Offer a Discounted Payoff?

[David L.]

Hi all,

I am new to note investing - so new that I have not closed my first deal yet, so I have what is most likely a very rookie question.  

I'm working on a deal where I would purchase a re-performing note (10 payments on time after workout, so far) at around 50% of UPB. The reason for the seller's willingness to discount that much in today's climate, from what info I have so far, is due to the extremely low rate on the modified loan (less than 2%, recast for a new 30 year term).

So due to the rate, even at 50% of UPB, the return on my investment would be around 4% after considering servicing fees, etc., which is not nearly enough to interest me in this deal, considering the risks of borrower re-default, etc. However, the steep discount relative to UPB seems interesting. If the borrower pays off early, I would make a nice return, obviously, but I wonder, what motivation is there for the borrower to pay off a sub 2% loan early. From some info I've found, I suspect that the borrower is renting out, not owner-occupying the home, and at this rate, I expect they should have good positive cash flow each month. So if I were them, I would be inclined to ride this loan out for 30 years as they're never going to find another deal like this.

Which brings me to my question(s). Can I purchase this note and then offer the borrower a discounted payoff? Say 60% of UPB good for the next 12 months, which should yield something like a 20% return on my initial investment (10% of UPB cash return / 50% of UPB initial investment). I know these types of deals are offered routinely with NPN, but is this generally done, or can it be done, with performing loans? If so, is this something that a third party servicer could do at my direction? I am not a licensed servicer/debt collector and would almost certainly mess something up if I attempted on my own the first time. :-)

Lastly, what other questions should I be asking or what other input would the BP crowd offer for this situation?