PPR Note Returns only 5%?

Question

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. · Answer

@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.

Jay Hinrichs · Answer

one reason we always give our clients the right to service their own.. or we have a service that will do it for 7 to 10 bucks a month some people chose to do that but it will affect the rate of return a tad..

for me personally I have never ever bought an owner occ note that i kept only to foreclose on .. so i am not familar with all the stuff you have to do that adds layers to those investments.. therefor I have always serviced my own notes.

My dad did this with our paper.. and our note buyers it was old school.. you had a payment book borrower sent in the payment in the booklet.. secretary in our office would post in the book then in our records and mail the booklet back.. we found that worked pretty well for folks .. by the time the buyer paid the note off 5 to 10 years down the line it was tattered beer stains coffee stains it was cute really. I wonder if you can even buy those anymore

Mike Hartzog · Answer

Edward and Chris have good points. One must take expenses like servicing into account when calculating yield, as it will have a significant impact for loans with small P&I payments. Because these costs can vary from servicer to servicer, or you may be planning to self service, note sellers like PPR cannot be expected to factor them into a yield number for you. Here's a blog post that may help you calculate yield on your own.

Account Closed · Answer

I wanted to vote @Edward B.'s comment 10x but I couldn't figure out how to do it...

Note for readers, just google "How to use XIRR in excel" when calculating note returns, especially if you are buying several years into the note's life and have misc costs like servicing. Frank Gallinelli's book also breaks down the concept so well

@Bob M. - I think there may be something missing to those numbers. I just had a look at a recent PPR note and the interest rate was in the low double digits (not 5%). Otherwise I can't think of how buying a 5% loan at 100% UPB will come out to a 12% IRR.

Christopher Winkler · Answer

It is something to consider, especially if you want to keep it for the long run. Don't be afraid to pass on the ones that won't get you the yields you want. We have a similar that was modified to 5% and there really is no place to go lower... And with being at Peak note, with the very best selling for outrageious prices, like $0.75 of UPB with paying first & full equity from several funds, PPR included, it might be worth it for the market to change direction.

Mike Hartzog · Answer

Sorry about that. This link should work. Use the RATE formula to calculate yield. Reduce your payment amount used in the formula to account for servicing costs. Here's a sample spreadsheet which includes examples of the formulas.

Christopher Winkler · Answer

Thanks for the gumball, Popeye! @Mike Hartzog https://www.youtube.com/watch?v=poQR8hX2VV0

Eddie L. · Answer

is there any suggestions for any servicing company?

@Mike Hartzog the Blog post seems doesn't work. it said Page not found

PPR Note Returns only 5%?

PPR Note Returns only 5%?

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