As delinquencies climb across commercial and residential real estate, a growing number of banks and private lenders are choosing to sell their defaulted loans rather than navigate the lengthy and costly foreclosure process. 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.
Miller explained that sellers typically fall into two categories: those not equipped to handle distressed loans and the legal process that accompanies them, and those who need their capital back to continue lending. “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, lenders that once handled an occasional default are seeing them far more often. There is also a human element. “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 illustrate 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, forcing the lender to buy force-placed coverage, which Miller estimated 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 borrowers, learning that a loan has been sold can be unsettling, but 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.
Looking ahead, Miller 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.
