Selling your note or mortgage can be confusing, and what you initially thought was a substantial asset can look a lot less attractive. You most likely have questions like:
- Why am I taking a discount off the principal balance to sell my note?
- How is this buyer coming up with their offer price?
- Why would the appraised value of the collateral affect the value of my note?
- Why does my borrower’s credit report affect the value of my note?
The quick answer is RISK! Anything in your note that creates additional risk reduces its value. Throughout this article, I will try and lay out a short guide to the risk involved and explain what can affect the note’s value.
Throughout this article, the terms “note” or “mortgage” will describe various financial debt obligations. These debt obligations or notes have different terms or jargon used to describe them. These additional terms could consist of the following: Note, Mortgage, Promissory Note, Deed of Trust, Contract for Deed, loan, or Note Mortgage ETC. Additionally, throughout this article, the notes being sold generally will be “seller originated notes” or loan created outside of the traditional financial institutions. Your note is your “Personal Property” and can be sold at any time. Note sells, assignments, or transfers are performed very commonly by financial institutions but are less common when done outside of these traditional and bank environments.
Below you will find 5 of the main topic that can affect your loans value. To keep things very simple, the closer your note is to traditional bank institutional originated notes and performing the HIGHER, the value of your note will be. The more origination, performance, servicing, and market issues you have, the LOWER the value of your note.
Let’s jump into a few topics in greater detail!
| 5 Reasons Why Your Mortgage is Losing its Value |
» 1. Performance
The performance of your borrower or note directly will affect the value of your note. This essentially translates to your borrower paying his monthly obligation on time and every time your loan is headed toward a foreclosure scenario. There is a very significant difference between purchasing a performing loan and a non-performing loan or pre-foreclosure loan. Additionally, is your borrower on-time, or is he/she someone that has to be called every month or someone that is three months past due while always staying 1-3 months past due? These habitually late borrowers cost a lot more to service and take 10X as much time as a paying and traditional note.
» 2. Loan Servicing
The quality of loan servicing can significantly affect the value of your note. The questions that you need to ask yourself are:
- Can I accurately show the principal and interest break-out over the entire life of the note?
- Do I know what the principal balance is at this time?
- Do I have documentation for the payments that have been paid?
- Did I accurately pay and document the escrow balance? (if applicable)
- Will the borrower dispute the principal balance?
- Can I prove the principal balance?
- Did I comply with all the annual notices (1098s, for example) and other consumer servicing requirements?
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» 3. Litigation & Consumer Law Compliance
We live in a very litigious society now, and it seems like it is getting worse as the years go by. In the past, the general rule was there needed to be a victim and a loss for a lawsuit to arise. This is not the case nowadays; there are enough consumer mortgage laws now that even good intentions could cause your note to become worthless, or there could be enough litigation risk that no one will purchase it. A small list of consumer laws that affect or apply to your note is as follows:
- Truth In Lending
- Fair Housing Act
- Real Estate Settlement Procedures Act
- Equal Credit Opportunity Act
- Fair Debt Collection Practices Act
- Dodd-Frank Act
- Texas SAFE Act
» 4. Market Fluctuations
The value of your note can be affected by the general market fluctuations. This simply means that the macro changes in the credit, real estate, job, and national markets will have a significant variation on the value of your note. A few of the market fluctuations are:
- Increases, or decreases in the interest rate environment
- Note buyers have to maintain a spread compared to their cost of capital that must be held. As their cost of capital changes, the price they can pay will change as well.
- Increases, decreases, or instability in the local real estate markets
- The changes in the value of the underline collateral’s local real estate market will affect your notes value, mostly if there was not either a significant down payment paid by your borrower or if there were not substantial principal reductions made over the months.
- Inflation
- An increase in inflation or the expectation of inflation will cause the value of your note to decrease. The increase in inflation reduces the actual REAL interest recognized and, additionally, in-turn, will increase the note holder’s cost of capital.
- National or State Market Performance
- The expectation or actual performance of the national or state being in a down-turn or recession will have a significant impact on the value of the note and could cause the number of note buyers to reduce significantly (or stay away from an area altogether)
» 5. Availability of Credit
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The last category applies to the note buyers and their availability at their disposal to purchase notes. Market fluctuations can play a large role in how much capital they have to buy your note. As credit becomes tight, the number of notes that can be purchase reduces. As the number of notes that can be purchase reduces, choices have to be made and, thus, value is press downwards. Additionally, another large factor is the number and willingness of institutional investors to step into the market and purchase loans. This will significantly impact the loan values.
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