Overbidding on 1st position performing notes

[Joe Daigle]

Hey note investors,

I have noticed that a lot of bidding on 1st pos performing notes is being won by investors bidding above the UPB. Is this the new norm or just overzealous investors? Also, I was taught that a note is always discounted/because of risk and the time value of money. Why would someone bid higher than the balance?

Thanks for all your replies.

[Jay Redding]

The only reason I can see to bid above UPB on a performing note is if the loan is in chapter 13 bankruptcy with a large arrearage and the payment plan has been confirmed and documentation of 12 months of on time payments have been paid. Many people would not view this as a performing note. I would view it as a re-performer. I would be willing to bid slightly above UPB based upon the amount of arrearage still owed. The likely hood that note will continue to perform is pretty high. However, as we all know, any note can go bad at anytime. Bad things happen to good people. It gets back to finding out the story behind the bankruptcy. There are times you would pay above UPB on an NPL also based upon arrearage and equity in the property which I have done before and received a very large ROI. I agree totally with the comments made by Jamie and Chris. What I am seeing is that buyers are buying at prices that yield net single digit returns, but the quality of the note, in my personal opinion, is in no way close to the quality it should be to justify that pricing. There are times to put a single digit yield into your portfolio based upon the raw dollar discount and based upon what you want to accomplish, but that note better be rock soIid in quality of borrower equity and borrower performance. I see very few like that. I don't know if the over paying is a result of a lot of new inexperienced note investors in the market or a "starving for yield mindset" just to get a loan that is performing. If the latter, I believe many will be disappointed in the performance of the loan over time. Especially if they have over paid and the loan goes bad. Just some food for thought to think about. In my opinion, discounting based upon risk/quality and the time value of money is still a solid approach.