Part 7 of 15 · The Scratch & Dent Strategy
Targeting Tier 2 and Tier 3 Banks
If S&D loans are so profitable, where do you actually find them? The secret is knowing who is motivated to sell.
Bypassing the Retail Market
You will never find a Scratch and Dent mortgage on Zillow or the MLS. You must bypass the retail market entirely and go straight to the source. Calling JPMorgan Chase, Bank of America, or Wells Fargo is a waste of time — the mega-banks have balance sheets so vast that a few million in defective loans don’t move the needle. They bundle them into $500M tranches for hedge funds.
The Sweet Spot: Tier 2 and Tier 3
| Institution Type | Characteristics | Motivation Level |
|---|---|---|
| Regional Banks | $1B–$10B in assets. Rely heavily on secondary market sales to maintain liquidity. | High. Quarter-end balance sheet cleanup drives sales. |
| Large Credit Unions | Member-focused. Strict regulatory capital reserves. Cannot afford to hold non-conforming paper. | Very High. Regulatory compliance forces rapid liquidation. |
| Independent Mortgage Originators | Non-bank lenders that originate solely to sell. Rely on warehouse lines of credit. | Extreme. Must clear warehouse lines to originate new loans. |
These mid-sized institutions lack the vast balance sheets of the mega-banks. When a loan fails to sell, it actively hurts their operational capacity. They are highly motivated to liquidate quickly, quietly, and at a discount.