Newbie Question on NPN from FCI

[Ethan Anderson]

Hi BP,

Can someone help a newbie piece together the story behind the note data below? This is just a learning exercise for me, I don't have the education or background to seriously consider investing in NPN's, but I'm eager to learn more! This note caught my eye since the underlying real property is in my backyard.

Main Questions:

• Why is the note listed as "Non Performing"? It looks like there were 12 payments made over the last 12 months, including one on 9/20/16. Even if the 10/20/16 payment was missed, it can't possibly be 90+ days late as of today. 
• Why is the Principal Balance 40% higher than the Original Balance? From the "Note Dates" section, the loan was originated in 2005 but payments did not begin until 2016. Did the borrower take a loan for $160k in 2005, but not make a single payment until 2015, resulting in $63k+ of interest and fees being added to the principal balance? 
• Was is the $25k downpayment mentioned in the Seller Comments? Was this something the borrower has already paid the note holder, perhaps as part of a loan modification? 

[Dion DePaoli]

Ethan,

Any loan data at large can have data integrity issues.  There are numerous reasons for this including input error, seller misunderstandings all the way down to malicious intent.  

In this particular case I would venture to say the Seller has errored with input data.  The First Payment Date would not be 10 years after the loan was made.  The Next Payment Due being October 2016 makes the loan 60 days past due.  Delinquent not defaulted.  These would seem to be user input error/misunderstandings.

The balance increase would be from a modification.  A balance can only increase if the loan is negative amortizing or open ended or modified.  Neither of those other ideas seem to be present.  Further, the First Payment Date of Oct 2015 is 30 years from the Maturity Date.  A loan made in 2005 in second position would not likely have a 40 year term.  

The due day of the month also is scrambled around.  Generally the day of the month stays fairly static throughout the loan from both the origination and any modification.  Payments due on the 5th are always due on the 5th.  Payments due on the 20th are always due on the 20th.  Payment due days can be adjusted informally but unless the note is formally amended what is in the note prevails in terms of enforcement. 

It is possible to make 12 consecutive payments and still have a loan which is in default.  It all depends on when the payments made in the consecutive string was due.  If it was due for 2015 then 12 payments might just bring the loan due date into the 2016's.  

The down payment, if it is truly a down payment, would have been made at the time of origination and has already been collected by the original lender.  If that payment was for a modification, then it was made at the time modification was made.  Both scenarios are fairly meaningless now except for the theorized equity that should be present.

The loan is defined as a step up loan. The rate will increase at certain times over the course of the term. The problem is the rate increase being described is 100% increase going from currently 4% to 8% in 2020. Not really a positive. Since we presume the loan is modified, as it looks to have been, the modification would have required the Mortgagee to consider the borrower's ability to repay that step up by considering the DTI on the highest payment possible based on their income now. I would guess it fails that test, but that is just a guess.

For these reasons plus many more is why a buyer should ensure they have proper time and knowledge to perform due diligence.  Stay inquisitive.  Keep learning.