Any loan a bank or other institution makes is associated with a “mortgage note” which is essentially a promissory note or contract stating that the borrower is to pay a specified sum of money at a specified interest rate over a specified period of time. Banks and other institutions can sell these “notes” individually or in bundles to investors.
The notes can be “performing” when the home owner is up to date on their mortgage payments, or “non-performing” when they are not. Performing notes are typically sold for the value of the loan balance or a small amount less. Non-performing notes are typically sold at a greater discount to the actual loan balance and at an even greater discount to the original purchase price of the property.
When they are performing they provide a regular, fixed, totally passive income every month. When they are non-performing, investors can negotiate with the borrowers to try to get them to start making payments again – perhaps the borrower had employment issues but is able to pay the mortgage going forward if the back owed payments are forgiven, perhaps the borrower had their hours cut at work and can keep paying the mortgage but only at a reduced monthly repayment, or perhaps some other kind of arrangement can be agreed. Mortgage note investors can provide flexibility the banks cannot and can receive a great profit for their efforts. They also have the ability to initiate foreclosure on the properties if they cannot come to an agreement. In fact, many investors specifically look for notes that they can foreclose on and take physical possession of the property.