Buying a note in the middle of a trial payment plan

[Michael Vaughn]

I'm currently in the due diligence of a note, perceived as non performing but as I started to inspect the file I have noticed the current loan services company has reached a 3 payments trial payment plan agreement with the borrower, and two payment has already been done. Servicing comments shows 3 trial payment, with the offered plan is 25 years at a certain rate, and an estimated UPB.

My question is, are the 3 payments part of the 25 year new loan or not? Is it going to be 297 payments left after he (the borrower) completes the trial or 300? UPB listed by in the plan is said to be estimated and If i calculate what UPB I get from either 297 or 300 payments, given the payment and rate, both numbers are close (300$ difference). I wanna make I don't leave money on the table plus I am not breaking a rules.

[Mike Hartzog]

As Chris had indicated, you need to read the agreement to understand where the payments are applied.  From an asset value perspective I would not be too concerned about 3 payments on a 25 year plan.  The borrower is expected to continue making monthly payments for the next 25 years, so plus or minus the 3 payments at the end of the term has very little impact on value, due to the time value of money.  You can prove this to yourself with a little financial math.  

I think the concern over a short trial period here is related to how much the borrower is really proving themselves.  Two payments thus far on a trial plan demonstrates that the borrower wants to keep the property and that they are capable of paying.  These are both very good things, however, this does not qualify the loan as a performing loan, so the price you pay here should take this lack of "seasoning" this into account.  I would calculate the yield you would get on the investment as a performer, and would be looking for something upwards of 15% given the risk level here.  I would also ensure that I could exit via foreclosure with a meaningful profit.