Modeled the note sale at 92 cents, best bid came in at 74

The bid was arithmetic and you can rebuild it. A buyer of a 42-month balloon at 94% ITV is not underwriting your borrower's 18 clean payments, they are underwriting what happens if they end up owning that house. They price to a yield in the low to mid teens for that risk profile, and once you fix the yield and the remaining term the purchase price falls out of the equation. At 116.5k against a 1,116 payment with a balloon in 42 months, back into it and you land somewhere around 13% to 14%. That is the number they were solving for. 92 cents on that structure would have put them near 9%, which is roughly what your borrower is paying, and nobody buys paper to earn the coupon.

The three things that moved their required yield were all set at closing. 5% down means the borrower has almost nothing to walk away from. A 5 year balloon on a borrower with no documented path to a refinance is a real risk that lands inside their hold period. And unverified servicing means their diligence team has to build the payment history themselves out of your bank statements, which they charge you for in the bid.

Seasoning helped you. It just cannot fix an ITV that never had room in it. If you had put 15% down and run it through a servicer, the same buyer is probably bidding in the high 80s on the same coupon, and you would not have needed the coupon to be higher.

The part that lands for me is that the buyer prices your paperwork habits, not just the borrower. I have never touched a note myself.

What did you actually collect on the borrower before you signed? I ask because I am about to screen my first tenant and I keep thinking a buyer who is putting 5% down is closer to a tenant than an owner in terms of what you can verify.

The insurance gap would have kept me up. You went 14 months without knowing the collateral was covered. A kitchen fire in month 9 and your 94% ITV is a lot on a slab and an insurance company you have no standing with. Being named as mortgagee on the policy costs nothing and gets you the cancellation notice.

I read the cause differently than @tender does on weighting. The missing servicing record cost you a few points and it is cheap to fix. The 5% down cost you most of the gap and it cannot be fixed after closing. You created a note at an ITV where no institutional buyer has a cushion, and everything after that was them pricing around a hole you dug on day one. Sextant, would you have gotten the deal at 15% down, or was the thin down payment the reason the buyer chose you?

28k is a fairly cheap tuition bill for learning how the bid side thinks. Most people learn it on their only note.

Can someone spell out UPB and ITV for me. I think UPB is the balance still owed. ITV I have seen written as investment to value and I do not know if that is the buyer's purchase price over the house value or the loan over the house value.

@vellum UPB is the remaining balance the borrower owes. ITV here is the loan balance against what the house is worth, which is why 95% means almost no cushion. The plain version of sextant's post is that a note is only worth what it is worth to the next person, and you decide that at closing.

I would want to see the note itself before I agreed the down payment was the whole story. Two things I look for on paper like this. Whether the balloon has any extension mechanism, because a hard maturity with no cure gives a buyer a date they might have to foreclose on, and whether there is a late fee and a default rate that a servicer can actually apply. Also whether the security instrument was recorded correctly, which varies by state in both the form used and the recording practice, and a defect there gets discovered by the buyer's title work at exactly the moment you have the least leverage. Did anyone's diligence flag the documents, or was it all credit?

Adding to @fathom, the servicing agreement is worth reading before you sign it and not after. A licensed servicer running escrow gives the note buyer a clean tape, a payment history they trust, and proof the taxes got paid, and it puts a third party between you and the borrower when something goes wrong. Cost is small against 28k. Servicer licensing requirements differ by state, so confirm the one you hire is licensed where the property sits.