Episode 32: Identifying Strong Re-performance Candidates

Most note investors chase discounts — but the real money is hidden in borrower behavior.

In this episode, we unpack how to spot the deals that actually turn into cash flow.

🔍 What you’ll learn:
 ✅ Why second liens behind a current first mortgage signal “emotional equity” and high workout odds
 ✅ How pay strings (like 12 straight “1s” or rolling 30s) reveal discipline vs. distress
 ✅ Why rising FICO trends expose borrowers already recovering—and ready to reperform
 ✅ How small balances and the “1% payment rule” quietly boost modification success rates
 ✅ How speed to respond, equity, and life events create “layup payoffs” hiding in plain sight

This program is for informational purposes only and should be independently verified before taking action.

Transcript

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Welcome to the show, where you'll learn how to invest in mortgage notes, the savvy real estate investor's secret weapon to create cash flow without tenants and property acquisitions for pennies on the dollar. My name is Robert Haitha, founder of Fix Notes, and my mission is to make note investing ethical, profitable, and accessible for you. In every episode, we're democratizing the industry to put these powerful Wall Street assets into the hands of mainstream investors like you. So without further ado, let's get into this show where you're in good hands with my AI clone. Let's go. This program is for informational purposes only and should be independently verified before taking action. When you are sorting through a mortgage note tape, you are essentially looking for a diamond in the rough. You want to find that specific account where the borrower has hit a rough patch but is ready and able to get back on track. In our world, we call these strong reperformance candidates. These are the notes that have the highest probability of turning from a non-performing headache into a consistent monthly cash flow stream. The absolute gold standard for a reperformance candidate is what we call a second position loan behind a current senior lien with positive equity and an owner-occupied property. If you remember nothing else, remember that trifecta. When the borrower is living in the home and making that first mortgage payment every single month on time, they are telling you everything you need to know about their intentions. We call this emotional equity. Even if the house is worth slightly less than what they owe on paper, if they are protecting that first mortgage, they are much more likely to work out a modification agreement with you to save the home from a second lien foreclosure. You can verify this by looking at the pay string on the credit report. You are looking for a long string of ones on the senior trade line. Twelve ones in a row means they haven't missed a single payment on that first mortgage in a year. That is a disciplined borrower who values their roof. On the other hand, look for patterns like a rolling 30. This is where you see a string of twos month after month. It means the borrower is struggling, but they have a habit of making a payment every single month. They just cannot seem to catch up on that one month they missed a long time ago. These are some of the best candidates for a resolution because you know they have the income to sustain a payment, they just need a small concession, like for giving some arrears to get back to current status. Another indicator is the FICO score trend. If a borrower had a 500 credit score two years ago when they defaulted, but it has climbed up to 650 today, that is a massive signal. It tells you their financial hardship is in the rearview mirror and they are actively rebuilding their life. That borrower is often just one phone call away from a successful loan modification. We also look at the unpaid principal balance. Sometimes small balance accounts are the easiest to get reperforming. If a borrower owes only$10,000 or$15,000, the threshold to get them into a plan is much lower. A payment of$150 or$200 a month is often very manageable for someone who is back at work. In these cases, we often use a rule of thumb for amortization where we target a payment of about 1% of the principal balance. So for a$20,000 loan, we aim for$200 a month. If the borrower can afford that, you have a very high likelihood of success. The mindset of the borrower is also a factor we score. We actually look at the speed to respond. If a borrower gets our initial letter and calls in within the first 48 hours, they are a high probability candidate. These proactive individuals are often relieved to finally have a single point of contact instead of a giant bank call center. That they want to settle the debt because it has been hanging over their head for years. When they are motivated and communicative, we can often skip the expensive legal process and go straight to a modification. When you do find these candidates, the way you structure the deal is key to keeping them on track. We write our modifications at a slightly higher interest rate, usually around 9.9%, to account for the risk. But here is the secret: we never charge a prepayment penalty. That we explain to the borrower that our goal is to help them get back on track for 6 to 12 months, so they can then go to a traditional bank and refinance at a lower rate. This aligns our interests perfectly. They want a lower rate, and we want a lump sum payoff so we can go buy more notes. One last thing to look for is what we call a layup payoff. This happens when there is so much equity in the home that the borrower or their heirs are essentially forced to pay you off when the property is sold. That's if you find a note on a deceased borrower's home where there is$200,000 of equity and your note is only$20,000, that is a strong candidate for reperformance or a full payoff because the heirs are going to want to capture that equity. Identifying these strong candidates early in your due diligence allows you to bid more aggressively on the winners and ignore the junk. It turns note investing from a guessing game into a methodical wealth-building strategy. Now that you know how to find the best deals in the pile, you need to know how to actually make an offer without losing your shirt. Next time, we are diving into creating a no-risk bid. Thanks for sticking around to the end and thank you to my trusty Robot and the Fix Notes team for putting together another episode. If you want to learn more and hang out with the real, not AI version of me, join our free school community at school.com slash fixed notes. That's s k o L dot com slash F I X N O T E S. In the meantime, we'll see you in the next episode.