While many investors, realtors, and homeowners are familiar with a short sale transaction where the property is sold at a loss by bank with the institution taking a loss on the underlying note and or asset, most people don’t realize that banks have been doing something very similar since the beginning of banking.
What I’m talking about is also called a short paper transaction or buying the note from the lender. Banks have been selling their notes to other banks. If you have ever bought a house and closed with one specific lender, I’m willing to bet that you at some point received a letter stating that your mortgage company has changed.
The great thing is that this can also take place on an individual basis as well where an individual like Nancy Notebuyer, calls up Wells Fargo and buys a specific mortgage. Nancy at that point then becomes the actual bank and holds the mortgage or “paper”. Payments from the home owner are then made to Nancy and she has all the rights that the bank had. This can be very attractive in times where the homeowner starts to default on their mortgage. Nancy could modify the terms of the loan (change interest rate, defer payments, reduce principle, or even perform a friendly foreclosure or accept a deed in lieu of foreclosure where the homeowner just hands over the keys and walks away).
What’s extremely attractive to an investor is that there is very little paperwork involved with buying the note, unlike short sales! Where short sales can drag on for months and sometimes years (I know of one situation that took 60 months to close). As an investor, having the knowledge and education on what options are available to homeowners is only useful if you actually put it to work.