Most people know reverse mortgages as the loan seniors take out to tap home equity without selling the house. What most people don't know is that those loans get bought, sold, packaged, and traded — just like any other mortgage. And when they go bad, they end up on the same secondary market where non-performing note investors hunt for deals.

HECM notes are a different animal. Different default triggers. Different government backstop. Different exit strategy. If you're going to buy one, you need to understand what you're actually buying — and that starts with knowing what makes these loans tick.

What Is a HECM (Reverse Mortgage) Note?

A HECM — Home Equity Conversion Mortgage — is the federally-insured version of a reverse mortgage. It's the most common type by a wide margin, and it's the one you'll actually see traded in the note market.

The mechanics are simple: a homeowner age 62 or older borrows against the equity in their home. Instead of making monthly payments to the lender, the lender pays them — as a lump sum, monthly draws, a line of credit, or some combination. The loan balance grows over time as interest and fees accrue. It doesn't come due until a maturity event — more on that in a minute.

Under the hood, though, a HECM is still a mortgage. There's a note. There's a lien on the property. There's a servicer collecting (or, in this case, disbursing) money. And when things go sideways, the loan can be sold to a third party — which is where investors like us come in.

Two Flavors of HECM Notes on the Market

The non-performing side is where retail note investors typically play. Not because the loans are cheap — they're not — but because the underwriting is fundamentally different from a traditional NPN.

How HECM Loans Enter the Note Market

Here's the path a HECM takes from origination to your inbox:

  1. Origination. A HUD-approved lender writes the loan. FHA insures it.
  2. Securitization or servicing transfer. Most HECMs get bundled into Ginnie Mae HMBS (HECM-Backed Securities) or sold to specialty servicers. This is invisible to the borrower.
  3. Maturity event. Borrower dies, moves out permanently, or defaults on property charges. Loan becomes due and payable.
  4. Assignment or claim decision. The servicer decides whether to assign the loan back to HUD (if the balance has hit 98% of the Maximum Claim Amount) or to work the loan themselves and file a claim later.
  5. Secondary market sale. If the servicer keeps the loan, they'll often try to sell it off to avoid the cost of foreclosure. That's when the note shows up on marketplaces like PaperStac.

The takeaway: when you see a HECM listed for sale, it's usually there because the current holder decided foreclosing themselves wasn't worth the time and staff. They'd rather take a discount and let someone else finish the job. That someone else is you.

Why HECM Notes Go Non-Performing

This is where HECM investing diverges from traditional NPN investing in a big way. On a normal mortgage, non-performing means one thing: the borrower stopped making payments. On a HECM, the borrower never made payments in the first place. So what triggers default?

Per HUD and the CFPB, there are three main things a HECM borrower has to do to keep the loan in good standing:

Miss any of those, and the loan can be called due. But even when the borrower is doing everything right, the loan still eventually matures. That's baked in by design.

The Maturity Events That Actually Matter

The most common non-performing HECM you'll see for sale is the first one: the borrower has passed away, the home sits vacant, and the heirs either can't or won't settle up. The property is often in decent shape (or was until recently), the title is generally intact, and the servicer just wants out.

This is fundamentally different from a traditional NPN, where you're often dealing with a living borrower, potential loss mitigation, and the emotional messiness of foreclosing on someone's home. HECM defaults tend to be cleaner. Sadder in origin, but cleaner mechanically.

The HUD Piece: What Government Backing Does and Doesn't Cover

This is the part people get wrong most often — including me, when I first started looking at these deals. HECMs are FHA-insured, which means HUD stands behind them. But that insurance isn't a magic guarantee for the buyer of the note. It's insurance for the original lender.

Here's what HUD's insurance actually does:

Here's what HUD's insurance does not do:

What the FHA piece really means for you as a note buyer is that the underlying loan is well-documented and originated to a federal standard. HECMs go through mandatory HUD counseling. There's a paper trail. That's real value, but it's not the same as HUD backstopping your investment. Never confuse the two.

The Investor Angle: Where the Opportunity Lives

So why would a note investor look at a HECM at all? The math — when it works — has a few things going for it that a traditional NPN doesn't.

1. The Exit Is Usually the Property

On a standard NPN, you have multiple exits: workout, re-performing sale, DPO, foreclosure to REO. On a HECM, especially one where the borrower has passed, the exit is almost always foreclose → take the property → sell it. There's no borrower to negotiate with. Heirs typically walk away because the loan balance exceeds the home's value.

That means your underwriting collapses down to one question: what's the property worth, and what will it cost me to get there? If you can answer that, you can price the note. If you can't, you shouldn't be bidding.

2. Vacancy Is Often Baked In

Most non-performing HECMs are already vacant. That's a double-edged sword. On one hand, no borrower to evict, no cash-for-keys negotiation, no drama. On the other, vacant properties get vandalized, weathered, and stripped. Your holding costs — insurance, taxes, winterization, maintenance — start ticking the day you close.

3. The Discount Reflects the Complexity

HECMs often list at meaningful discounts to UPB, but that's not a gift. It reflects several things the seller is pricing in: the loan may be underwater (balance exceeds home value), foreclosure takes time and money, and most retail note investors aren't set up to work these deals. The discount is compensation for complexity — not a free lunch.

Where the real opportunity lives isn't in the discount itself. It's in the gap between what a spreadsheet-only buyer thinks the deal is worth and what an operator who understands the exit can actually execute on. That's the same edge that exists in any note market. HECMs just have a different set of variables.

Due Diligence: What's Different About Underwriting a HECM

You still do all the standard note DD: read the tape, order a BPO, pull title, verify the collateral file. But HECMs add a specific set of checks you won't run on a traditional note.

Extra Checks Specific to HECM Notes

Timeline Reality

Don't build your model around a fast foreclosure. Every state runs its own process, and even non-judicial states can slow to a crawl if title issues emerge or heirs surface late. Assume the timeline the seller gives you is optimistic, add a cushion, and run your math on the conservative version. If the deal still pencils, it's a deal. If it only works on the seller's timeline, it isn't.

Is HECM Note Investing Right for You?

Here's the honest answer: HECMs are not a starter asset class.

If you're new to note investing, start with performing seconds or a straightforward first-lien NPN where you can practice the mechanics without also learning HUD program rules on top. There's a reason we cover the basics first — like what non-performing note investing actually is and how exits work — before we get into the specialty stuff.

Where HECMs make sense is when you have:

The upside is real. HECMs are one of the few corners of the note market where a solo operator with the right skill set can compete with institutional buyers — because most institutions don't want to do the property work on the back end. If you like the operator side of the game, this is where that shows up.

Just don't romanticize the discount. The discount is there for a reason. Do the work, underwrite like you're going to have to live with the deal, and remember that HUD isn't your safety net — your bid is.

AJ Dent is the founder of Take Notes Capital, a mortgage note investing firm specializing in non-performing notes. Book a free strategy call.