There are different strategies and choices when it comes to investing in mortgage notes for the note buyer. Among one of these choices is the lien position the actual mortgage note is in when purchasing a mortgage note for sale. The lien position dictates the order in which the debt gets paid. For a note buyer, entering a second lien position is cheaper than a first lien position, in the secondary mortgage market, since it is second to get paid. The fact that it is cheaper allows a greater profit to be achieved.
As stated, second lien mortgage notes are in the second position. They could have been originated to purchase the home, or it may be a home equity line of credit. However they were originated, they are second to get paid after a first lien is paid off. Investing in second liens can be very risky but also very lucrative as well.
The whole game in the second lien game is buying right. The note buyer makes his money on the purchase. A responsible homeowner wants to save his home and buying the right second lien mortgage note can lead to great profits if the note buyer aligns his investment with the right type of homeowner. Second liens can be bought for a fraction of first liens and thus allow for a healthy return when the note re-performs again.
There are many factors when considering to enter a second lien position. The performance of the first lien note, the equity in the property and neighborhood trends.
The performance of the first lien is important because this gives insight to what is in the mind of the homeowner. A non performing mortgage note in the first position usually means the homeowner is having very tough times or it may be that he feels that the property dropped so much in value that he feels that is not worth it to continue to pay the mortgages.
Equity in the property is important since it is what guards the note buyer’s investment as well as his profit in the event the homeowner is unwilling to work with him. As a last resort, the note buyer can foreclose on the property to recoup your investment.
Neighborhood trends will give you insight on how quick you need to act on your investment. In a down trending neighborhood yo have to move to protect your position quick whereas in an up-trending neighborhood your investment gets better with time.
So with a few precautions, a note buyer can be very successful with purchasing second lien mortgages.