or they are slow to pay. They may pay one month and the next skip a payment…or just stop paying at all. What happens when a performing note goes bad and stops performing?
While solid performing notes bring consistent cashflow, distressed notes can occur with even the best of borrowers. Whether a borrow has had a recent job loss, illness, or tragic accident, sometimes they simply stop paying or pay slowly. What can you do?
Here are some simple tips to make distressed notes less distressing.
First, have your note servicing company contact the borrower to find out why they stopped paying. Discover how you as a lender can assist. The answer may be a simple temporary issue or a more long-term issue like significant job loss. Different options are available based on how far behind the borrower is and their willingness to remedy the situation.
Slow Performing Note Strategies
Say the borrower is a month late on payments. Your goal is to get the borrower up to date and to continue paying.
Option 1: Divided Payments
Take the missed payments and divide them over 12 months. Then, increase the monthly payment over 12 months. This will ensure that you will retain some payments even if the borrower stops paying again down the road.
Option 2: The Back End
Add the missed payments to the back end of the loan. This is not a preferred strategy as the borrower may never reach the end of loan term.
Loan Modification
Once a borrower shows they can make payments on time, but still owe more due to fees and late charges, as the lender, you may offer to restructure the note with a loan modification.
This benefits the borrower in that their credit shows on time payments and their credit score is less impacted by the prior late payments. Loan modifications create a win-win scenario for both lender and borrower.
Non-Performing Notes
So, you have tried the prior strategies, and nothing has worked. If you believe that the borrower will simply never pay on time, you still have other options.
Option 1: Sell the Property
Suggest the borrower that they sell the property, so they completely remove the debt and move on. This only works if the borrower wants to sell.
A lender can also agree to a short sale. A short sale is when a lender accepts less than the mortgage balance owed. For example, a borrower owes $100,000 and the value of property is only $90,000. The lender agrees to accept $90,000.
Option 2: Deed in Lieu or Cash for Keys
This occurs when a borrower signs over ownership to a lender to prevent a foreclosure from showing up on their credit report. With cash for keys, a borrower will also get paid money to hand over the property to resolve the debt.
Option 3: Foreclosure
Foreclosure is the last resort when you have tried all other measures, yet the borrower still will not make mortgage payments. Contact a foreclosure attorney to begin the legal process to repossess the property.
Typically, borrowers must pay the attorney’s fees and the back mortgage payments and fees associated with starting foreclosure. At anytime, a lender can stop the foreclosure process if borrower begins to repay.
Performing notes can quickly become distress mortgage notes depending on borrower circumstances. It is helpful to learn a variety of exit strategies to mitigate your investment risk.
