Will Your Next Note Purchase Implode?
As I write this note we are in the middle of the Coronavirus epidemic worldwide.. If you are a note buyer you must navigate a landmine that none of us saw coming. Don’t let it trip you up if you are new to the craft financially don’t let it wipe you out.
The government has gotten involved and declared that if you have a government-insured loan (mortgage) you can miss three payments if necessary and your non-payment can not be reported to the credit bureaus. I understand the reasoning behind the decision because if you lost your job and your place of employment was closed down you need some breathing room in order to find a new job or go back to your last employer (if he or she decides to reopen).
Even in some cases, you have those advocating a deferral of six months.
In this example, let’s go with three months deferral. In this scenario, you do not have a job right away and it takes you another three months to find employment. In the meantime, you have missed six months’ payments. The first three months of missed payments can not be reported to the credit bureaus. Will the bureaus report the next three months of missed payments or will the government declare they will add three more months to deferred payments?
You are allowed to run a credit report on the borrower if you are considering purchasing the note (debt), just like a car dealership would if were considering buying a car. But if the second 3 months missed payments are not reported you have no way of knowing if the borrower is current in his payments. Is it because they are still unemployed or just decided not to pay. If they were current then you have a good idea that they are now back to work.
You take a big risk in purchasing either the first or second lien as you do not know if they have the income to continue to pay on their mortgage. In the past, if I was going to buy a non-performing second I would check to see if the first was current as reported on their credit report. Now I am taking a chance of buying a note not knowing if the first is current or it is in default and has not been reported to the credit bureau.
It is wise to run a merged credit report (Trans Union, Credco, Experian) because not all creditors report to the bureaus or they report only to one. When someone buys a home with owner financing many times the transaction is not reported to the credit bureaus.
Unless you do your due diligence you could buy a first or second lien and the find out the borrower can’t pay. As a side note, the missed payments (the first 90 days) are added to the end of your mortgage. The banks love this as it gives them a higher yield.
If you want to know more about notes, please contact me or we can make a Free 30-minute Consultation.
Will Your Next Note Purchase Implode?