status: draft

Non-performing loans (NPL)

Non-performing loans are mortgages where the borrower has stopped paying and is typically 90+ days delinquent. NPL investing is fundamentally different from performing mortgage investing: you’re buying distressed assets at a discount and executing a workout strategy to recover value. Success depends on resolution expertise, not underwriting new loans.

NPL categories

By delinquency status

Status	Definition	Typical Price
90-180 DPD	Early-stage NPL	70-80% of UPB
180-360 DPD	Mid-stage NPL	60-75% of UPB
360+ DPD	Seasoned NPL	50-70% of UPB
In foreclosure	Active legal proceeding	45-65% of UPB
REO	Foreclosure complete, property owned	Based on property value

By property status

Status	Characteristics	Recovery Approach
Owner-occupied	Borrower lives in property	Modification or sale
Vacant	Property abandoned	Foreclosure, property preservation
Tenant-occupied	Renter in place	Cash-for-keys or foreclosure
Unknown	No recent inspection	Property condition risk

---

status: draft

Resolution strategies

Modification

Re-underwrite the borrower for a sustainable payment. The goal is converting an NPL back to a performing loan.

When modification works:

• Borrower has income but experienced temporary hardship
• Borrower is engaged and responsive
• Property value supports modified terms
• Modified payment is sustainable (DSCR 1.0x+ for investor, DTI reasonable for owner-occupied)

Modification timeline: 6-12 months from acquisition to modified loan

Economics:

• Acquisition: 70% of UPB
• Modified loan value: 85-100% of modified UPB (which may be less than original)
• Gross return: Depends on balance reduction and success rate

Success rate by borrower type:

Borrower Engagement	Modification Success
Responsive, income-stable	60-70%
Responsive, income-stressed	40-50%
Non-responsive but occupied	20-30%
Vacant property	N/A

Short sale

Borrower sells property for less than the amount owed, with lender approval. The lender accepts the proceeds in satisfaction (or partial satisfaction) of the debt.

When short sale works:

• Property value below loan balance (underwater)
• Borrower cooperative
• Faster than foreclosure
• Property can be sold in current condition

Short sale timeline: 6-12 months

Economics:

• Acquisition: 65% of UPB
• Property sale: 85% of current value
• Net recovery: 60-75% of UPB after costs

Deed-in-lieu

Borrower voluntarily transfers property title to lender in exchange for debt forgiveness.

When deed-in-lieu works:

• Borrower wants to exit cleanly
• Property in acceptable condition
• No junior liens (or they’re cleared)
• Faster and cheaper than foreclosure

Deed-in-lieu timeline: 3-9 months

Economics:

• Acquisition: 65% of UPB
• Property value: 80-90% of appraised value (after repair credits)
• Net recovery: 65-80% of UPB

Foreclosure

Legal process to take ownership of the property and sell it.

When foreclosure is necessary:

• Borrower unresponsive
• No modification possible
• Short sale rejected or failed
• Property abandoned

This is the most expensive and time-consuming option, but sometimes the only path to recovery.

---

status: draft

State-specific foreclosure timelines

Foreclosure timelines vary dramatically by state based on whether the state uses judicial (court-supervised) or non-judicial (trustee sale) foreclosure.

Non-judicial states (faster)

State	Typical Timeline	Process
Texas	2-4 months	Trustee sale, no court
Georgia	2-4 months	Non-judicial
Arizona	3-5 months	Trustee sale
California	4-6 months	Non-judicial but requires notices
Colorado	4-6 months	Non-judicial

Judicial states (slower)

State	Typical Timeline	Process
New York	18-36+ months	Full court process
New Jersey	18-36+ months	Court, mandatory mediation
Florida	12-24 months	Judicial, contested cases longer
Illinois	12-18 months	Judicial
Ohio	12-18 months	Judicial
Pennsylvania	9-15 months	Judicial

Implications for NPL pricing

State Mix	Price Impact
80%+ non-judicial	Premium pricing (faster resolution)
Mixed	Baseline pricing
80%+ judicial	Discount pricing (timeline risk)
NY/NJ concentrated	Significant discount

Key insight: A 60% of UPB purchase price in Texas may generate 25% IRR, while the same price in New York may generate 10% IRR due to timeline differences.

---

status: draft

Bid modeling

Recovery analysis framework

Step	Description
1. Property value	Current value (BPO or AVM), less repair estimate
2. Net recovery	Property value minus foreclosure costs, commissions, holding costs
3. Timeline	Months to resolution based on state, borrower, condition
4. Success probabilities	Weight each resolution path
5. Expected recovery	Probability-weighted net present value

Cost assumptions

Cost Category	Non-Judicial	Judicial
Legal fees	$2,000-5,000	$8,000-25,000
Property preservation	$100-300/month	$100-300/month
Property taxes	Varies	Varies (often 12-24 months accrued)
HOA arrears	Varies	Varies
Insurance	$100-200/month	$100-200/month
Commission (sale)	5-6%	5-6%
Closing costs	1-2%	1-2%

Sample bid analysis

Loan characteristics:

• UPB: $200,000
• Property value: $180,000
• State: Florida (judicial)
• Timeline estimate: 18 months
• Property condition: Fair

Recovery model:

Scenario	Probability	Gross Recovery	Timeline	Net Present Value
Modification	30%	$170,000	9 months	$165,000
Short sale	25%	$155,000	12 months	$145,000
DIL	15%	$150,000	6 months	$145,000
Foreclosure	30%	$140,000	18 months	$120,000

Expected recovery: (0.30 x $165K) + (0.25 x $145K) + (0.15 x $145K) + (0.30 x $120K) = $143,500

Target IRR: 20%

Max bid: ~$120,000 (60% of UPB)

---

status: draft

What capital providers focus on

Property due diligence

Item	Source	Why It Matters
BPO / AVM	Third-party valuation	Floor for recovery
Interior inspection	If accessible	Condition, maintenance
Title search	Title company	Liens, encumbrances
Tax status	County records	Arrears, tax sale risk
HOA status	HOA	Super-lien states, arrears
Occupancy	Field inspection	Vacant vs occupied

Interior access: NPL buyers often cannot inspect interiors, creating condition risk. Some bid with an “occupancy discount” assuming worst-case condition.

Borrower analysis

Factor	Favorable	Unfavorable
Occupancy	Owner-occupied	Vacant
Communication	Responsive	Non-responsive
Employment	Employed	Unemployed
Prior mods	None	Multiple failed mods
Legal status	None	Bankruptcy filed

State and jurisdiction

Factor	Impact
Judicial vs non-judicial	Timeline
Deficiency judgment	Can pursue borrower for shortfall?
Right of redemption	Borrower can reclaim post-sale
Super-lien HOA	HOA can foreclose ahead of mortgage
COVID protections	Lingering moratoriums

---

status: draft

Financing NPL portfolios

Warehouse financing

NPL warehouse is specialized due to the asset profile.

Feature	NPL Warehouse	Performing Warehouse
Advance rate	50-70%	85-92%
Pricing	SOFR + 400-600 bps	SOFR + 175-275 bps
Mark-to-market	Monthly	Quarterly
Property value updates	BPO every 6-12 months	Annually
Servicer requirements	Special servicer required	Standard

Illustrative pricing. See pricing disclaimer.

Key risk: NPL values can deteriorate during the warehouse period if property condition worsens or foreclosure timelines extend.

Term securitization

NPL rarely securitizes in rated transactions due to:

• Cash flow uncertainty (no scheduled payments)
• Highly variable timelines
• Binary outcomes (recovery or loss)

What does securitize:

• Seasoned RPL that was previously NPL
• REO pools (property-backed, not loan-backed)
• Rated residuals from NPL servicers

Whole loan sale

Major NPL buyers:

• Credit funds: Oaktree, Cerberus, Angelo Gordon, Bayview
• Specialty servicers: Carrington, PHH, Shellpoint
• Regional investors: Smaller pools, local market expertise

Transaction process:

1. Seller (bank, GSE, prior investor) engages advisor
2. Data tape distributed to bidders
3. Due diligence period (2-4 weeks)
4. Bids submitted (often multiple rounds)
5. Winner conducts confirmatory diligence
6. Closing and loan transfer

---

status: draft

Red flags

At acquisition

• Timeline assumptions below market: Underestimating judicial state timelines
• No interior condition discount: Assuming best-case property condition
• High modification success assumptions: Overestimating borrower engagement
• Ignoring HOA arrears: Especially in super-lien states (FL, CO, NV)
• Title issues unresolved: Clouds that delay or prevent foreclosure

In portfolio management

• Resolution timeline exceeding projections by 50%+: Assumptions were wrong
• Modification success rate below 40%: Servicer or borrower issues
• Property condition deterioration: Lack of preservation, vandalism
• Advancing costs exceeding budget: Foreclosure costs spiraling

Structural

• Advance rate above 65% for fresh NPL: Inadequate cushion
• No servicer oversight provisions: No control over workout quality
• Concentration above 40% in single judicial state: Timeline concentration
• No property preservation requirements: Condition risk

---

status: draft

NPL-specific deal terms

Representations and warranties

Standard Rep	NPL-Specific Consideration
Loan status	Verified delinquency status
Chain of title	Complete, no breaks
Servicing history	Complete payment and mod history
Property condition	As-is, no condition rep
Borrower contact	Last known contact info

Servicing transfer

NPL servicing requires special servicer capabilities. Key transfer considerations:

• Data tape completeness
• Document delivery
• Borrower notification
• Foreclosure status (if in process)
• Property preservation handoff

Workout guidelines

Buyers typically establish workout guidelines with servicers:

• Modification authority levels
• Short sale approval thresholds
• Foreclosure initiation triggers
• Cash-for-keys parameters

---

status: draft

Related topics

• Re-performing loans (RPL) — successfully modified NPLs
• Servicer selection — special servicing requirements
• Deal structures — warehouse financing for NPL
• Key participants — NPL buyers and servicers