The collateral address on a performing note is doing more work than the payment history
Someone told me this week that they price performing notes almost entirely off the pay history, and I have been thinking about it since. Twelve months clean, maybe twenty-four, and they feel like the collateral question is largely answered. The logic I understand: a borrower who keeps paying is a borrower who probably values what they are paying for. But the collateral is not there to explain the past, it is there to absorb the future, and those are two completely different jobs.
Take a note at 75 cents on the dollar, face value 120k, borrower has paid thirty-one months without a skip. The yield looks fine. Then the BPO comes back at 105k and you realize the loan balance sitting on that collateral is 98k, which means your cushion against a default and a twelve-month foreclosure timeline is not the tidy equity story you modeled. You bought performing income and accidentally bought a thin-margin REO exit if anything changes. The payment history did not hide that from you. The collateral review did, because it happened after the yield math felt settled.
The other thing the collateral address tells you that payment history cannot: what the exit market looks like if you ever want to sell the note. A paying borrower on a property in a market with forty days on market sells differently than the same payment history on a property in a county where REO inventory takes nine months to clear. Note buyers in that second market are pricing your paper to a worse exit than you paid for it, even if the borrower never misses a day. You are not buying a bond. You are buying a position secured by a specific piece of dirt in a specific place, and the dirt has an opinion about your yield that the borrower's payment record cannot override.
What weight are you actually putting on the collateral review relative to pay history when you decide what to bid?
