The August 7th Note Investors Forum Meetup focus on:
TOPICS: Several New Case Studies
Where Does a New Note Investor Begin
Bring your questions, This will be an interactive meeting.
The August 7th Note Investors Forum Meetup focus on:
TOPICS: Several New Case Studies
Where Does a New Note Investor Begin
Bring your questions, This will be an interactive meeting.
House prices are rising.
There is a shortage of housing.
There is a shortage of rentals.
There is a shortage of well priced notes & REO’s.
“Prices are growing more quickly in some places than in others, and in MSAs where recovery has been most robust (and even in surrounding metros), price growth is probably not the best metric to use for rental investors seeking a new property to buy and hold.
So………….which MSAs have the best rate of return on rental investments?
The following article was from CNBC.
They were blamed for the biggest financial disaster in a century. Subprime mortgages – home loans to borrowers with sketchy credit who put little to no skin in the game. Following the epic housing crash, they disappeared, due to strong, new regulation, and zero demand from investors who were badly burned. Barely a decade later, they’re coming back with a new name — nonprime — and, so far, some new standards.
California-based Carrington Mortgage Services, a midsized lender, just announced an expansion into the space, offering loans to borrowers, “with less-than-perfect credit.” Carrington will originate and service the loans, but it will also securitize them for sale to investors.
“We believe there is actually a market today in the secondary market for people who want to buy nonprime loans that have been properly underwritten,” said Rick Sharga, executive vice president of Carrington Mortgage Holdings. “We’re not going back to the bad old days of ninja lending, when people with no jobs, no income, and no assets were getting loans.”
Sharga said Carrington will manually underwrite each loan, assessing the individual risks. But it will allow its borrowers to have FICO credit scores as low as 500. The current average for agency-backed mortgages is in the mid-700s. Borrowers can take out loans of up to $1.5 million on single-family homes, townhomes and condominiums. They can also do cash-out refinances, where borrowers tap extra equity in their homes, up to $500,000. Recent credit events, like a foreclosure, bankruptcy or a history of late payments are acceptable.
All loans, however, will not be the same for all borrowers. If a borrower is higher risk, a higher down payment will be required, and the interest rate will likely be higher.
“What we’re talking about is underwriting that goes back to common sense sort of practices. If you have risk, you offset risk somewhere else,” added Sharga, while touting, “We probably are going to have the widest range of products for people with challenging credit in the marketplace.”
Carrington is not alone in the space. Angel Oak began offering and securitizing nonprime mortgages two years ago and has done six nonprime securitizations so far. It recently finalized its biggest securitization yet — $329 million, comprising 905 mortgages with an average amount of about $363,000. Just more than 80 percent of the loans are nonprime.
Investors in Angel Oak’s nonprime securitizations are, “a who’s who of Wall Street,” according to company representatives, citing hedge funds and insurance companies. Angel Oak’s securitizations now total $1.3 billion in mortgage debt.
Angel Oak, along with Caliber Home Loans, have been the main players in the space, securitizing relatively few loans. That is clearly about to change in a big way, as demand is rising.
As a real estate note professional, the buyer of performing and non-performing notes & REO, the following article confirms/addresses what has been shared from many venues.
The nation has a staggering shortage of 7.2 million affordable and available rental homes for extremely low-income (ELI) renter households, reports MFE sister brand Affordable Housing Finance. Deputy editor Donna Kimura examines a new study from the National Low Income Housing Coalition (NLIHC), The Gap: A Shortage of Affordable Homes, which finds that for every 100 of the lowest-income renters, or those earning 30% of their area median income, there are just 35 homes affordable and available to them.
“This leaves over 8 million of the lowest-income people [spending] more than half of their limited income on rent each month, leaving very little for healthy food, for savings, or to cover an unexpected financial emergency,” says Diane Yentel, NLIHC president and CEO. “The report highlights the urgent need for an increased national investment in more homes affordable to the lowest-income people.”
Yental also noted that federal housing programs serve about 5 million low-income households, but the needs of many more families go unmet. Only one out of every four eligible families receives the help they need. As a result of the housing shortage, low-income unassisted households are often severely cost burdened and pay more than half of their limited income on rent.
The severe shortage of rental homes affordable and available to the lowest-income households predates the Great Recession but has worsened in recent years, according to the study. In 2007, 40 affordable and available rental homes existed for every 100 ELI renter households and 67 existed for every 100 renter households with incomes at or below 50% of the area median income (AMI). A small surplus of affordable and available rental homes existed at 80% and 100% of the AMI in 2007. Since then, the supply of affordable and available rental homes (relative to demand) has declined even at these higher-income levels. Renter households at 100% of the AMI, however, still enjoy a surplus nationally and in most markets.
the Note Investor of the Year Award.
The Conference was held at the Irvine, CA Marriott.
Dave Franecki has been in the Note investor space since 2013 and works in the Performing | Non-Performing| and REO space. Prior to delving into this niche asset class, Dave was an high producing REO agent in the Phoenix Metroplex selling over 900 houses during the real estate recession.
His real estate career began in 1978 in Cincinnati, OH.
Danielle Baker wanted a $324,000 loan last year to expand the peanut-processing business she ran from the family farm. She had a longstanding relationship with the Roxobel branch of Southern Bank, and she thought Southern would help fund the peanut operation she had spun off, too.
But that branch—the town’s only bank—closed in 2014. A Southern banker based in Ahoskie, 19 miles away, said Bakers’ Southern Traditions Peanuts Inc. was too small and specialized, she says. A PNC bank branch also turned her down.. Click below for more
Most Financial Services Firms Maintain Optimistic Outlook for US Capital Markets in 2018, but Also Advising Note of Caution
property fundamentals in the markets and property sectors they invest in for 2018 as the U.S. economy continues its extended recovery now heading into its 10th year.
Despite record low unemployment, increased consumer confidence and a strong stock market, many in the industry see slower growth ahead for rent increases, property prices and overall demand for commercial space. As the capital market moves later into the current real estate cycle, financial services firms are maintaining an optimistic outlook for the U.S. economy, although many are also recommending a cautious approach.
S&P Global Ratings, for example, does not expect a steep correction in real estate prices in the New Year, but is forecasting modest price pressure given slowing fundamentals in light of lower economic growth than in previous years.
There are other risks that could develop, S&P added, that could potentially cause a steeper correction in real estate values, including capital market volatility from a steep equity market correction or sudden spike in interest rates. In addition, bank exposure to CRE is at peak levels and a significant reduction in loan originations could dampen valuations.
In its outlook for 2018, LaSalle Investment Management refers to a Goldilocks environment, in which investors should look for an investment that is neither too ‘hot’ nor too ‘cold’ driven by balanced fundamentals and steady pricing.
LaSalle is expecting debt for real estate to remain plentiful in 2018. At the same time, it expects lenders will continue to tighten their underwriting, especially for specific sectors that become “overheated.”
Over the course of the year, Morgan Stanley noted that larger banks of more than $20 billion in assets tightened their lending standard much more than smaller banks. Multifamily loans had the greatest increase in net tightening and loan demand declined more in that category more than others in 2017.
On the positive side, LaSalle expects less hurdles for the major lending sectors in 2018 after the market overcame several potential obstacles in 2017, including the maturity of 2007 vintage loans, CMBS risk retention and Fed oversight of bank real estate.
As 2017 progressed, it became clear that risk retention wasn’t going to be a major market impediment, and issuance increased as the year went on, according to Kroll Bond Ratings Agency (KBRA). Transaction sizes, however, largely remained under $1 billion, which was partially attributable to risk retention that forced a number of originators to exit the market, as well as the size of the CMBS investor base.
On the up side of peaking property this year, KBRA noted, is that single borrower refinancing deals should continue to thrive as borrowers look to lock-in gains from property value increases. Borrowers may also want to lock in rates the Federal Reserve sending signals that more rate increases are to come in 2018.
As always, job growth will be a critical driver of real estate demand. And to the extent that the recently passed tax legislation that slashed corporate rates spurs additional business investment and hiring works as intended, job growth could exceed expectations.
“We’re now confronting a wider range of possible outcomes for the economy, depending on how various initiatives such as federal policy changes play out,” said Spencer Levy, CBRE Americas head of research and senior economic advisor, who added that agility will be more important than ever for investors this year.
Investors should shift to focusing on income gains rather than appreciation as their primary source of returns as cap rates flatten out or, in some cases, start to rise, Levy noted.
Major U.S. office markets are on the verge of a cyclical tipping point, with new construction and softening demand mirroring the evolution of previous CRE cycles, Moody’s Investors Service reported.
And while the markets may be hoping the supply-and-demand cycle plays out differently this time, that isn’t likely, Moody’s noted.
“New office construction is ramping up in many major U.S. cities, so that by the end of next year new inventory will be coming online at roughly double the rate of the past three years, while at the same time the growth of office-using employment will be slowing,” said Kevin Fagan, a Moody’s vice president and senior analyst.
As we enter 2018, there is 154.5 million square feet of new office space under construction, according to CoStar data. That compares to 97.8 million square feet delivered in 2017.
While the amount of office construction is increasing, the 252 million square feet delivered last year or under construction is still one-third lower than the 381 million square feet delivered in 2006 and 2007 when CRE markets last peaked.
However, underwritten office property values today far surpass those of the pre-financial crisis peak, particularly for CBD offices, Moody’s Fagan said.
Similar to the office market, new supply is also running high in the industrial property sector going into 2018 with 318.1 million square feet under construction following 311.6 million square feet delivered last year.
The big difference compared to office is that demand remains very robust for both bulk warehouse and closer-in delivery hubs as e-commerce continues to reshape and boost demand for distribution space. This positions the industrial market to perform well in 2018, although risks would escalate should economic growth slow, according to LaSalle.
While E-commerce is boosting the industrial investment potential, the retail sector continues to bear the brunt from lower traffic and sales. Construction of new retail space continues to decline with just 86 million square feet under construction at the beginning of 2018, well down from the 103.6 million square feet of retail space delivered last year.
Investors see exceptions within the sector, however. Grocery-anchored retail space in well-located centers remains in demand as reflected in the strong capital market activity at these centers that we believe will continue, according to LaSalle.
CBRE sees retailers and investors gravitating to either the discount and off-price sectors or luxury. This may create weakness, and, in many cases, investment opportunities, in secondary and suburban markets.
In a previous post, I gave some cautionary advice and questions relative to a borrower signing a personal guaranty. That personal guaranty allows the creditor to pursue any other assets then owned or acquired in the future by the guarantor should the note go into default and a judgment be obtained. These personal guaranties are frequently required in commercial lending environments wherein the main borrower is an entity such as a corporation or an LLC.
The second of the twin dangers is a cognovit promissory note. I realize that not all states recognize and permit cognovit promissory notes. Those states that do only allow them to be used in a business context; however, I have often seen real estate investors who are borrowing money for their business, or for a rehab or flip, willingly sign a cognovit promissory note without fully understanding what can occur.
A properly formatted cognovit promissory note includes the warning language and agreement that the borrower will, in the event of default, allow for the lender to immediately sue and obtain judgment against them. In other words, the lender/creditor can sue on Monday and, with the filing of the lawsuit, file an answer with the court confessing or admitting to judgment requested in the lawsuit. This means that by Tuesday, the lender/creditor can have a court order signed by a judge granting them judgment in the full amount of the unpaid balance with no opportunity for the borrower to challenge, defend or question the allegations that have just been filed by the lender/creditor. It’s an open and shut case; borrower loses!! That cognovit judgment then becomes a very powerful collection tool to be used in conjunction with a personal guaranty to place liens on any other assets owned by the debtor or guarantor.
I have also seen instances wherein bank attachments and garnishes were filed immediately thereafter based upon the filing of the lawsuit and the confession of judgment according to the terms of the cognovit note, which means it is possible for the borrower/guarantor to not even know they have been sued until after their bank account has been frozen or cleaned out. I don’t think I have to describe to you how paralyzing that can be to a borrower who is in default to have all their money taken from them and have no ability then to retain counsel to fight this situation and try to mitigate the damage.
If you think I’m exaggerating, allow me to share with you one instance in which` I watched a lender holding a cognovit note with a personal guaranty craftily lure the borrower into default by promising a refi that he then delayed. At the closing of the refi, the lender insisted on an extra $15,000 in late fees, penalties and accrued interest, leaving the borrower with the choice of paying that extra money at the refi closing or risk having judgment immediately obtained against him for the full amount of the note he thought was going to be refinanced 60 days earlier.
By now I trust you can understand how powerful these tools are in the hands of a lender or debt collector, particularly one who lacks morals and ethics. That’s why many states no longer permit them to be used. In those situations in which they still can be used, you, the borrower, must be informed and prepared when your lender asks for that type of note or instrument to be signed.
In case you’re wondering, when I represent lenders in commercial transactions, I do my best to get strong personal guaranties and cognovit notes signed by the borrowers. After all, I’m doing everything I can to protect and secure my lending client’s position.
I hope this helps you be better informed for the next time you have to make a borrowing decision.
Editors Note: This is a well written article by Attorney Jeff Watson.
One major change Sinclair has seen recently is that several banks have lowered their minimum deal size from $500,000 to around $350,000. This is great news for individual buyers as they now have another option where none existed before.
Once the deal size starts to increase, the percentages and amounts that banks will contribute increases commensurately. The most common form of bank financing to individual business buyers has been from those institutions participating in the Small Business Administration’s 7(a) loan program. Under the SBA umbrella, the government guarantees a percentage of the loan that a bank will make. There is very specific criteria regarding the SBA 7(a) program eligibility and collateral guidelines, and while the government essentially guarantees part of the loan, the banks must be in compliance and the buyers must meet other specific guidelines.
John Martinka, of Martinka Consulting, a Washington state mid-market mergers and acquisitions firm, was involved in a deal recently representing the buyer in the purchase of a Washington-based fabrication business. In that deal, “a competing buyer to his client could not get approved for financing and the suspicion is he would not personally guarantee the loan or put up his house” as collateral.” Martinka also explained that “relevant business experience, meaning some management experience by the buyer is a requirement.”Martinka is typically involved in deals under $10.0 million and regardless of the percentage of bank financing, he notes that a portion of all of the deals include some participation by the seller in the financing. In other words, the banks want to see the seller absorbing some of the risk as well.
While banks may be softening their stance regarding deal size, buyers cannot escape having to be qualified financially and experience-wise, and must be willing to personally guarantee the loan. This is also the case with seller-based financing although in these instances, while personal guarantees are required, the assets of the business, rather than personal ones, are usually pledged by the buyer. Similarly, when selling a business, the owners need to realize that they are going to have to participate in the financing to some extent. The smaller the deal; the more they have to fund it. While every seller would obviously would prefer an all-cash deal, those deal terms are not common. No matter how badly the parties want to do a deal, both sides need to keep an open mind regarding the financing terms because nothing gets done without funding.