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2008, but different 5X

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A majority of the real estate investors with whom I associate and converse with have been talking about a repeat of 2008.

1973 + 1986 + 1992 + 1998 + 2008 = today on steroids 

One of Jeffery Watson’s close friends and clients who has been investing far longer than I shared with me some very significant statistics the other day. Between 1.6 and 2 million residential mortgages are in major default. We aren’t talking 30, 60 or 90 days late. We are talking over a year behind in their payments.

Personally I have been speaking to this event for the last several years at the Note Investors Forum. Stan Harley of the Harley Market Report discussed what was coming back in 2019 at the Capstone Capital USA Note Investors Forum. You can find the Blog Articles dating back to early 2020. CLICK HERE  FOR THE ARTICLES.  Having lived through several of these cycles, a veteran can spot the trends years ahead of the crowd.

These loans are not like 2008 loans where they are very loosely written with adjustable rates, teaser introductory interest rates or a host of other things that created the 2008 sub-prime lending drama. Many of these loans are good, solid, well-underwritten, Freddie Mac/Fannie Mae compliant loans, and the borrowers, for a host of reasons, have not made a payment for well over a year, some for over two years, and even some since before the COVID outbreak. –Editors comment.–Some of these loans are seller financed loans, where the homeowner sold the property with seller financing—to receive future payments. Typically these loans are poorly written. One could drive a semi tractor trailer through the legal language.  They are full of legal swiss cheese loopholes.

I believe we will be seeing over the next few years a combination of 1973, 1986 and 2008 all rolled into one. In 1973 we had the beginning of the huge energy shock as a result of the Arab oil embargo which caused the price of anything connected to oil to skyrocket. In 1986 we saw tax reform that changed the way commercial real estate was used and valued for tax advantages, triggering in part what became known as the S&L meltdown, as projects invested in solely for their tax benefit and not their cash flow failed and dragged down their borrowers and lenders. In 2008, people were unable to pay their ever-increasing house payments because the horrible underwriting practices by many of the major lenders contributed to wide-scale default and the collapse of the housing economy.

A very good friend of mine provided the real # of recent crashes. As he commented, “which is one worse?”

  • 1998 Asian market crash or Dot com crash
  • Dot com bust or 2008
  • 1992 recession  or 1998 Asian market crash

Do you see the pattern? Both Howard Tenn, Jeffery Watson, Stan Harley and myself all feel each bust is different, It always is. It is always worse than the last time.

Every-time was different and every time was worse than the one before.

Therefore, this time will be different than the last, because it will be worse. We are just running out of runway.

Yes, I am going out on a limb with this, but I see components of all three of these events – rising fuel costs, increasing government taxation and regulatory costs, and homeownership difficulties – all coming together to provide a very challenging opportunity for investors. You want to stay on top of your payor.

My advice for anyone involved in the real estate investing space:

  • If you are receiving payments on a seller financed loan, are you being proactive with your servicing and or collection procedures to protect the balance owed to you?
  • Is your payor current?
  • Are you escrowing for taxes and insurance?
  • If not, has the payor kept the taxes and insurance current?
  • Have they provided you the most current proof of insurance declaration page?
  • Is the property being maintained?
  • How is the payors job status?
  • Are they financially challenged with the $5.00+ gasoline and the 20%+ increase in food prices? Do they still live in the property?
  • Have you pulled a recent credit report to have a complete snapshot of their finances?

I realize the foregoing does not paint a pretty picture, and I realize I may not be right in some or all of my assessments, but I still believe my two recommendations would serve any investor well in almost any type of investing or economic environment.

If needed, Capstone Capital USA can provide the financial safety valve to help you with a potentially troublesome or currently troublesome mortgage or Deed of Trust. We have a 4 decade record of maneuvering through times like what is just on the horizon.

Click Here To Request Help

 

Portions of this article reprinted from Jeffery S. Watson email blog

Is “Normalcy Bias” Blinding Us to the Looming Economic Storm?

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Editors Note: The following was written by Michael Maharrey and appeared in shiffgold.com. 

While is is written by the  Gold expert Peter Schiff, the principles, the overlay is expressed as to what is really going on in peoples thought processes.

Bottom line change is in the wind.    JPMorgan Chase boss Jamie Dimon urged investors Wednesday to prepare themselves for turbulence in the market in the weeks ahead – warning that extraordinary financial circumstances were creating a potential “hurricane” for the economy.

“It’s a hurricane. Right now, it’s kind of sunny, things are doing fine, everyone thinks the Fed can handle this,” Dimon said during a conference sponsored by AllianceBernstein, according to Bloomberg.

“That hurricane is right out there, down the road, coming our way,” he added. “We just don’t know if it’s a minor one or Superstorm Sandy or Andrew or something like that. You better brace yourself.”

We cannot hide from what is coming.  My question to you is, ” Do you have the financial resources if your note payor stops paying?  What is your backup plan?  Capstone Capital USA has the resources to provide you a lump settlement for all or for a portion of your seller financed mortgage. We will provide a fair market FREE  quotation.

Doesn’t it make sense to be proactive while the payor is still current with their payments vs being late causing you to market a note with a developing poor pay history?   Read on…I believe you may identify with the following narrative……….   

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Average people are worried about the economy. Consumer confidence has been falling. People undoubtedly feel the squeeze of inflation. But despite their general discontent, most people don’t seem to think a severe economic downturn is imminent — despite many warning signs.

Why not?

Peter Schiff has been warning that a recession is in all likelihood already here. In a recent interview on NTD News, he emphasized that the economic downturn will be much deeper than anybody expects.

I don’t think it’s going to be a mild recession. I think this recession is going to be worse than the Great Recession that started following the 2008 financial crisis.”

But most people remain sanguine about the economy. They may fret a bit about ongoing inflation – as reflected in the consumer sentiment numbers – but they assume the Fed will be able to tame the inflation dragon with some modest monetary tightening. They even concede this might cause a minor recession, but the mainstream believes Jerome Powell when he claims the economy is strong enough to handle higher interest rates and some balance sheet reduction. Virtually nobody besides Schiff and a few other contrarians sees anything major economic problems coming down the pike.

But as Schiff pointed out in that same interview, nobody saw the 2008 recession coming either.

In fact, when we were six or seven months into that recession, the Federal Reserve and other economists still claimed that there was no recession anywhere in sight. So, this recession is going to be much worse than that one.”

In retrospect, the signs of a housing crash were pretty obvious in 2006 and early 2007. It was apparent that there were serious problems in early ’08. But almost nobody in the mainstream saw the financial crisis and Great Recession coming. Like today, there were only a few voices in the wilderness sounding a warning.

Why is it that so few people are prepared for economic crashes when the warning signs are so obvious?

There are certainly many factors, but one likely reason people don’t can’t see the train hurtling down the tracks is a psychological phenomenon known as “normalcy bias.”

In a nutshell, normalcy bias is a form of denial based on the assumption that everything will continue as normal.

Here’s a more formal definition.

Normalcy bias is a psychological state of denial people enter in the event of a disaster, as a result of which they underestimate the possibility of the disaster actually happening, and its effects on their life and property. Their denial is based on the assumption that if the disaster has not occurred until now, it will never occur.”

In simple terms, it’s the “it can’t happen to me (or us)” syndrome.

Normalcy bias leads to inaction. It’s one of the reasons people often ignore hurricane warnings. The assumption is “we haven’t ever had a hurricane yet, and if we do, it probably won’t be that bad.”

According to PsycholoGenie, there may be some evolutionary basis for normalcy bias.

There is a theory that associates normalcy bias with the evolutionary aspect, that suggests that paralysis gives an animal a better chance of survival because predators are less likely to attack and feed on something that isn’t moving.”

That’s great if predators are hunting you in the jungle. It’s not so great if an economic disaster is looming.

I think normalcy bias is one of the reasons the Federal Reserve’s transitory inflation narrative gained so much traction. Despite the money printing after the 2008 financial crisis, consumer prices never rose as many predicted. Instead, inflation manifested in asset prices, particularly stocks and real estate. This led Fed policymakers to assume they could do quantitative easing again – and even double down on it – without severely impacting consumer prices. Of course, the dynamics were different during the pandemic. Not only was the Federal Reserve printing trillions of dollars, but the US government was also handing out cash in the form of stimulus checks, even as most Americans were sitting at home producing nothing. This was a recipe for rapidly rising consumer prices.

But normalcy bias kicked in. We were told, “Inflation didn’t happen before, so don’t worry, it won’t happen now.” An assumption set in – things will continue as they always have. And when prices started to spike, these same people assured us that it was transitory. All along, Schiff was warning that inflation wasn’t transitory. But pretty much nobody listened.

Similarly, I think normalcy bias has played a role in gold and silver’s lackluster performance in recent months. As Schiff put it in a video on the recent performance of gold, “Even though we have a lot of inflation today, investors still think we won’t have inflation tomorrow.”

Because the Fed has been able to raise interest rates to keep inflation at bay in the past, the mainstream just assumes it will be able to modestly raise rates and keep inflation at bay this time around. Never mind that there are different dynamics in play and plenty of signs that inflation will likely remain entrenched over the coming months. Normalcy bias has blinded people to the fact that it would require a Paul Volker style hike to push real interest rates into positive territory — the only cure for inflation.

At some point, reality will cut through the normalcy bias. It always does. But when the mainstream wakes up, it’s too late.

As you survey the economic landscape, be aware of normalcy bias. There is no reason to assume things will continue as they always have. Keep your eyes on the economic data, analyze it objectively and keep basic economic principles in mind. And then, prepare accordingly.

Link to the full article

NOTES TODAY VS VALUE OF THE PAYMENTS IN 3 YEARS

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Dave Franecki originally wrote this article which was published in the March 2021 NOTEWORTHY NEWSLETTER

 

Whether you are a seasoned real estate / note investor or a new to the note space, buckle up as this article addresses both audiences. Do you see what is happening as inflation  or deflation in the next 3 years? This article will focus on inflation therefore a weaker dollar vs deflation and a stronger dollar.

We are entering the most turbulent period in US financial history…

That’s because severe crises are brewing on multiple fronts and are converging. There’s going to be much less stability of any kind—financial, economic, political, social, cultural, or military—in the months to come. The whole system will have a complete reset, and soon. We’re in an economic no-man’s-land…

There is a stock market bubble, a real estate bubble, a bond super-bubble…

 

It’s really an Everything Bubble. The coming financial volatility will be unlike anything we’ve ever seen before… It could be the BIGGEST thing not just since the Great Depression of 1929 to 1946. It could be the BIGGEST thing since the founding of the USA. The enormous and unprecedented effects of this have only just begun. Almost EVERYONE could lose money in the ensuing economic collapse. The question is how much. That means most investments YOU own are likely overvalued and high risk.

How did this happen?

In a desperate attempt to paper over their problems, governments have printed trillions of new currency units, brought interest rates to below zero, and bailed out failing institutions.

But those gimmicks have now been exhausted. We are in the beginning of the GREAT RESET. Nobody has ever seen a market so good and so bad at the same time.  This black swan has a split personality!

The top layer of the data onion looks good. But the more layers you peel off the smellier it gets, and the more you’ll want to cry. On the surface, things are looking good.  But in the deeper layers of data, the current state of the industry shows some major red flags. And the deeper you look, the future of the industry looks downright scary. Investing basics have gone by the wayside because of the fear of missing out for [more].

How does this inflationary time impact notes as a passive investment?

A “set it and forget it” buy and hold passive note investor a is typically in for the long term yield. They want the 10+ year run of “guaranteed returns”. It feels good. But, inflation, the eroding of the dollar’s purchasing power over time erodes those payments just as it has since 1913.

Ask yourself this question. Today, if you spent $1,000 at WALMART, how many carts of groceries would that buy as compared to ten years ago?  A huge difference. What about in 3 years ago? With just food prices escalating, it may be safe to assume a 20% drop in buying power with all the funny money being pumped into the system. Find todays real inflation #’s here.

The Wolf Report had a great article on this subject. The Dollar’s Purchasing Power Dwindles to Another Record Low.

From a different perspective, an item costing $1 in 2013 would cost $26.57 today. A cumulative rate of inflation of 2556.7%

Click Here For US Inflation Calculator  

Click Here for Official vs ShadowStats

Do not expect the borrower to refinance as refi applications are now down 72% because most of the people with perfect credit have already refinanced.

No matter what, keep a back door open. What is your exit strategy? Make sure you are covering your “asset “.  What if the real estate bubble pops, and property values drop. Now the note investor is facing both eroding buying power on the monthly payments and a depreciated equity position. If you plan on holding it forever, you are setting yourself up for a loss. Things change. There are Black Swan Events.

In essence it means buying any asset class with the end in mind.

Oh, but you say that could never happen?  Really.

Ever heard of ENRON. It was flying high in October, 2000. 14 months later, it filed for Chapter 11. Ever heard of Lehman Brothers? It was founded in 1847 and filed for Bankruptcy in September, 2008. Too big to fail. Yea, right.

I have personally experienced the pain of 3 huge cycles. 1981, 1991, and 2008. I am speaking totally from experience.  I was a legend in my own mind.  When the bubble pops, expect a lot of pain or set yourself up to thrive.

So, let’s distill it down to basics when buying notes.

What does this mean for you the seasoned or newbie note investor?  What should you do?

Phrased another way is all about WHEN TO BUY AND WHEN TO SELL.

Prepare for the unknown before you pull the trigger. Investing is a risk. Plan for the worst, and hope for the best.

Remember profits/yield is not realized until you sell.   Do not get drunk chasing yield. Focus on return of capital vs return on capital. Think about how to get out, if a worst case scenario pops up. My recommendations have NOT changed since 2015 when I organized the Phoenix Note Investors Forum.

The following recommendations are very simple and straight forward:

#1. Recommendation–Get back to basics.

#2. Recommendation—Get Back to Basics

#3. Recommendation—Mitigate the inevitable.

#4. Build in your stop losses.

The real estate industry has been propped up by the FEDS for a while.

This reminds me the story of the old turkey farmer and how he encouraged his new poults to grow. For 100 days he come into the turkey yard playing music and spreading out handfuls of grain. Eventually the now growing poults became totally friendly toward him. They relied on the goodies. Then on the 100th day he came into the yard—carrying a manchette. They had no clue what hit them. They were so set up.

Does this resonate?  I am not sure about you but I’d rather be the farmer vs the turkey on the 100th day.

Why not plan on being the farmer? Today, the economy is/has been propped up with fake everything. Investors are on a drunken high. No clue of what is going on. Another black swan event couldn’t happen again. Could it?

With that in mind let’s go back to my current filters when buying notes to mitigate risk. When buying performing notes, don’t get drunk on yield. Take several factors in mind. When figuring out the LTV, take the current BPO value, subtract 20% and then take 60% of that # to filter LTV for future what if scenarios.  Let’s put that in perspective. Asset values can, will and do drop. As they drop,  your investment is more exposed to what if situations. But, as the upb decreases, your investment becomes safer.

 

Assume a BPO value of $100,000 x 80% = $80,000 x .6 = $48,000 for LTV purposes. Factor in $40 monthly servicing fees to calculate your current yield. Servicing fees are INCREASING. Shops that were charging $30 are in some cases charging $40/month. Some less.

Look at the pay history of the borrower. Is it solid?  What do they do for work? If they work at a restaurant or other industry hit hard in COVID, evaluate your risk. What happens if they loose their income? Do you want to own the Asset if they stop paying?   Cover your back side for what if situations.

 There are no rules in today’s market place. There is no rhyme or reason. Remember the lawmakers can change anything at any time.  If eviction rules can be changed with the stroke of a pen, so can foreclosure laws.  What happens if you buy an NPN and you cannot foreclose? What happens if a perfectly reliable, great paying borrower stops paying due to a Black Swan Event?  You are left to work it out—receiving proceeds that are not worth what they are today. When the NPN volume increases in the next 12 months, keep your filters in place. In 2014, I was buying NPN assets with an ITV and LTV not exceeding 30-35% depending on the asset. Allow for the unknows. NPNs can be messy. Taxes, title and blight will take you to the turkey yard. I was conservative. It worked well.

At this time, I am only buying short term performing notes at a steep discount. That is a way to keep the value of your investment in check. Your risk will be reduced every time a payment is made.  When the market drops/stalls and it will, you are where you are. There is no going back. Be prepared for the pain and jump the opportunities.

To learn more on the strategies I employed in the year of COVID 2020, go to the Cash Flow Expo 2021 video series @  https://bit.ly/3voMEkY     Buy the video series.

 

Survive and thrive when this economic crash comes.  Be the hunter vs the hunted.

When one typically is buying it is about greed. When one is selling it may very well be about fear.

When they intersect, there could be challenges.

 

Bottom line it is all about  When To buy and When To Sell.

NOTES AS WELL AS MOST ASSET CLASSES ARE OVERVALUED.

The dollar is loosing value, therefore your payments in 3+ years will not buy as much. Your unpaid principle balance will not worth what it is now. You have become the turkey vs the farmer.

Set yourself up for success in the years to come.

Avoid being slaughtered.

To learn more about what due diligence strategies when buying which will set you up for a profitable sale go to the Capstone Capital Utube series @ https://bit.ly/31hrvuW

Feel free to call me @ 480 232 5477  or email me at Dave@CapstoneCapitalUSA.com

Wish you all the very best!

[ NOTE INVESTORS FORUM | MEETUP | KEVIN SHORTLE | 8 5 20 ]

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Hi ,

The next  NOTE INVESTORS 

FORUM ZOOM Meetup

August 5th.  11:30am AZ |   PST

You can register now!

GUEST SPEAKER:  KEVIN SHORTLE                                                

 Note Educator of the Year – NoteWorthy 2019

TOPIC:  Market Updates

Market Trends

Creating Notes

Non-Performing Note

Case Studies

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Additionally: 

Preview of a Self-Storage Facility

 

Register Here for The Note Investors Forum Now!     


See you next Wednesday August 5th  11:30am AZ/PST !!!

To Your Success!

Dave Franecki

Dave@CapstoneCapitalUSA.com

 

CASE STUDY ~WHEN A NOTE GOES BAD, HOW TO HANDLE IT

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SHARING EXPERIENCE 

Recently I was interviewed by Kevin Shortle about a note purchased in 2016.  It is a great crystal ball into what is on the horizon with the thousands of non-performing loans in Q for the near future, most likely in early to mid 2021.

This case study will give you a great view into what can happen when a deal goes bad and you know how to handle it.

The Forbearance Tsunami: 4.7 million mortgages are now in forbearance with an unpaid principal of $1 trillion.

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The following article was in Dr Housing Bubble. I found it to be very enlightening.

The Forbearance Tsunami: 4.7 million mortgages are now in forbearance with an unpaid principal of $1 trillion.

Let us clear something up regarding the last financial crisis with housing at the center of the market unraveling. The vast majority of the foreclosures that happened in the Great Recession occurred on standard 30-year fixed rate mortgages. There is this mythology that only subprime and NINJA (no income, no job, no asset) loans were the culprit of the entire collapse. This narrative fits into the crony capitalist mentality that somehow, only losers caused the crisis and that of course all of the suckers that got lured into a toxic mortgage somehow deserved losing their homes (while banks of course got bailed out with billions of tax payer dollars). A swift kick to the poor, and corporate welfare for the banks. It almost fits into this modern psychology of dis-information and revisionist history that we are now seeing.  So it should be no shock to rational individuals that now, we suddenly have a whopping 4.7 million mortgages in forbearance (aka not paying their mortgage payment). This is not a good thing. The assumption is that people are going to start paying their mortgages back on time once the virus goes away but is that the case with so many jobs being lost? First, let us show you some data on the previous crisis for those that somehow forgot who lost their homes based on the type of mortgage on the property.

 

CLICK HERE FOR THE REST OF THE ARTICLE

EARLY PAYOFFS HELP THE BORROWER AND LENDER

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In March of 2020 Capstone sent letters to 10 borowers to determine if offered a slight discount, would they be interested and able to pay of their mortage. 3 replied yes. They were thrilled. It was a win for the home owner–to own their home outright. It was a win for Capstone to recapture capital to redeploy for other opportunities.  Kevin Shortle and I discuss this in the following short video

 

Partials For Beginners ~~ Case Studies

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Capstone recently purchased several low balance Contract for Deeds and sold 3 small partials which were tagged “Partials For Beginners”. They were sold before all of the COVID-19 mess. This is a situation that evolved truly by accident. The variables were such a new investor could make that big decision to “jump in” and buy their first note without any real risk. Even with the uncertainities of COVID, the investors funds are relatively safe.

One may ask, “Why minimal Risk?”

They all had great basic analytics. Meaning, low Investment to Value(ITV)< 35% & low Loan to Value(LTV) <50%. All the loans had a great pay history–greater than 5 years with real negatives. The payors insurance was in place. They were professionally serviced.  They all had a low investment entry point of less of than $11,500 and a  partial amortization schedule of <46 months.

Normally a partial is only viable with a larger # of payments remaining –typically over a 100. In this case, the partials were viable due to the superior buying power of Capstone resulting in a winning combination for the partial buyer and Capstone.

I asked each investor why they chose to buy. To the person, it was the set up.

Meaning:

  • Low dollar entry point
  • Great deal analytics
  • That I, a seasoned note investor would be protecting their interest as the “tail owner”
  • This would be a learning opportunity for them to see 1st hand just how a professional note broker structures a partial transaction for free and still make money and get all the paperwork. No mentoring fees were asked for or required.
  • Bottom line it was the 3 famous words in any sales transaction–the know, like and trust factor.  Therefore, not just the deal but the deal maker.

Check out this short utube detailing the deal points and similiarities of each transaction.