Generally speaking, most homeowners do not simply pay off their mortgage over the course of 360 payments. Any of several things might happen long before the 30 year mark, some good, some bad: the borrower might sell the property, the borrower may pay the property off early, the borrower might simply quit paying for any number of reasons, the property might be destroyed (fire, earthquake, tornado, hurricane, flood, etc), the borrower might refinance for a lower rate with another lender. Things rarely go according to plan.
Borrower Sells the Property
When a borrower sells a property, there are a couple of common outcomes. The amount received from the sale is equal to or greater than the current amount owed (this includes loan(s), closing costs, any other related bills) … or the price received is less than the amount owed. If the amount is equal to or greater than, the existing loan is paid off as part of the closing process. In this case, the investor and partial investor are simply paid the amount owed to them at that point in time, per the amortization schedule. Title companies are pretty good at getting this right. If the amount of the sale is less than the amount owed, the title company will not be able to issue clean title to the new buyer until the original note has been completely satisfied.
Early Payoff
When a borrower pays off their mortgage, congratulations are in order for them! For the investor and partial investor, this is more of a bittersweet occurrence. First, they will both be paid what is due them at that point in the amortization schedule(s). Second, those funds can be redeployed into another note or invested elsewhere.
Borrower Quits Paying
When a borrower stops paying on their property, there are several potential remedies. First and foremost, the lender (i.e. partialNotes.com) must stay on top of things to recognize quickly if the borrower has quit paying. Communication must begin immediately. This is handled by the loan servicing company and/or partialNotes.com. If it is deemed that the borrower has had something bad happen in their life, and this is a short-term event that will be overcome, partialNotes.com might consider a loan modification. This will temporarily interrupt the income of both partialNotes.com and the partial investor. Often, the missed payments are simply placed onto the back end of the loan.
If, on the other hand, it appears the borrower is not going to correct their situation, foreclosure proceedings can begin. This will also interrupt income flow; once foreclosure has completed, the partial investor gets all money due them returned to them, then partialNotes.com receives all money owed them. If the price received at the foreclosure auction is greater than the owed amounts, the borrower of the property (ironically) receives any net overage.
If the borrower and lender are headed towards foreclosure, one approach that often works is a cash for keys offer. In this approach, the lender has determined the root cause of lack of payments. Sometimes the root cause dictates that the borrower loses the house; but this doesn’t necessarily mean damaging the borrower’s credit with foreclosure. Sometimes the root cause can be addressed by offering the borrower a cash incentive to sign the property over to the lender. For instance, if the borrower is being relocated, or is getting divorced, or …, that cash might solve their problem by allowing them to get out from under their now-burdensome financial commitments with their credit, and more importantly, their dignity, intact.
Property Destroyed
A best practice within the note industry is to ensure that the borrower purchases insurance for the mortgaged property and that the lender is listed as the loss payee on the insurance. When a note is acquired by partialNotes.com, these two practices are followed. Insurance companies are required by law to notify the lender when the insurance is cancelled or it changes. If necessary, the lender can force the purchase of insurance for the property (at borrower’s expense); this is called force placed insurance.
Refinancing
This occurrence is very similar to the early payoff scenario discussed above. If the borrower chooses to refinance with another lender, that lender will ensure that the original lender is reimbursed for the loan amount owed at that point in time per the amortization schedule. Once funds are received by the partial note buyer, said buyer can pocket the monies, re-invest in another partial (or full) note, or invest the monies elsewhere.
Risk Mitigation
All investments have risk. Note investing is no different. However, by wisely choosing notes, and associated properties we choose to purchase, partialNotes.com strives to mitigate the associated risks. Beyond these practices, the biggest mitigation to risk within the note investing world is the fact that your and our investments are backed by real estate.