Investor Education
10 Lessons Learned From Buying Defaulted Mortgages
What happens to a home loan after the payments stop, who buys it and why the homeowner’s equity matters so much.
We have spent nearly two decades buying mortgages after the borrower has stopped paying. Most people assume a home loan stays with the bank that made it until the house is sold or the loan is paid off. When a borrower falls behind, though, the loan often changes hands, and what happens next looks very different from the foreclosure stories most people picture. Here is what we have learned working in this corner of the mortgage market.
Prefer to Watch?See Our Full Fund Overview VideoHear us walk through how defaulted loans are bought, priced and resolved.Watch the Video ↓
The 10 Lessons
- 1Big Lenders Would Rather Sell Than Foreclose
- 2We Buy in Pools, Then Work Loan by Loan
- 3Equity Can Matter More Than a Credit Score
- 4Measure the Gap Between Loan and Home Value
- 5Record Home Equity Changes the Math
- 6Keeping the Homeowner Home Comes First
- 7Equity Gives Borrowers More Options
- 8Foreclosure Is the Last Resort, for Good Reason
- 9Today’s Defaults Look Different From the Last Cycle
- 10A Defaulted Loan Can Perform Again
1Big Lenders Would Rather Sell Than Foreclose
When borrowers fall behind, banks, government-sponsored enterprises and other large holders of mortgages often sell those loans rather than work them out themselves. In our experience, the main reason is regulatory overhead. A mistake in the foreclosure process can bring liability, litigation and public scrutiny, so many large institutions would rather sell these loans into the market, where specialized operators can give each one hands-on attention.
Who Sells Defaulted Mortgages
2We Buy in Pools, Then Work Loan by Loan
Defaulted loans are usually sold in pools, so the buyers tend to be firms like ours that are built to buy in bulk. Before we buy, we do the diligence on every loan and the property behind it. After we buy, it takes policies, procedures and servicing relationships to work with each borrower one at a time, which is a very different job from making new loans.
3Equity Can Matter More Than a Credit Score
A credit score helps predict whether a borrower will fall behind. Once a loan has already defaulted, the question we care about is how much could be lost. Lenders call that loss given default, and the homeowner’s equity, the gap between what the home is worth and what is owed, is a large part of the answer. The more equity there is, the more room there is to resolve the loan without a loss, which is why equity is where our review starts.
Lifetime Loss Rate by Equity and Credit Score
| LTV / FICO | <580 | 580–619 | 620–659 | 660–719 | 720+ |
|---|---|---|---|---|---|
| ≤40% | 0.14% | 0.09% | 0.04% | 0.01% | 0.00% |
| 41–60% | 0.25% | 0.13% | 0.08% | 0.03% | 0.01% |
| 61–80% | 0.62% | 0.36% | 0.17% | 0.08% | 0.02% |
| 81–90% | 1.10% | 0.83% | 0.50% | 0.21% | 0.07% |
| >90% | 2.34% | 2.00% | 1.50% | 0.77% | 0.37% |
Hover or tap a square to read it.
Outlined: the weakest credit with the most equity lost 0.14%; the best credit with the least equity lost 0.37%. Gross lifetime loss rate, loans originated 2011 to 2016. LTV (loan-to-value) is the loan balance as a share of the home’s value. Source: Freddie Mac Single-Family Loan-Level Dataset.
“Equity cushion matters much more than FICO score.”
Taylor Nelson, Director of NPL Investments4Measure the Gap Between Loan and Home Value
Because a defaulted loan comes with missed payments, legal costs and an uncertain timeline, it trades below the value of the home behind it. A loan might be bought for $300,000, for example, on a house worth $500,000. That gap varies from loan to loan, and measuring it is a central part of our underwriting.
5Record Home Equity Changes the Math
American homeowners have more equity in their homes than at any point in the Federal Reserve’s records, which go back to 1945. Owners’ equity in household real estate reached about $35.8 trillion in the second quarter of 2026, nearly double its level at the start of 2020.1 For the loans we buy, that equity is what gives the borrower and us room to find a solution.
Owners’ Equity in Household Real Estate
Hover or tap the line to see each quarter. Quarterly, 2000 to Q2 2026, not adjusted for inflation. Source: Board of Governors of the Federal Reserve System, via FRED (series OEHRENWBSHNO).
6Keeping the Homeowner Home Comes First
Foreclosure is rarely our first choice. Our first step is to work with the borrower on a solution, such as a loan modification, which changes the terms of the loan so the payment becomes affordable.2 Servicers call these efforts loss mitigation.3 Keeping more homeowners in their homes is ultimately the goal.
Questions about how we work with borrowers? Our Investor Relations team is happy to walk you through it.
Connect With Investor Relations7Equity Gives Borrowers More Options
A homeowner with equity has choices that an underwater homeowner does not. They may be able to refinance, agree to a modification, or sell the home and keep the difference. When a home is worth less than the loan, those doors close, and selling may only be possible as a short sale, where the lender agrees to accept less than is owed.4
Common Paths After a Borrower Falls Behind
Simplified. Other options such as repayment plans, short sales and deeds in lieu of foreclosure also exist. A HUD-approved housing counselor can explain them.
8Foreclosure Is the Last Resort, for Good Reason
Foreclosure takes time and money for everyone involved, from legal fees and property upkeep to months of uncertainty for the family in the home. That is a big part of why both sides usually have a reason to find another path.
“Foreclosure process is long and expensive. So if we can figure out a way to avoid that, it’s a win-win and both sides come out better.”
Taylor Nelson, Director of NPL Investments9Today’s Defaults Look Different From the Last Cycle
After the 2008 housing crash, many defaulted loans were underwater, meaning the borrower owed more than the home was worth. Owners’ equity in household real estate fell to about $8.3 trillion in early 2012, less than a quarter of today’s level.1 Before COVID, we often saw homes worth around $400,000 with $500,000 still owed. With no equity to protect, borrowers had little reason to work out a solution, and foreclosure was often the only way forward.
Then vs. Now, an Illustration
Before COVID, many defaulted loans were underwater
Owes more than the home is worth
Today, equity sits behind the loan
The home is worth well more than the loan
Illustrative figures, not data from a specific loan.
10A Defaulted Loan Can Perform Again
A loan that has stopped paying is called non-performing. If the borrower catches up through a repayment plan or a modification and starts making regular payments again, the loan is often described as reperforming. For the homeowner, that means staying in the home on terms they can afford. For us, it means a steady payment stream instead of a costly foreclosure.
Commonly Asked Questions
What Is a Non-Performing Loan?
A non-performing loan is one where the borrower has stopped making the scheduled payments for an extended period. In mortgages, it usually refers to a home loan that is seriously past due.
Who Owns My Mortgage?
The company that collects your payment, called the servicer, is not always the company that owns your loan. Loans can be sold, and when ownership or servicing changes, the borrower is notified.
Does Selling a Loan Change the Borrower’s Rights?
A loan’s terms and the borrower’s legal protections do not go away when the loan is sold. If you are a homeowner having trouble paying, a HUD-approved housing counselor can help you understand your options.
What Is Loss Given Default?
It is the share of a loan’s value that is lost if the loan defaults and has to be resolved. A homeowner’s equity is one of the biggest factors in how large or small that loss is.
What Is a Loan Modification?
A loan modification is a change to the terms of a mortgage, such as a longer repayment period, a lower interest rate or a reduced principal balance, meant to make the payment affordable.2
Watch the Fund Overview
See the Full Conversation
This article grew out of our recent fund overview conversation. Watch the full video to hear us talk through how defaulted loans are bought, priced and resolved.
Watch the Fund Overview Video
Want to walk through how mortgage notes work? Our Investor Relations team is happy to answer your questions.
Speak With Investor RelationsSources
1. Board of Governors of the Federal Reserve System, Households and Nonprofit Organizations; Owners’ Equity in Real Estate, Level (OEHRENWBSHNO), retrieved from FRED, Federal Reserve Bank of St. Louis, November 2, 2026. fred.stlouisfed.org/series/OEHRENWBSHNO
2. Consumer Financial Protection Bureau, “What is a mortgage loan modification?” consumerfinance.gov/ask-cfpb/what-is-a-mortgage-loan-modification-en-269/
3. Consumer Financial Protection Bureau, “I got a letter from my mortgage servicer about my application for help to prevent foreclosure of my mortgage. Can you help me understand some of the terms?” (loss mitigation). consumerfinance.gov/ask-cfpb/
4. Consumer Financial Protection Bureau, “What is a short sale?” consumerfinance.gov/ask-cfpb/what-is-a-short-sale-en-290/
Pull quotes are from our October 2026 fund overview conversation.
