The repayment; by the property owner, of a loan in an amount that is less than the principal balance outstanding.
A Discounted Payoff, sometimes called a DPO, is one of the loss mitigations available for resolving a defaulted mortgage debt. It is the same process as a short Sale, but with a DPO, the property is allowed to keep the property. The property owner does not necessarily have to be in default for a DPO, BUT the property need to be significantly negative equity, i.e. the real estate has to have declined significantly in value, resulting in the outstanding loan amount being greater than the amount owed the lender. refinanced.
Because writing down part of a loan, and the property owner keeping the property results in a financial blow to the lender, lenders will only consider a discounted payoffs if other loss mitigations efforts have been exhausted.
A lender may resort to a DPO if the borrower does not have the capacity to capitalize (cure) the debt, order to refinance, and if a foreclosure sale would not result in full recovery of the outstanding loan amount.
Once the DPO has been negotiated by Mortgage Fixers® on behalf of a borrower, the borrower has to provide the money to pay off the loan.
Since it is generally unlikely that a new lender will finance a payoff on which the previous lender took a loss, the borrower will have to –come up with All Cash, lock-stock-and barrel, or qualify for our Interim Financing, –Bridge Loan– loan until their credit and financial profile allows for more institutional and conventional financing.
The discounted payoff amount will form the new cost base for the property. Mortgage Fixers® may require the property owner to pay a portion to the negotiated discount amount or our Bridge Loan may require the borrower to provide a substantial monthly equity injection into the property, to have a sufficient equity cushion and margin of safety.
For example, assume a $10 million building was financed with $7.5 million in debt and $2.5 million in equity. After five years, because real estate prices have slumped, the building is now worth only $6.5 million, while the principal amount outstanding on the loan is $7 million. The buyer therefore is “underwater” on the property to the extent of $0.5 million.
The borrower is unable to refinance the full $7 million principal amount outstanding. The lender decides that due to the soft property market, the best option available to minimize its loss is to go for a discounted payoff. The DPO is therefore established at $6.5 million. The borrower then raises the $6.5 million by injecting $0.5 million as its equity contribution, raising $2.5 million from other equity investors, and obtaining a bridge loan of $3.5 million. This amount of $6.5 million is then used by the borrower to pay off the DPO amount to the original lender.