When a borrower stops paying, the lender holding that loan has a decision to make. It can spend the next year or more working through collections and foreclosure, or it can sell the loan to a buyer that specializes in distressed debt. A growing number of banks and private lenders are choosing to sell.
H. Jack Miller, founder and president of Gelt Financial, says his firm is now buying several defaulted loans every week. “We just literally closed one today. We’re closing one tomorrow,” he said. He explained why lenders are letting go, what it costs to keep a defaulted loan, and what a sale means for the borrower.
According to Miller, most sellers fall into one of two groups. Some are not set up to handle distressed loans and the legal process that comes with them. Others need their capital back to keep lending.
Many of these lenders have had little reason to build that capability. “The economy was so good for so long. A lot of people just didn’t deal with it. They didn’t have to deal with it,” Miller said. Now delinquencies are rising, and lenders that once handled an occasional default are seeing them far more often.
There is a human side, too. “It’s not fun to foreclose on someone. It’s not fun to be adversarial,” he said. For a lender whose business is making loans, managing a default can feel like a different job entirely.
To show why selling can make financial sense, Miller walked through a hypothetical $500,000 first mortgage at 12%, with the borrower paying $5,000 a month. He stressed that the figures are illustrative and vary by deal.
When the borrower stops paying, the lender loses that $5,000 in monthly income. If the lender borrowed the money it lent out, it still owes its own lenders. “So not only don’t they have $5,000 in, they have $5,000 out,” Miller said, describing it as a $10,000 monthly swing.
Expenses then begin to pile up. Borrowers in default often stop paying property insurance, which forces the lender to buy force-placed coverage. Miller estimated that could run around $500 a month. Attorney fees can add another $3,000 to $4,000 a month.
“One day, they have $5,000 coming in when the loan’s performing. The next day, when the loan doesn’t perform, they can have $7,000, $8,000, $9,000 in expenses every month for a year, year and a half,” Miller said.
A defaulted loan also cannot simply be handed to an attorney and forgotten. Someone has to manage the workout and the asset itself, and Miller said that position alone can cost a lender around $150,000 a year.
“So some lenders just say, look, I don’t want to deal with it. It’s not my business. I’m moving on,” he said.
For a borrower, learning that a loan has been sold can be unsettling. Miller says it is usually good news.
The loan terms do not change. “The new lender can’t change anything. We just have to live with it,” he said. What changes is the relationship. When Gelt buys a loan, it contacts the borrower, introduces itself as the new owner, and asks whether the two sides can reach an agreement.
Miller summed up the message this way: “Forget what happened in the past. Let’s talk the future.” If a borrower is six months behind, the first question is whether they can start making monthly payments again.
He describes it as a second chance for borrowers to re-engage. Borrowers who could not reach a deal with their original lender often reach one with the new owner, sometimes because hard feelings had built up on both sides. “Sometimes you just need a fresh face,” he said.
“Look, I don’t know what’s going to be tomorrow,” Miller said. But based on the deals crossing his desk today, he says the volume of troubled loans for sale is increasing.
The distress is not limited to one corner of the market. “It’s across the board,” Miller said, pointing to rising delinquencies in commercial and residential loans alike.
Buying non-performing debt from banks and non-bank lenders has been part of Gelt’s business since its early years. For lenders deciding whether to hold a troubled loan or sell it, Miller’s example offers a practical starting point: add up the lost income, insurance, legal fees, and staff time, knowing those costs may run for 12 to 18 months.
About Gelt Financial
Gelt Financial LLC is a national private lender and distressed debt buyer with over 37 years of experience across commercial and investment real estate. Operating in 37 states, the company provides bridge financing, foreclosure bailout loans, and non-performing loan acquisitions for real estate investors, operators, and institutions.
Disclaimer: This article is based on information provided by the expert source cited above. It is intended for general informational purposes only and does not constitute legal, financial, or real estate advice. Readers should conduct their own research and consult qualified professionals before making any real estate or financial decisions.
Disclosure: Individuals or companies mentioned may have a commercial relationship with KeyCrew.
Comments
No comments on this item Please log in to comment by clicking here