Default Status Loan Investment Opportunities

When an investor considers purchasing a mortgage they have a choice. That choice is to look for current mortgages to buy or, look for loans in default. Whatever your interest, I believe the question is, how are you going to find the loans?

Let’s say for a moment that your interest lies in current mortgages. I am not aware of any magazine or periodical that lists current mortgages for sale. Therefore, your search must begin by reviewing the public records.

You can perform a public records search of every mortgage that has been recorded since a given date and seek to contact the mortgagee (lender) listed on each one. Your contact could be by mail, in person, or by telephone. It would probably go something like this….. Mr. Mortgagee, would you be interested in selling the loan that you have? I’m suggesting that this approach is going to fail far more often than it’s going to succeed.

My reason is that if the owner of a current mortgage wanted to sell, they would be actively seeking buyers. I sincerely believe that if there is no desire to sell the loan before your call, there won’t be a desire after the call either. The same cannot be said for mortgages in default.

Defaulted mortgages are a very different animal than current mortgages.

Why do I prefer to focus on mortgages in default rather than mortgages that are current? The best answer to this question lies in the opportunity available for beneficial pricing. Defaulted mortgages are nonperforming assets, sitting on the books of either a private investor or an institutional lender. The loan is not making money and affecting their bottom line. If a reasonable offer is presented to the current owner of a defaulted mortgage, there is a better than average chance of it being accepted.

Another reason I believe defaulted mortgages to be unique, and a true investment, is because you make your money on the buy. When you purchase a defaulted mortgage, the amount owed is clearly defined on the face of the mortgage. The principal amount of the mortgage will never increase. However, the amount of your payoff may increase depending upon the amount of interest the borrower owes.

Investing in defaulted mortgages, is investing in non-performing assets, which is contradictory in and of itself! You must think differently. It is imperative that you make your money at the time of the purchase.

If you invest in current mortgages, you can hopefully rely on a safe and steady income during the term of the loan. The amount you receive will be equal to the unpaid principal balance plus the interest agreed on in the promissory note. At time of this writing, current mortgages are priced at around 90 to 92% of the unpaid principal balance. Alternatively, defaulted mortgages are enjoying a much more handsome discount.

At the time of this writing, depending upon the State, defaulted mortgages, are priced at 35% to 75% of the unpaid principal balance. The discounted pricing of defaulted mortgages allows quite a large upside potential which would provide a very high yield.