The BIG Opportunity in Non-Performing Junior Liens (AKA ‘Seconds’) is that You Can Buy them for Pennies on the Dollar
The first step to making money with non-performing residential seconds (junior liens and HELOCs)is to find them.
There are 3 places you can get non-performing junior lines
Where you’ll be able to source them from depends on how much capital you have to work with and how much work you’re willing to do.
The easiest way to buy non-performing junior notes
Some large private funds, frequently ‘hedge’ funds, will buy pools of non-performing juniors seeking opportunistic returns. They might workout or foreclose on some loans in this pool, carve it up and sell off other pieces to smaller investors. Often then that investor will carve up the pool further and might even sell notes directly to the final buyer.
The challenge with taking this approach to acquiring ‘seconds’ as they’re often referred 3-fold:
- If you’re the end buyer you’re getting very picked over assets, the bottom of the barrel
- Each “middle man” or step between the original source of the loan and the end buyer makes a margin on his sale which means if you’re at the end of the line you’re likely paying too much.
- The nature of notes, especially seconds, is that the paperwork must be in order if you’re to have any ability to exercise your rights as the lender (foreclosure, collection, etc)
The more profitable way to make money with non-performing junior liens requires more work
Source non-performing notes directly from the banks and credit unions. As you know banks and credit unions make loans…
Sometimes these loans are originated for the express purpose of then selling them on the secondary market, sometimes the loans are originated to be held on the bank’s books as “portfolio” loans. That is to say “whole loans” (non-securitized) originated and held for the purpose of collecting the payments form the borrower.
Many banks will sell non-performing junior mortgages rather than trying to work them out or resolve them internally.
Your job then is to find out which banks are selling the types of assets you want to buy, find a decision maker, and then be there when the lender is ready to sell.
You can learn about how to source bank direct junior liens here . If you already know how to work with banks and you’re looking for tools, data, or contacts to help you do more then have a look at BankProspector. If you’re an investor and you have more capital to put to work then you have time to source deals then become a verified investor.
Making Money with Non-Performing Junior Liens is All About What You Pay
They say in real estate that you make your money when you BUY the property. The same holds true when you’re buying notes. If you’ve overpaid there’s virtually no way to recover your investment.
One way to make a return on your investment is to ‘workout’ the note, that is to say, you get the borrower to start paying again. When a borrower stops paying on their second mortgage default interest and arrears accrue. Most of the time part of your workout strategy will include getting the borrower to catch up on the arrears and default interest.
When there’s equity in a property an investor can get a return on his investment by foreclosing on the property. Yes, junior liens mortgages in any position usually have the power to collect monies owed through the foreclosure process. Of course if there’s no equity to cover the second position then foreclosing does not help you get a return because foreclosing lien holders always have to pay superior liens.
What that means is that if you own the HELOC on a property that also has a first position mortgage, a second position mortgage, and back taxes, all of those will have to be paid from the proceeds of the sale BEFORE you will see any money in last position.
Trying to make a business out of trading junior liens is doable but you’re going to have to learn a few thing:
- How and where to source notes
- How to evaluate a “tape” (the spreadsheet of loan information you’ll receive)
- How to negotiate a pricing on a tape
- How to submit your offer to purchase, LOI, or “indicative bid”
- How to evaluate the collateral (paperwork, loan documents)
- How to close on the sale and take possession
- How to workout the loan
- How to service the debt
- How to transfer your rights in a sale
It looks like a lot. And it is.
But the money in trading notes can be HUGE once you figure out what you’re doing.
Arguably, the first step in the note business is to be able to source the assets. Nothing happens until you have “product” to evaluate and bid on.
If you’ve got experience working with banks and you need portfolio information and contacts to grow your business then have a look at BankProspector. If you’re just getting started and have never worked with a bank before then have a look at the Academy. If you’re an investor with more cash than time, then have a look at the Verified Investors Program.
Which banks have non-performing junior residential liens?
The list of course changes from time to time but this list of banks has junior liens in “nonaccrual” the most troublesome loans on a bank’s books and this is a list of banks with 90+ day late junior liens (also considered non-performing). HELOCs “home equity lines of credit” are also “junior liens” and you can find a list of banks with those 90 days late here and a list of banks with HELOCs in nonaccrual here.
What kind of discounts can you get on non-performing second mortgages?
This depends on the collateral, who’s selling, the borrower’s status and a host of other factors but you could pay anything from literally a penny on the dollar up to 30+ cents.
How many banks have non-performing junior liens?
Thousands of banks have portfolios with non-performing junior liens.
What’s the dollar volume of junior NPLs today?
At the time of this writing a little more than $17Billion
How do I get bank’s to sell their seconds to me?
If you’re looking to learn how to work with banks and their distressed assets you should checkout The Academy.
Got a question about non-performing junior liens? Ask me in the comments box below.