A majority of the real estate investors with whom I associate and converse with have been talking about a repeat of 2008.
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.
Portions of this article reprinted from Jeffery S. Watson email blog