The Small Balance Distressed Note Niche

The Small Balance Distressed Note Niche

Despite government efforts to help, 1 in 8 homeowners are delinquent or in some stage of foreclosure. It is estimated that there are up to 1.1 million loans that “seriously delinquent” defined as those loans that are over 90 days late.

This is the highest rate since 1972. Significant market dislocation exists within this asset class, especially small-balance liens: these assets are not a servicing focus for large banks while being too niche for large institutional buyers. This imbalance between supply and demand for distressed small-balance liens presents an historic buying opportunity.

  • Approximately $150 billion worth of small-balance mortgage loans sold to investors/specialty services annually
  • Small-balance mortgages are not strategic for banks; they are too costly to service and don’t yield meaningful results for the large banks
  • Imbalance between supply and demand for small-balance mortgages; too niche for large institutional buyers and hedge funds
  • Operational intensity; requires creative, skilled workout staff and management systems creating a barrier to entry for small investors

This provides an exceptional window of opportunity for those who understand how to provide viable solutions for borrowers at risk of foreclosure to stay in their homes

1. Sometimes, homeowners experience events in their lives that hurt them financially and prevent them from meeting all of their obligations. As a result of the recent economic downturn a significant number of homeowners have all experienced common life events like loss of job, reduction in pay or hours, etc.

2. Many times the financial impact of the event is behind the homeowner after a period of time.

3. Many of these homeowners have tried to reconcile with the banks, but to no avail; banks don’t have the resources to foreclose or execute a custom workout solution. They are compelled to sell the non-performing notes at a discount to mitigate losses and avoid regulatory issues

4. We service these notes and contact the homeowner to work out a solution based on their financial situation and intentions

5. If the homeowner wants to remain in their home, we can allow a discounted payoff, workout a payment plan of some kind, or work to reinstate their account, improve their credit and refinance.

6. While our goal is to retain the repositioned loans for cash flow, some loans are worked out and seasoned to prepare them for sale to third party cash flow investors.

7. The intended result is a win/win where homeowners gain equity in their homes, improve their credit, avoid foreclosure and save money while the fund receives cash flow and returns secured by real estate.