mortgage notes

[Nikki Anello]

Hello,

I am completely under with one of my personal properties and my attorney is saying that shortsaling is my only option. Then I had one of my realtor friends suggest that she have one of her investor friends buy my mortgage note, this way I can keep the home. I am not familiar with this option and was wondering if I could get some other advice from this site. Thank you so much for any information that can be provided.

[Jon Holdman]

Your investor would need to buy this note for less than the value of your place. You're talking about a nearly 50% discount on the face value of the note (i.e., the balance you owe.) Its difficult to buy individual notes at all, especially from the big lenders. These notes have been packaged, sliced, and diced to the point its hard to know who really even owns the note, or if there even is a single owner. The company you mail your payment to is unlikely to be the actual owner of the note. So, the first hurdle is to find the right person to actually sell the note.

The second hurdle is to find someone with the cash to buy the note.

The third hurdle for you is to negotiate the balance owed with the new owner of the note (i.e., your new lender.) Even if someone buys this note for, say, $110K, guess how much you now owe? $230K. Someone buying the note from the current owner has no effect at all on what you owe.

I would guess your mortgage is a 30 year fixed rate mortgage at something around 5% interest. Investors who buy these notes aren't interested in earning 5%. They're looking for 10% or more to invest their money into a risk investment like this. Even if your house was worth more than $230K, its unlikely an investor would pay that for the note. Buying the note for the balance owed gives a return that's the same as the interest rate. A buyer would want a discount in order to increase their effective yeild.

The probably don't need a 50% discount. I can make a few guesses about the interest rate and the payments left and say an investor might pay $160K for this loan in order to get a 10% yeild. Buying it for $110K gives a yeild of about 16%, which would be pretty good.

But getting that 16% assumes you continue to make the same payment. And you want the payment and the outstanding principal balance reduced. The investor is NOT going to say "ok, we will make the new balance $125K (the value of your house), the interest rate 5% and the new term 30 years and compute a new payment." That would be great for you, but now the investor isn't earning enough for this to be worthwhile. If that's the sort of deal you're looking for the investor can only pay about $75K for this note. I think its very unlikely a lender would take $75K for a performing note with a balance of $230K. They would be better off to foreclose and take it to auction.

Short selling might be the best option. Even that has consequences. If this is your residence, and you have few assets and some sort of hardship, the lender might agree to a short sale. And you may be able to avoid the tax bill associated with the forgiven debt. If its an investment property and you have the assets and income to continue to make the payments, its much less likely. And if they do accept such a short sale the forgiven debt becomes taxable. You might get a short sale to work by agreeing to pay back some of the shortage. If your only reason for wanting to do a short sale is that its underwater then you may have an even tougher time to get the lender to agree. Is just staying put and continuing to pay an option?