How to Analyze Risk of Holding Notes? - Posted by Neil Roseman

Posted by John Behle on April 04, 2000 at 13:02:05:

There is a very low percentage of foreclosure. There are “National” figures out there, but they are not necessarily relevant to you, your area and circumstances.

Each market is different and even another broker or national funding source’s figures would not necessarily fit. It also has a great deal to do with collections. Even the low figures reported in the industry can be much lower for someone that is proactive and creative in their collections and problem resolution.

How to Analyze Risk of Holding Notes? - Posted by Neil Roseman

Posted by Neil Roseman on April 03, 2000 at 21:21:56:

I’ve been watching this newsgroup closely the last couple of months and have seen very little information on the “risks” or “expense” to holding a note.

I’m looking for any insight or rules of thumbs for the risk of holding notes.

For example, on the main newsgroup there seems to be a rule of thumb that 40% of Gross Rents would go to expenses.

What would be the rule of thumb for the missed payments, or percent that would be in foreclosure, etc. if I was holding the notes for the properties I own.

My payors would probably be substandard credit risks, in other words, if they are paying me 11%, there probably is some reason they haven’t gone to mainstream lenders.

I’m not looking for an exact answer, just some rules of thumbs, or a discussion of how you guys look to estimate your your risk or expenses over a large number of mortgages.

Thanks in advance.


Re: How to Analyze Risk of Holding Notes? - Posted by John Behle

Posted by John Behle on April 04, 2000 at 12:30:37:

Actually, we have covered this a couple times, but it has been a while and I can’t find all the posts. What I can find I’ll post at the bottom of the page.

The primary factor I look for is LTV/ITV. The Loan to Value ratio is the most important. I always look at the bottom line - which is that I could get the property back, including some delays of foreclosure and possible bankruptcy.

What LTV? 80% has been the standard figure for many years. There’s nothing all that magic about the number it’s just that a 20% cushion or more gives you some room to deal with the problems and avoid loss.

In an active appreciating market, you could look at a higher LTV. If you are unsure of the stability of the market or it is softening, you might want to consider lower LTV’s. Of course credit of the payor, condition and location of the property, other liens, type of property, cash flow, etc. are all factors. BUT LTV is the absolute crucial one. You should NEVER sacrifice LTV for any other factor. I might turn down a note over the other factors, but they will never sway me to overlook a bad or un-acceptable LTV.

Higher LTV’s amount to speculating. Sometimes other factors can make a higher LTV acceptable. That might be the ease of foreclosure on a deal - like some cases where a contract can be foreclosed quickly or state laws that provide a quick forfeiture. In cases where a partial is used the seller can be made responsible for the higher part of the LTV - effectively lowering your LTV/ITV.

ITV or Investment to Value ratio is the ratio of the amount I have invested to the value. Sometimes there can be a bad LTV and yet a good ITV. In that case, ITV is what’s important.

A large part of my strategy is “Loss Mitigation”. When a problem arises, I work with the payors and am both proactive and creative in solving the problem profitably. Every once in a while I get too busy to jump on the problems to solve them and pay the price when I let it ride or delegate it out to someone else.

See the following articles also at

“Paper Funding Pitfalls”
“Risk Management”
“Throw the Old Couple Out”
“Forget Foreclosure”

and the following archived posts at:

“What makes a good note”
“Seasoning on Notes”
“Prevention vs. Recourse”

I have an article I’m looking for too that is titled “Leveragectomies and other LTV solutions”.

Re: How to Analyze Risk of Holding Notes? - Posted by Neil Roseman

Posted by Neil Roseman on April 04, 2000 at 12:54:06:

Thanks John, that is some good insight.

If we assume I’m carrying a note with an 80 LTV, any thoughts to the percent of payments that are missed? Or percent of homes that go into foreclosure?

I will have an underlying mortgage, and am trying to assess my risk. (the good news is that i will be putting almost no money down, the bad news is that if my payors miss payments, i will have some out of pocket expense.)