What it means
When a borrower falls behind on a mortgage, the loan becomes delinquent, and the lender may begin the process of repossessing the property. In many cases, the lender prefers to agree a new arrangement, such as a lower interest rate or a longer repayment period.
If the borrower then starts to pay again, the loan is said to be reperforming. A reperforming loan sits between a healthy loan and a non-performing one.
The borrower is paying, so it produces income, but the earlier problems suggest a higher chance of falling behind again. Investors and rating agencies therefore treat reperforming loans as riskier than loans that never had trouble.
These loans are often sold in pools by banks that want to clean up their balance sheets, and bought by specialist funds. Because of the extra risk, the pools are priced below the unpaid balance, which creates the opportunity for a return.
A buyer might pay 85 cents per dollar of balance and hope to collect most of the payments. The key question is how long the loan keeps performing.
Analysts study the length of time since the modification, the borrower's payment record, the loan-to-value ratio and the state of the local housing market. A loan that has paid on time for two years is generally viewed as safer than one that resumed payments last month.
Banks must also decide how to classify and provision for reperforming loans in their accounts. Rules vary, but many require a probation period of timely payments before a loan can be treated as fully healthy again.
Finance teams should follow the guidance of their regulator and auditors. Servicing quality has a large effect on results.
A specialist servicer that contacts borrowers early, explains options and offers fair modifications can keep more loans paying than one that simply sends reminder letters. Buyers of reperforming pools therefore examine the servicer's track record as carefully as the loans themselves.
In practice
Real-world examples.
Example
A bank has a mortgage customer who lost his job and missed six payments. After the bank reduced his interest rate and extended the term, he found new work and has paid on time for 18 months. The bank now reports the loan as reperforming.
Example
An investment fund buys a pool of 1,000 reperforming mortgages with an unpaid balance of $150,000,000 for $127,500,000, or 85 cents on the dollar. The fund's analysts estimate that 85% of loans will keep paying. They calculate the expected return based on monthly payments and the value of homes behind the loans.
Example
A rating agency reviews a bond backed by reperforming loans. It examines how long each loan has been current and assigns a lower rating than for a similar bond backed by loans that were never delinquent. Investors in the bond require a higher yield as a result.
Formula
Calculation
Reperformance rate = Loans still paying after a set period / Loans modified
Re-default rate = 1 - Reperformance rate
Suppose a lender modifies 500 delinquent mortgages. Twelve months later, 400 of them are still making payments. Reperformance rate = 400 / 500 = 80%. Re-default rate = 1 - 0.80 = 20%, which means 100 of the loans fell behind again.Case study
Seen in the real world.
Bridgeport Capital is an illustrative, fictional fund that bought a pool of reperforming mortgages with a face value of $80,000,000. The fund paid 88% of face value, or $70,400,000, expecting steady payments from borrowers who had recovered from earlier difficulties.
In the first year, 92% of the loans kept paying and the fund received the expected cash flows. A regional job loss in the second year led to a rise in missed payments, and 15% of the loans fell behind again.
The fund worked with servicers to offer second modifications and avoided most foreclosures. The illustrative lesson was that reperforming loans can deliver good returns, but they remain sensitive to local economic shocks.
Watch out
Common mistakes.
- Treating a reperforming loan as equivalent to a loan that has never missed a payment.
- Ignoring the length of time since the modification, which is a strong indicator of the chance of future default.
- Assuming the property value backs the loan fully, when house prices may have fallen since the loan was made.
Questions
People also ask.
What is the difference between a reperforming and a non-performing loan?
A reperforming loan is paying again, while a non-performing loan is in default or seriously overdue.
Why do investors buy reperforming loans?
They are usually sold at a discount to their balance, which can produce a good return if most borrowers keep paying.
How long does a loan stay labelled as reperforming?
There is no single rule, but lenders and regulators often require a period of consistent payments before it is treated as fully performing.
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