The Lower the Investment-to-Value Ratio, the Safer the Note

The post below is reprinted by permssion by Rick Gordon, Director - Transactions, Florida Asset Financing Corp....

An investor in mortgage notes in the secondary market has one objective... that is, to earn a targeted return on investment.

Although in purchasing such notes we evaluate the seasoning, the down payment, the payor's credit scores and other elements, ultimately the most important factor is the value of the property relative to the amount owed.  

Just because a borrower has paid promptly for a period of time or has good credit or put up a sizable down payment does not assure that he or she won't run into future cash flow problems and an inability to make required payments.

As mutual fund operators always caution, "past performance may not be indicative of future results."

However, if an investor holds paper with a low balance owing relative to the value of the property, the investor has a very high probability of "coming out whole" and realizing its targeted return either through receipt of the promised periodic payments, or, if for any reason the payments are not made, through realization of an equivalent amount through foreclosure on the property.

The lower the investment to value ratio, the safer the note.