Can a re-performing note command the same exit pricing as one that never defaulted
A borrower catches up, makes six months of payments, and the note technically re-performs. The question is whether that history prices like clean paper when you go to sell it, and the answer is almost always no, though how much the discount persists is where I want the room's experience.
The mechanism matters here. A secondary note buyer underwriting a re-performer is looking at the same borrower who already stopped paying once, and the payment history since cure is short by definition. Most institutional buyers apply a haircut to re-performers relative to comparable performing paper that never defaulted, because the probability of re-default is statistically higher in the near term. That haircut is real exit value that has to be baked into the original bid, and in my experience most buyers running a workout-to-sell path underestimate it.
Take a note with a $120k UPB bought at $60k. If you get the borrower re-performing and assumed you could sell at 80 cents on the UPB, that is $96k and a clean double. But if the market for that re-performer is actually 65 to 70 cents because of the default history, you are selling at $78k to $84k, and suddenly your return on an 18-month workout looks a lot thinner once servicing costs come out. The assumption doing the most work in most re-perform exit models is the resale price, and it is usually pulled from performing note comps rather than re-performing ones.
What I want to know is whether anyone has actually tested exit pricing on re-performers held longer, say 12 or 18 months of clean payment post-cure, versus the six-month minimum most servicers use to call something re-performing. Does the institutional buyer discount compress meaningfully with seasoning, or does the default history stay in the price regardless of how long the borrower has been current?
