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.
Recently I had the honor of being interviewed by Tom Olson of Good Success
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.
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
I had the distinct peasure to be a guest on the Podcast–Passive Wealth Stratagies for Busy Professionals hosted by Taylor Loht.
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.
- 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.
Paul Birkett of Automation Finance is a really sharp note investor from NYC. Paul has a large capital fund that specializes in the 2nd mortgage space. I met Paul a few years ago at the Phoenix IMN Conferance and we have been on several of the same presenting panels. In this video Paul details what he sees see on the horizon. This is his opinion which is based on the facts. I agree with his thoughts. Bottom line, it is going to be a rough ride. Lots of pain and a ton of future opportunities. The mortgage market volume is about half as big as the stock market. A significant #. The availablity of financing drives housing prices. If funding is limited, housing prices will fall. Of course the inverse is true. Housing is a key economic driver. Debt, not Equites that set the tone for the economy.
Paul is suggesting 30% of the US Mortgage Market could go into default within the next 12 months. How do defaults affect the serviciers, the linch pin of the loan industry. We have to wait for more of the frames of the film to play out.
Fantastic article. Wow, great insight by a man of wisdom. A guy in his mid-90’s who has seen it all–Charlie Munger of Berkshire Hathaway.
“I don’t think we’ll have a long-lasting Great Depression…. But we may have a different kind of a mess. All this money-printing may start bothering us.”
By Wolf Richter for WOLF STREET.
There is something refreshing during these insane times when a guy in his mid-90s who has seen it all and has been successful at navigating it, and who, during the last Financial Crisis, was buying stocks and entire companies hand over-fist, now says that he has never seen anything like this before, and that he doesn’t know what to do except to sit tight. And they’re not buying the rally, and they weren’t buying the crash.
Charlie Munger, vice chairman of Berkshire Hathaway, was talking with The Wall Street Journal about the current situation and how he and Warren Buffett are looking at it. And they’re not buying.
Scott Teerink is a seasoned Phoenix investor with 20+ years of experience. He also does consulting work with one of the largest real estate development firms in the Southwest with a large focuse on 55+ communities, development & construction plus retail and office in Arizona, California and Texas. He brings an interesting perspective about the local market as of April 7, 2020.