PPR Note Returns only 5%?

[Bob M.]

I have been watching a lot of the Re-Performing 2nds PPR offers up each week and noticed that the interest rate on many of them is only 5%.  I guess I am a little confused why so low when I myself (with excellent credit), have a hard time finding a second mortgage for myself for only 5% these days.

I could see if they were selling at a significant discount to UPB, but many are selling at close to par, especially if they have any kind of equity behind them, so there is not even the chance for a higher rate of return or early payoff from purchasing at a discounted rate.

Lastly, they describe many of the notes as having an IRR of 12% but how is this possible if the note rate is only 5% and it is being sold for 90-100% of the UPB? What am I missing here? Why are people buying these?

[Edward B.]

@Bob M., I'd have to see some of the numbers you are talking about. If you have the payment amount (P&I), number of payments remaining, and the purchase price, you can easily determine what your yield will be if they pay to the end. The few that I have looked at from PPR have been in the 11%-13% range. I have not bought anything from them because I feel like I can get the same return on a first with more equity.

My beef with note sellers is when they talk cash on cash return. As if the note payment is the same as rent, which it is not, so that is misleading in my opinion. Also, no one factors in servicing, which is a flat rate. Thus it impacts your return on a note with low payments significantly more than a note with higher payments.