Is buying somebody's defaulted mortgage as grim as it sounds

The mechanics are worth laying out plainly, because they explain why the outcomes vary so much.

When a borrower defaults, the bank or servicer already owns a problem. They have a loan they can't collect on, capital tied up against it, and a foreclosure process that costs them money and takes months to years depending on the state. Many of them would rather sell the debt at a discount and move on than run the process themselves. That's where a note buyer comes in. You didn't cause the default and you can't undo it, but you now hold the decision about what happens next.

A note buyer who paid 55 cents on the dollar has room a bank at full basis doesn't have. They can accept a reduced payoff, cut a payment down, or forgive some arrears and still make money. A servicer holding at par often can't do those things without a loss, so they foreclose. That's the real reason a workout can leave a borrower in the house.

The other side is honest too. Some buyers are collateral buyers. They want the house, they underwrite the foreclosure timeline, and any conversation with the borrower is about getting them out efficiently. Both types are in the market and both are legal.

One thing that shapes this more than most beginners expect: the rules on how you can contact and treat a borrower on a defaulted consumer mortgage are extensive, they differ by state, and some states require a license to acquire or service residential mortgage debt. That's a question for a lawyer in the state before you buy anything, not after.

The 55 cents point is the one that reframed it for me. The bank can't offer the borrower a deal because of what they paid. You can, because of what you paid. That's an odd thing to sit with but it's not nothing.

What percentage of workouts actually end with the borrower staying, across a real book, not the ones that get written up? Suspect it's lower than the marketing implies.

Been on job sites cleaning out houses after foreclosures. Whatever the paperwork says, the family is gone and the house is trashed and somebody paid for both. Doesn't make the strategy wrong, just don't let anybody tell you it's tidy.

There's a service angle here too. Borrower outreach done well, actually reaching someone, documenting income, getting a mod signed, is skilled work and most small note buyers are bad at it. That's a real business someone could run.

@anchor I've wondered the same. My guess is it depends entirely on whether the buyer wanted the house in the first place. If your model is collateral, the mod attempt is a formality.

Depends what state too. Where foreclosure takes two years and costs you 12k, you're much more motivated to do a deal with the borrower. Where it takes four months non-judicially you just take the house. The ethics end up following the statute, which is uncomfortable but I think it's accurate.

@lantern that's the part I keep coming back to. The negotiation is the actual product and everyone treats it as an afterthought.

@parcel that's a bleak observation and I don't have a counter to it.

On the property side, a house that's been in default 18 months is usually worse than the BPO suggests. Roof past due, HVAC dead, sometimes copper gone. If you underwrote the house as the fallback and the fallback needs 30k, your grim-versus-not question turns into a solvency question fast.

What I still don't understand is who's on the other side of the phone. Do you talk to the borrower yourself or does a servicer do it? Because those feel like completely different jobs and I'd assumed the first one.