Conventional Mortgage

A conventional mortgage is any residential home loan that is not insured or guaranteed by a federal government agency — meaning it carries no backing from the FHA, VA, or USDA. The lender (and any subsequent note holder) bears the full credit risk of the loan. Conventional loans make up roughly two-thirds of all U.S. mortgage originations and represent the broadest category in residential lending, encompassing everything from prime conforming loans sold to Fannie Mae to non-conforming jumbo loans and private-lender originations.

Conventional vs. Government-Backed Loans

The defining characteristic of a conventional loan is the absence of government insurance or guarantees. This has significant implications for how the loan is originated, serviced, and — most importantly for note investors — resolved when it goes into default.

For a note investor, the critical difference is in workout flexibility. With a conventional non-performing loan, you negotiate directly with the borrower. There is no government agency dictating the loss mitigation waterfall, no mandatory waiting periods before foreclosure, and no agency approval required for a loan modification or discounted payoff. This flexibility generally makes conventional NPLs faster and simpler to resolve.

Conventional Loans in the Note Market

Conventional mortgage notes are the most common asset type in secondary note trading. They appear across the full performance spectrum:

• Performing loans — Conventional performing notes trade at or near par value when the borrower has a strong payment history. Investors buying these are typically seeking yield from the interest rate spread rather than distressed-asset returns.
• Re-performing loans — A conventional loan that defaulted and was subsequently modified or reinstated. These trade at a discount to UPB because of the elevated re-default risk, but at a premium to NPLs because the borrower is currently paying.
• Non-performing loans — The largest segment of the secondary market. Conventional NPLs trade between 30% and 70% of UPB depending on equity, lien position, state foreclosure timelines, and borrower circumstances.

Private Mortgage Insurance and Its Impact

When a conventional loan is originated with a loan-to-value ratio above 80%, the borrower typically must carry private mortgage insurance (PMI). PMI protects the lender — not the borrower — against loss in the event of default.

For note investors, PMI status matters during due diligence:

• Active PMI policy — If the original PMI policy is still in force and you acquire the note, you may be able to file a claim after foreclosure. PMI claims can recover a portion of the loss, but the claims process is complex and policies have strict notification and timeline requirements.
• Cancelled or lapsed PMI — Most PMI policies are cancelled once the borrower reaches 78% LTV through amortization or when the borrower requests cancellation at 80% LTV. On seasoned NPLs, PMI has almost always lapsed or been cancelled due to non-payment of premiums.
• Impact on pricing — The presence or absence of a viable PMI claim can shift the value of a note by several points. If a claim is available, the investor's downside is partially protected, justifying a higher bid.

Why Conventional Notes Dominate Secondary Trading

Government-backed loans are harder to trade because each agency imposes its own rules on who can hold the note, how it must be serviced, and what resolution strategies are permitted. Conventional notes carry no such restrictions. Any investor — individual, LLC, fund — can purchase and hold a conventional mortgage note. The servicer does not need agency approval to execute a workout, short sale, or deed-in-lieu. This operational simplicity, combined with the sheer volume of conventional originations, makes conventional notes the backbone of the secondary mortgage note market.

When evaluating any note for purchase, confirming that it is a conventional loan — and not a government-insured loan that was improperly transferred — is a basic but essential step in collateral file review. Government-backed notes that end up in private hands without proper agency approval can create enforcement and servicing complications that erode the investment's value.