Why Are Notes Discounted?
They are discounted for a variety of reasons, such as performance, borrower status, and property value, condition, and status. Banks do not have the personnel to attend to and process defaulted notes resulting from interest rates on mortgage loans adjusting, natural disasters, fraudulent loans, unqualified buyers, housing price declines, and personal catastrophic losses to the borrower. Banks are in the business of lending money. They can lend out approximately 10 times the amount on a performing mortgage loan balance, depending on the institution’s financial strength. For example, a non-performing mortgage with a balance of $250,000 results in a lost lending opportunity to the bank of up to $2,500,000. Due to this regulatory requirement, economics prove that a discounted note today will reap far greater returns for the bank tomorrow by allowing it to put money back into loan circulation sooner rather than later. This is known as the Time Value of Money (TVM).