When a borrower stops paying, the lender holding that loan faces a choice: spend a year or more on collections and foreclosure, or sell the loan to a buyer that specializes in distressed debt. According to H. Jack Miller, founder and president of Gelt Financial, a growing number of banks and private lenders are choosing to sell. His firm is now buying several defaulted loans every week, a pace that underscores how quickly the calculus is changing for lenders.
Miller explains that most sellers fall into one of two groups: those not set up to handle distressed loans and the legal process that comes with them, and those who need their capital back to keep lending. Many lenders had little reason to build that capability during the long economic expansion. “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 delinquencies are rising, and lenders that once handled an occasional default are seeing them far more often. There is also a human side. “It’s not fun to foreclose on someone. It’s not fun to be adversarial,” he said.
The financial case for selling is compelling. Miller walked through a hypothetical $500,000 first mortgage at 12%, with the borrower paying $5,000 a month. 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 a $10,000 monthly swing. Expenses then pile up: force-placed insurance at around $500 a month, attorney fees of $3,000 to $4,000 a month, and a staff position to manage the workout that can cost around $150,000 a year. “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. Faced with those numbers, many lenders decide to move on.
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, and the distress is not limited to one corner of the market. “It’s across the board,” he 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. The trend suggests that more lenders will opt to sell, reshaping how defaults are resolved and giving borrowers a new counterparty—and potentially a new beginning.
