Lenders holding defaulted loans are increasingly choosing to sell them to distressed-debt buyers rather than spend a year or more working through collections and foreclosure, according to H. Jack Miller, founder and president of Gelt Financial. Miller said his firm is now buying several defaulted loans every week, noting that it closed one deal on the day of the interview and expected to close another the following day.
The trend matters because it signals widening stress across credit markets and changes the calculus for borrowers who fall behind. According to Miller, sellers generally fall into two groups: lenders not set up to handle distressed loans and the legal process that accompanies them, and lenders that need their capital back to keep lending. Many had little reason to build that capability during a long period of economic strength. "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.
Miller also cited a human factor. "It’s not fun to foreclose on someone. It’s not fun to be adversarial," he said, adding that managing a default can feel like a different job entirely for a lender whose business is making loans.
The financial case for selling is stark. Miller walked through a hypothetical $500,000 first mortgage at 12% with the borrower paying $5,000 a month, stressing that the figures are illustrative. When the borrower stops paying, the lender loses that $5,000 in monthly income while still owing its own lenders if it borrowed the money it lent out. "So not only don’t they have $5,000 in, they have $5,000 out," Miller said, describing a $10,000 monthly swing. Borrowers in default often stop paying property insurance, forcing the lender to buy force-placed coverage that Miller estimated at around $500 a month, while attorney fees can add another $3,000 to $4,000 a month. Someone must also manage the workout and the asset itself, a position Miller said can cost a lender around $150,000 a year. "So some lenders just say, look, I don’t want to deal with it. It’s not my business. I’m moving on," he said.
For borrowers, a loan sale can be unsettling but is usually good news, Miller said. 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: Gelt contacts the borrower, introduces itself as the new owner and asks whether the two sides can reach an agreement. Miller summarized the message as: "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 resume monthly payments. He described it as a second chance to re-engage, and noted that borrowers who could not reach a deal with their original lender often reach one with the new owner. "Sometimes you just need a fresh face," he said.
Miller said he does not know what tomorrow holds, but based on the deals crossing his desk, the volume of troubled loans for sale is increasing, and the distress is not confined 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 weighing whether to hold or sell, 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.
