Good information here.
I wanted to add some thoughts to this thread. Re-performing notes can be a wonderful asset to own when the initial modification is handled correctly.
We create modifications and purchase re-performing notes on a regular basis. While borrowers certainly can slip back into default, much of this depends on how the modification was initially handled.
Issues that set the borrower(s) up for failure are things like:
- Forcing them into a payment they cannot afford long-term.
- Failing to review their financial application and create a payment that makes financial sense for them.
- Not getting a down payment from them at time of modification.
- Setting up the modification with a large balloon payment due at a future date.
- Setting an unrealistically high interest rate with the hopes of forcing them into a refinance in the future.
There is a bit more nuance to creating sustainable modifications, and I think this should be judged on a case-by-case basis. Much of this depends on the borrowers situation. The idea that someone fell on hard times once, and is now a repeat offender is not the norm in real life. I have not seen a reliable statistic of the re-default rate, as much of this depends on the above information.
I can say that my experience has been less than 5%. Results may vary depending on the type of loans you buy and the overall profile of the borrower(s). I am certainly not implying all mods work out, as this is not the case. However when done correctly they can be great assets to own long-term.
- Josh
