There are a handful of ways to source non-performing loans:
- Direct from banks
- Direct from credit unions
- Special servicers
- Hedge funds
- The FDIC
- Private Note Holders
Sourcing Non-Performing Loans from Banks
We track all the late and non-performing loan portfolio balances for every bank in the US.
Here’s a video about how that works.
In any significant financial transaction the deal is going to happen between people, erego if you want to buy non performing loans you’re going to need relationships with people who are selling them. A lot of people want to stop right here, they don’t like that answer, they want an ‘easy button’. The truth is there are easier ways to source notes but here’s the truth:
If you’re not buying direct from the originator you’re paying a premium
That’s a fact. Why? Because a few things happen here:
- The note broker has to make a commission
- You are going to compete against other qualified buyers
When you’re sourcing non-performing notes direct from the source, from banks, you’re going to have less competition and no middle man making a fee. BUT you are going to have to work for it. If you are the broker then you have no choice you have to source notes direct or suffer, broke, at the end of a hopeless broker chain (true).
Each quarter banks report their late and non-performing loans. We track them here and we provide contact information for each bank.
Banks report 11 types of non-performing loans 9 of which are real estate and additionally they report, C&I, consumer credit card and non-performing auto loans.
Banks report nine kinds of non performing real estate loans (mortgages) every quarter. Those loan types are:
- Commercial Real Estate Owner Occupied
- Commercial Real Estate Non-Owner Occupied
- Multifamily (5 or more residential units)
- 1-4 Family Residential Construction
- All other construction
- First Position 1-4 Family residential
- Junior 1-4 Family Residential
- Revolving Lines of Credit (HELOCs)
- Agricultural Land
Before you approach a bank for non-performing debt, you should have some data. You should know, for example:
- What percentage of their loans are late and non-performing?
- Has the bank been charging off or writing down a substantial amount?
- Are late and non performing loan conditions improving or deteriorating?
- Does the bank have sufficient capital to be able to sell loans at market value?
Banks are regulated by a number of different government agencies. The common thread however is that insured banks have to report a statement of condition on a quarterly basis to the FDIC in the form of a Call Report. Presently all of these filings
(OTS regulated banks excluded) are received at a clearing house, or aggregator, called the FFIEC. In addition to the quarterly reports many banks make amendments and adjustments to their reports, electronically, throughout the quarter. A lot of information can be gleaned from the FDIC call reports.
BankProspector connects to the FFIEC database on an hourly basis and pulls in all the financial data, parses the parts that are important to you as an buyer or broker, and then makes the real estate data, and in particular the late and non performing loan data searchable and sortable. Then we pair that financial data with contact data so you can get right to the decision makers.
In addition to non performing loans (nonaccrual loans) banks have to report 30-89 Day late loans, 90+ day late loans (and still accruing) and OREO (commonly referred to as REO, aka ‘bank owned property’). At this time there is not a more granular breakdown of the non performing commercial and construction loans for example hotels, office properties, retail, etc all fall under commercial non performing loans and broken condo project or a subdivision or an abandoned office building all fall under non performing construction loans.
Banks report aggregate totals for the various stages of late and non performing loans as well as REO but they do not have to report individual loan details. At present their is no central database where one can find the details for individual non performing whole loans.
Sourcing Non-Performing Loans from Credit Unions
There are more than 7,000 credit unions many of them have non-performing assets. We track non-performing loans and foreclosed and repossessed assets for every credit union in the US.
Working with credit unions is very similar to working with banks with a few differences.
- Credit unions are very sensitive to their reputation, most of their loans are with members, they’re not excited about selling to predatory note buyers (generally)
- Credit unions are small… You are most likely going to talk to the president, call there first.
- Credit unions are regulated by the NCUA rather than the FDIC
Sourcing Notes from Special Servicers
A servicer is an entity that handles the administration of a loan on behalf of or in partnership with the owner. A special servicer handles the administration, collection, workout, and sometimes disposition of problem loans.
We maintain a growing list of loan servicers, special servicers, BPO and REO asset Management companies here.
Sourcing Notes from Hedge Funds
Hedge funds buy large pools of non-performing loans from (typically) the largest banks. There are a few “exits” that hedge funds use.
- Foreclosure and then sale as REO
- Workout (loan modifications)
The last of these is where you can find opportunities. Hedge funds can buy much larger pools than most investors. When they do they’re able to slice up the pool and find different ways to make a return on different sets of loans. After a fund has run its course and made its returns it will look to clear the rest of the assets off it’s books and move on.
If you want to source notes from hedge funds, sadly, they don’t have to make public reports like banks and credit unions because they’re not insured. You can find lists of hedge funds with real estate assets if you google for it, expect to pay a few thousand dollars for it.
Note Brokers AKA Loan Sale Advisors
There are a few online sources that allow you to buy non performing debt like DebtX and First Financial as well as other note brokers and intermediaries (some of which are BankProspector subscribers). Other note brokers and loan sales advisors include Mission Capital, CBRE (sometiems), Cushman and Wakefield (sometimes) and increasingly a long list of smaller independent players in the market.
FDIC Loan Sales
The FDIC announces their loan sales here
Loan Sales Marketplaces
There’s a whole crop of loan sales marketplaces or ‘MLSs’ of sorts that are cropping up. LoanInterchange.com, LoanMLS.com (more to come on this topic in the future)
General Non-Performing Loan Info
Definition of a Non-Performing Loan (NPL)
Investopedia defines a non performing loan as a loan that is not being paid according to terms. Non performing loans are reported by banks in their quarterly FDIC call reports as ‘nonaccrual loans’. When a bank reports a loan as ‘non accrual’ it’s because there is no longer any reasonable expectation that the loan will be repaid according to terms.
Non Performing Loan Ratios
Non performing loan ratios have of course accelerated during the recent downturn. Construction loans have been some of the worst performers with some local and regional banks struggling with 40, 50, 60 I’ve seen up to 80% non performing loans. Many commercial portfolios are now seeing non performing loan ratios north of 10%. There are no specific rules that we’re aware of at this time that dictate acceptable non performing loan ratios, only capital adequacy ratios.