Investors have been clamoring for yield . So much so that even NPLs were commanding unheard of prices [ as much as 85 % of face value ]. As the economy was doing well [ preCovid ], real estate prices were steadily increasing and there was confidence in the marketplace . However , in “ normal ” times , one might offer 50 % +/ of the face of the NPL note , as there is a fair amount of work that goes into managing a NPL regarding foreclosure , forbearance , modifications , bankruptcies , and possible lawsuits by the borrowers . As interest rates rise and the supply of NPLs is sure to increase , one should expect the prices of the NPLs to decrease allowing investors to potentially pick up handsome profits .
In the early 1990s , the S & L crisis provided such opportunities to investors swooping up “ bad loans ”, as the S & Ls were directed to unload these mortgages into the market very quickly . As the dust settled , as it usually does after wide pendulum swings , these investors profited , as they picked up loans [ or property if the foreclosure had already been completed , and the bank held the asset as an REO ] at discounts that were previously only imaginable . Discounts of more than 60 % were not uncommon . At such a discounted price , the investor appeared to not take any undue risk . There was so much room for error , almost any loan to be purchased was worth it . We may not be in that same situation now due to restrictive banking regulations that have been imposed on banks for years , prohibiting them from making unreasonably risky loans and the fact that real estate has held its own since The Great Recession , but there should be plenty of opportunity for investors to pick up discounted loans with fairly large margins built in ; however , the average investor is prohibited from participating in buying these loans due to the relatively large amount of capital needed to enter this space . For example , a large bank or hedge fund willing to unload NPLs may require a buyer to invest a minimum of $ 1,000,000 or more . If there is a bidding situation [ auction ], a refundable deposit is usually required , so the bank / hedge fund knows they are dealing with serious , wealthy buyers .
For those investors who have the wherewithal to participate in purchasing NPLs , they should have a sophisticated team to assist them , as there will be a need for analysts to do a deep dive in the values of the property to which the loans are secured , contractors to help facilitate potential rehabbing of the property if / when the property reverts to the investor , legal analysts dealing with the various foreclosure laws in the states where the properties are located , and good real estate sales people to not only give BPOs — but also help facilitate the eventual sale of the property or assist with the possible rental of the same [ or find a good management company ].
One strategy to consider is to approach the NPL borrower and try to rewrite or modify the loan [ of course , before doing so , consult with competent legal counsel to make sure that there are no legal issues that would compromise the collateral ]. There are a few benefits to this strategy ; first , turning a NPL into a performing loan brings immediate cash flow . Because of the discount that is obtained in the purchase , the new note holder has the flexibility of making the note more attractive for the borrower . For instance , if a note [ that has a face value of $ 100,000 ] has 20 years to go and has a note rate of 6 % was purchased for 60 cents on the dollar from the bank , the new note holder could offer to lower the balance to $ 90,000 and reduce the interest rate to 5 % and have a great asset that can either be held for cash flow or sold in the secondary market .
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