The Coronavirus has tossed our economy in the blender and has yet to turn it off. While we can’t be sure where the economy will head once our proverbial economic-smoothie is out of the blender, we can take a look at current and past trends that provide clues to taking informed real estate investment action. We can also see what some of the experts are saying about the post-pandemic real estate market with a special focus on real estate secured notes.
My engineer side will present data to show actual numbers while the River Guide side of me will interpret the data so that anyone can understand.
Let’s jump in.
1: Unemployment – How Many People Are Struggling?
When someone isn’t receiving a paycheck, they likely are struggling to pay their mortgage. With that in mind, it is helpful to look at unemployment to gauge how many people may not be paying their mortgages but also may want to try their hardest to start again.
Job loss numbers during the 2020 pandemic confound economists. With an initial sharp increase of job loss for 20.5 million people in April 2020, the number of unemployed has sharply declined over the course of 20201. In December 2020, the number of unemployed was only 10.7 million.
While that’s nearly a 50% decrease in the number of unemployed, there are still twice as many people out of work as compared to pre-pandemic conditions.
10.7 million people out of work heading into 2021 is no small number. These numbers don’t speak to the loss incurred by those who spent months without paychecks in 2020, or who are now underemployed and just trying to make ends meet.
Consider some of these other numbers reported by the Bureau of Labor Statistics December 2020 Report2. Keep in mind that many of them are also trying to pay a mortgage.
- 2.3 million more people are still “temporarily laid off” than pre-pandmic numbers (better chance of returning to the previous job)
- 2.8 million more people are “long-term unemployed” than pre-pandemic numbers (jobs may not come back)
- 45% increase in the number of people working part-time who would prefer to work full-time (taking what they can get to make ends meet)
In looking at this data, our question becomes:
Will Borrowers Be Able to Start Making Payments Again?
We see lots of potential in these numbers.
We see millions of individuals who want to work (and pay bills) and are doing what they can.
We see people who didn’t lose their jobs out of neglect.
We see lots of people who could use a little extra help to be able to keep their homes.
Unemployment undoubtedly sent people into hard times in 2020. Right now, we have the skills and knowledge to help those people. By purchasing Non-performing Notes from institutions, we can work with a borrower one-on-one to modify their payment plan as well as make huge returns on our investments.
Bottom line:
There are LOTS of people who will need help keeping their homes, even as jobs return.
2: Growing Numbers of Default Mortgages – Is There An Increase In Supply?
When there are more mortgages in default (not making payments), larger institutions scramble to get them off their books (by selling them to us). The number of mortgages in default massively increased by the end of 2020, as reported by the banks themselves3. But, by how much exactly?
Banks reported a $9.8 billion dollar surplus in late-stage default mortgages (more than 90 days late) than pre-pandemic conditions. That’s a 31% increase from pre-pandemic conditions.
That is a whole lotta surplus of inventory specific to our niche investing strategy.
These assets are like hot potatoes for the banks. They want to toss them (or sell them) as soon as possible. Thus, we have the ability to negotiate lower prices for those assets.
Why Do Banks Sell Loans?
- To reduce federal capital reserve requirements.
- Clean up financial books (looks bad to not have the right reserve…)
- Not in the real estate management business – don’t want to rehab, foreclose, etc.
- Regulations drive foreclosure costs for banks sky-high. They don’t want to spend the extra money to foreclose. Better to discount it and sell the note.
Bottom line:
There is a massive increase in supply of non-performing notes already in the pipeline. This means discounts will likely be higher.
3: Massive Numbers of Mortgages in Forbearance and Moratoriums on Foreclosure – Will This Impact Supply?
Yes, supply of non-performing notes will absolutely be impacted by forbearance and moratoriums.
First, let’s define a few things.
Forbearance: Period of time when the lender (typically bank or government) allows the borrower to pause on making payments. Payments will be required at a later date, which is up to the lender.
Foreclosure: When the lender takes back the property after the homeowner has failed to follow the loan terms (or make payments).
Foreclosure Moratorium: A time period where foreclosures are suspended or stopped (or delayed). In 2020, this was put in place for all federally or Fannie Mae and Freddie Mac backed mortgages until the beginning of 2021 (as of 1/2021).
What happened in 2020 with the number of forbearances and potential foreclosures?
Mortgage forbearances, or permission granted by lender to pause on paying a mortgage, in the early months of the Coronavirus quickly turned into a Himalayan-range mountain of debt4. With unemployment still high, a quick rebound may be difficult, even with Fannie Mae and Freddie Mac offering refinance options once forbearance ends5.
In an eight year period during the last financial meltdown (2006 to 2014), 10 million Americans lost their homes. In just the first two months of the 2020 Coronavirus Pandemic, there are nearly 5 million American households in forbearance – that’s half the number from the previous housing crisis.
Will borrowers be able to start making regular payments when the moratoriums are lifted and forebearances end?
Hopefully many homeowners have had time to recover from job loss and change thanks to government stimulus payments, emergency savings and savvy budgeting. HUD Secretary Ben Carson stated, “Because homeownership is the largest wealth builder for the majority of the nation’s families, providing relief from foreclosure and eviction to those who are in jeopardy of losing their hard-earned wealth, through no fault of their own, is a priority.”6
Thankfully, this will help millions of Americans keep their homes.
Yet sadly, in the Census Bureau’s Household Pulse Survey conducted in mid-November about 9% of homeowners expressed doubt that they would be able to make the next mortgage payment once moratoriums are lifted7.
Sitting on the brink of homelessness has got to be a scary place.
Banks will likely be looking to off-load the burgeoning number of loans in default to the secondary market (that’s us!). And luckily, we can step in and provide another safety net option for these distressed homeowners.
Bottom line:
Forbearance and moratoriums will likely cause another surge in supply – causing banks to get rid of defaulting assets quicker and sooner. This can mean better prices for us.
4: Will The Housing Market Crash?
If housing prices plummet in 2021 and we start seeing a similar market to 2008 – 2012 (after the previous housing crisis) could it be more difficult to sell a home and still make a profit on our investment?
Currently, there is already a pique in demand for foreclosed homes8. Investors know the potential in buying a house under market rate (which most foreclosure homes tend to be, even if only slightly). They are craving another increase in supply, similar to the previous housing crisis.
Additionally, the demand for residential real estate (single family homes specifically) continues to stay stable and even grow. Here are the housing highlights from 20209:
- Average home prices increased 12.9% in 2020
- Existing home sales increased 5.6% in 2020
- Inventory of homes for sale sank to historical lows of 1.07 million (1.9 month supply)
Finally, the single-family home in certain markets (non-urban centers) is radically increasing in desirability as buyers migrate out of the cities to find larger homes and more space.
Demand for the single-family home is on the rise. We focus exclusively on this type of residential real estate property and expect that it won’t go out of popularity any time soon.
Bottom line:
Markets are strong in many non-urban markets and even increasing in desirability. Housing markets are predicted to stay strong through 2021.
What Does This Mean for The Real Estate Secured Note Investor (i.e. You and Me)?
Simply put, experts believe that a new wave of default (non-performing) mortgages is headed our way, which means a massive opportunity to help people keep their homes. With an unbalanced number of non-performing mortgages owned by the banks, they will likely begin to sell prior to foreclosing.
We see investing in Non-Performing Notes as a win-win-win.
The borrower wins by keeping their home, we win with high returns on our investment, and the community wins by preventing vacant homes from popping up everywhere. We add value by getting the note to re-perform and see great upsides on the back-end.
Interested in growing your money in Notes in this market? Sign up to join our Investor Circle to schedule a call with me and learn more about our business strategy. We love sharing this strategy with others!
- https://www.bls.gov/charts/employment-situation/civilian-unemployment.htm
- https://www.bls.gov/news.release/pdf/empsit.pdf
- https://www.distressedpro.com/app/banks/residential/
- https://bit.ly/2M9S69t
- https://bit.ly/3pmJJ8S
- https://www.hud.gov/press/press_releases_media_advisories/HUD_No_20_134
- https://www.forbes.com/advisor/personal-finance/eviction-and-foreclosure-moratorium-on-federally-backed-mortgages-extended-through-january-2021/
- https://bit.ly/3a4Ikxe
- https://www.nar.realtor/research-and-statistics/housing-statistics/existing-home-sales
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