Possibly a dumb newbie question regarding NPNs

[Terrence Evans]

Ok so let's say I buy a a non-performing note for 30 cents on the dollar and I know that the area is someplace relatively depressed like say Detroit.

Let's say that the balance was $30k and the property is worth half that.  What is to stop me, the buyer, from throwing out the new balance and just creating different terms more appropriate for that property?  Do you have to be registered to do so?

[Dion DePaoli]

A loan modification is a new extension of credit and is subject to comply with any new regulations at the time new credit is extended.  If you are the Mortgagee, then you do not need a license to modify the terms of the loan.  A license is need if you are a third party, neither the Borrower or the Mortgagee. 

To the OP question, the general game plan certainly can sound that easy but the impact and difficulty of the task have some influence as well.  Principal forgiveness is a taxable event.  The principal that is forgiven is treated like income for the Borrower.  So, in the above example, the Borrower who you forgave $15k worth of principal just made $15k and has to pay taxes on that income.  Obviously you can see how this operation can have it's barriers in certain properties where the balance in contemplation would create a large taxable event.  So walking in and just forgiving $50,000 or $100,000 is not always that practical when a Borrower struggles to make a payment of $1,500.  

Aside from the above, in order to even begin a contemplation of working with the Borrower, the Borrower must want to be worked with.  Meaning they must make themselves available and have the means to help themselves.  Simple in concept and less so in practice.  Some folks do not deal well with falling behind in their obligation.  The slope can be very slippery and one moment they are standing on the ledge and the next they are full blow default and have moved out of the property changed their phone and have started their life over on their own and have no interest looking back.  

It is no secret that if you can purchase a defaulted loan then reinstate and modify the loan you stand to reap some nice returns.  I tend to think many, perhaps even most, approaches to reinstatement and modification are flawed.  It is not uncommon to see modified loans wanting to increase in value but ultimately still carry a sizable discount sometimes for a variety of reasons.  As such, caution in their utility is advised.  Do not expect to hand them out like hotcakes.