Why Wall Street Investors Are Buying Non-Performing Loans

August 16, 2017


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Since the housing bubble burst in 2008, Wall Street hedge funds have been buying up foreclosures in bulk as rental properties. The single-family homes have proven to be a good source of revenue and a safe investment as home ownership continues to decline and the market for rental properties grows. However, now that the housing market has had a chance to recover and foreclosures are at a 10-year low, there are no longer so many homes available for purchase. Therefore, Wall Street investors are starting to buy non-performing loans, or NPLs.

A loan is identified as “non-performing” when the debtor has not made a payment for 90 days or more, at which point it is deemed unlikely that the debt will ever be repaid in full. At this time, over 2 million loans are 90 or more days delinquent in the U.S. Banks and other lending institutions that hold these loans often sell them to investors in order to get rid of the risk and the cost of trying to collect. For the investor, buying a bad loan is considerably cheaper than buying a house. Real estate investors have the right to seize a home once it goes into default, and in this way, they can add more rental properties to their portfolio.

Some investors say that their first step after buying an NPL is to approach the home owner and give him or her the chance to retain ownership through loan modifications. However, if it is clear that the owner will not be able to resume payments, investors are offering to let the owner stay in the house as a renter. Keeping families in their homes is a benefit to the investor because families who are rooted in a community are likely remain stable renters.

Investors face some challenges in dealing with homes acquired through NPLs. One of the biggest problems is that homeowners in financial distress are often unable to keep up with maintenance on a house and let it fall into disrepair. This can lead to high renovation costs for the investor before the house can be rented or re-sold. The longer a loan remains delinquent, the worse the condition of the house is likely to be. To learn more about how investors respond to the challenges of buying NPLs, visit JonathanShechtman.tumblr.com