I want to explain what we mean when we talk about Notes.

Basically, a note is simply a promise by one party repay a debt to another party. If you’ve ever financed the purchase of a car, you’ve created a note. If you’ve ever written a check, you’ve created a note. In fact, if you look at a $1 bill in your wallet you’ll notice it says, “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE”.

When we talk about notes, we are referring to the loan a borrower takes out to purchase real estate, typically a single-family residence or SFR. However, when we talk about notes in this context, we’re really talking about multiple legal instruments. First, there is the promissory note that a borrower signs stating that they will pay money to the lender on specific terms (e.g. payment amount, payment schedule, and interest rate). Second, there is a document that pledges a specific piece of real estate as collateral securing the promissory note. In some states, this would be a “Mortgage”, in other States this is a “Deed of Trust”. Please feel free to Google “Mortgage vs Deed of Trust” if you want more information on what differentiates the two. The important thing to understand is that the notes we are referring to are “secured”, meaning that they are bound to a piece of real estate. In the event that the borrower does not fulfill the terms of the loan, the property may ultimately be sold in order to repay the debt.

Notes are negotiable instruments, meaning they can be sold by the originator of the loan (often a bank) to another bank, investment fund, or investor. Once the ownership of the note has changed hands, the payments from the borrower would then go to the new owner of the note.

If the borrower is paying their loan consistently and on time, we call this a “Performing Note” or a “Performing Loan”.

If the borrower, for whatever reason, is not paying on the loan, this note is called a “Non-Performing Note” or “NPL” (Non-Performing Loan).

Therefore in the “Note Business”, notes can be separated into two different columns: Performing Notes and Non-Performing Notes.

Commonly, a borrower who had not been making their loan payments will start paying again due to an improved economic situation in their life, or following a modification of the terms of the loan by the lender. This would then be called a “re-performing note”. In this case, the note would move from the “Non-Performing Note” column over to the “Performing Note” column.