Investors do not want nonperforming assets in their portfolio. A mortgage where monthly payments are not received is a nonperforming asset. To fully understand a nonperforming asset, consider a typical mortgage:

• 30-year loan (360 monthly payments)

• 6.5 percent interest rate

• $200,000 loan

• Monthly payment: $1,264.14

On this mortgage, the total amount of interest to be collected over the term of the loan is $255,088.98. The borrower would pay a total of $455,088.98 (the original loan amount of $200,000 plus the interest of $255,088.98).

The loan note — an asset to the holder of the note — produces monthly income to its owner. It is an asset so long as the borrower regularly makes those monthly payments.

When the borrower stops making the payments, the loan becomes a nonperforming asset. Not only is the amount loaned at risk, but the expected monthly income is no longer available.

Disposing of Nonperforming Assets

To lenders, the best thing to do is to get rid of this nonperforming asset (commonly referred to as an NPA). Rather than have their money tied up in a loan that is not producing any income, it makes far more sense to foreclose and get their money back. They can then use their money to invest in a performing asset — one that makes money each month.

When a mortgage payment is overdue by several days it is not automatically classified as a nonperforming asset. Payments that have not been paid on time are usually called past due if not received within fifteen days of the due date. After thirty days the loan payment is overdue. Payments not received for ninety or one hundred twenty days usually cause the loan to be identified as a nonperforming asset.

Nonperforming assets are never good for lenders. When income diminishes, stockholders and investors become impatient. Too many nonperforming assets also can attract the attention of government regulators. The sooner the lender can rid itself of a nonperforming asset, the better. When a home loan gets to this stage, the borrower can do little to stop the lender from proceeding.

The Borrower's Options

A borrower can always sell his property, even if his loan is classified as a nonperforming asset or if a foreclosure action has been commenced by the lender.

A loan classified as a nonperforming asset is one that will be closely supervised. The lender will take all steps necessary to do one of the following:

• Get the loan current, changing the loan from a nonperforming asset to a profitable one.

• Rid itself of the nonperforming asset by proceeding with foreclosure.

Remember that lenders make their money from the interest they charge and collect. When a mortgage loan is not performing, the lender is not making any money. And no lender lends money without the intention of making a profit. Once the lender believes the loan is a nonperforming asset, its best option (and probably the one that makes sense) is to foreclose. Once it takes control of the property, the lender can then sell it, freeing up funds that can be reinvested.