Real Estate Note Brokering?

It is very lucrative - and highly regulated on federal and state levels. These are secured financial instruments so check laws carefully and get some advice from RE experts, mortgage brokers, layers that specialize in sales of securities, banks that deal with real estate loans, etc.

Certainly not illegal. And most one-off notes or note pools aren't securitized as bonds. So dealing with the SEC isn't necessary unless you are pooling money from strangers to buy these . You wouldn't be seeing any of those bonded RMBS or CMBS note pools anyway as they are traded on wall-street and are VERY large, handled by institutional funds.

These notes are already originated, so you are acting solely as an investor here. Many states have servicing laws though and there are federal and state housing laws that apply depending on if you purchase Non-Owner Occupied vs Owner Occupied residential 1-4units notes. You can hire a licensed servicer in exchange for a portion of the monthly payment.

Owner-Occupied notes are definitely covered under federal lending laws like TILA and RESPA etc... Non-owner occupied notes, including commercial notes aren't generally. Again if you are originating, ie; running credit, qualifying and writing a residential loan you need an NMLS license. When you are purchasing a note after it's been originated you don't, but other laws apply that you should look at.

You will be OK brokering/trading these as long as you provide value and be DIRECT to the seller and buyer. There are many "Brokers" who pile on to these note pools, creating what's called a daisy chain, charging fees getting in the middle etc.. Stay away. Those pools never close. Source your notes directly from banks and hard money lenders. Find legit buyers, who have real money. Charge only 1-2% in arbitrage on the purchase price.

There are notes available in all types.

• Performing Notes are usually a yield play. You purchase at 80-95% of the unpaid balance and collect payments. I've seen performing notes sell at Par or Par+ pricing. Many are newly originated (where there is risk to be managed). Other are performing and seasoned for a long time, where the seller is looking to get out a bit early.
  
  You really want to figure out what the coupon is (the interest rate) and what your actual yield will be with all of your costs. Then decide if your current yield requirements will be hit. Otherwise discount your offer until you hit your "Yield Bogey" or pass on the note.

• Re-Performing Notes are a yield play as well, but with more risk. 75-90% depending on the seasoning of the re-performing payments and other factors like current credit, location, asset value etc.
  
  You purchase these with the idea that you have a buyer who is compliant, but circumstances may hit again and they might go delinquent.

• Scratch and Dent loans are notes that have some piece of key documentation missing or other issue not related to the borrower's payments. They generally have issues that need to be taken care of to remain compliant, like a hard money lender on an OO property who forgot to get a RESPA disclosure signed.
  
  Issue is, if a savvy borrower refuses to sign the disclosure and perhaps decides to report, big trouble for the lender can come down the pike. You ALWAYS want to check the existing documentation and disclosures on owner occupied notes before purchasing. If you miss one and you buy..you take on the liability. Expect to get a discount in the 75-80% range depending on how you leverage the issue in negotiations.

• Non-performing notes run the gamut of delinquency up and through foreclosure. from 30 days through 500 days depending on how the current lender has dealt with it. A whole book could be written on just this type of note.
  
  Non-Performers can generally be purchased for 25%-75% of unpaid balance, depending on many factors including the location and where i the foreclosure timeline the note is.. Much research and know how go into buying this type of asset. You should have a solid foundation on buying paper and real estate, perhaps with performing notes before venturing into buying NPNs.

Why listen to me? My company originates commercial bridge loans for a $30m hedge fund and aggregates deal flow, as well as trades these assets for another, larger, institutional hedge fund. We buy, sell and trade about 25 million+ of these types of assets every quarter. My fund and investor group was also in on a $50m portion of the recent Freddie Mac note sale. I am a licensed RE & NMLS loan originator as well.

Good luck!!

I'm working on my first, in fact.