Thoughts from the desk of Bob Repass…
As they say, “Timing is everything…”
For me, this cliché came to the forefront this past weekend. I flew to Newark, New Jersey, last Friday to attend and speak at NJ’s 1st Annual Creative Financing & Distressed Mortgage Expo. So when I woke up Saturday morning and looked out the window and saw that 3 inches of snow had fallen overnight, I thought Jersey in January–what a deal!
Later that afternoon, I participated in a panel discussion about buying small balance commercial real estate notes. Perfect timing, I thought, as we’re about to launch our next capital fund for accredited investors, Colonial Impact Fund II, in which we will not only continue to purchase residential loans but where we are also expanding to commercial loans. The audience had a lot of interest in and questions about this segment of the note industry.
By this time, the snow had stopped, and all seemed to return to normal–that is until I woke up Sunday morning and turned on the news and listened to the non-stop talk about the big winter weather event heading for the Northeast. My original travel itinerary had me scheduled to return to Dallas on Monday morning since I was slated to speak Sunday afternoon at 3:30 pm on Partials: The Ultimate Retirement Strategy in Notes.
Now the issue of timing moved to front and center. I texted my wife, Angie, and asked her to check on the last available flight out of Newark to Dallas to see if I could get a seat. Luckily, there was a flight leaving at 6:45 pm, and she was able to change my ticket–at no cost since there was a travel advisory in effect!
Thankfully, I made it home late Sunday night and watched the storm blast the area I had just left all day Monday. Timing really is everything!
The Trading Corner
Default Rates Set to Soar!
By Kevin Shortle
Hundreds of thousands of people under government and loan servicer/investor agreements are going to have their monthly loan payments increased this year and every year for the next four years. These increased payments will inevitably cause soaring default rates among certain borrowers.
Because of the compounding nature of this issue, the impact of this on the real estate market will start to appear now and will grow strongly over the next two years before it eventually starts to recede.
Why is this Happening?
The Home Affordable Modification Program (HAMP) loan modifications were only “permanent” for five years, after which point the interest rates start to go up 1% per year.
This will likely be a shock for many still struggling borrowers.
Further complicating this issue is the fact that HAMP loan modifications did not require the lender to reduce principal balances which left many homeowners underwater. In other words, this gave homeowners affordable payments but on a loan that is larger than what the property is now worth. Where is the incentive to still pay?
To understand this program and the impending payment increases, you need to understand a little bit of the history of the program.
Making Home Affordable Program
In order to assist homeowners and prevent further foreclosures, in February 2009, the Administration announced the Making Home Affordable program. This comprehensive, US Treasury-run program allocated both Troubled Asset Relief Program (TARP) and non-TARP (through GSE’s) funds to provide financial incentives for mortgage servicers to modify eligible first-lien mortgages.
The flagship of this program was the Home Affordable Modification Program (HAMP). The HAMP program was adjusted in 2012 and then further adjusted in 2013 by adding Tier 2 HAMP loan modifications. Since the addition of Tier 2, the original program was named Tier 1.
This program initially estimated that it would help three to four million people but it fell well short. According to the Special Inspector General (SIGTARP) Quarterly Report to Congress of October 29, 2014, just over two million entered trial modifications in which they had a chance to prove that they could afford to make three months’ worth of timely payments. Once the trial period ended, they could receive permanent status. 800,000 did not convert to permanent modification.
The program has been riddled with red tape. The SIGTARP report details out all of the problems as well as attendant criminal activity. The bottom line is that these problems have led to an abnormally high default rate on these loans modifications.
Nonetheless, that means that there are approximately 1.2 million people who have received loan modifications under the HAMP program.
So how is the program doing now?
Table 4.7 of the SIGTARP report shows the latest data available at the time of this article:
As you can see the overall re-default rate is approximately 31% (410,652/1,345,522) among the permanent loan modifications. In certain years the re-default rate was over 50%. This is before interest rates are to go up!
What about 2015?
As mentioned earlier, these “permanent” loan modifications adjust upward after five years. Looking at Figure 4.2 below, you will notice that a large amount of these HAMP modifications were completed in 2010 and 2011.
More specifically you can see that a large number were started in the 1st and 2nd quarter of 2010. These loans will start adjusting in the 1st and 2nd quarter of 2015.
By now, some of these loans will have already been paid off, defaulted, or even reapproved through tier 2, but, clearly, you can see that a large wave of homeowners are going to start receiving notices that their payments are going up.
SIGTARP estimates that by the end of 2015, a cumulative total of 309,050 loans will adjust up.
Are the increases really significant?
Rather than get into the complexities of the numbers, rules, and regulations, we used estimates of the median numbers to create the chart below. This chart shows you what will happen to the monthly payments on a $200,000 HAMP modified loan.
So, in 2010, if a homeowner’s payments were lowered on a HAMP modification to 2% interest, the payments would drop to $739 per month. A 1% increase brings them to $843 per month and so on.
For some homeowners, another $100+ dollars per month is a backbreaker. Remember that this theoretical homeowner could still owe more on the loan than the property is worth! Inevitably, more homeowners are going to default.
Think of the cumulative effect as more and more people receive these increases.
Opportunity to help and profit
Based upon the last four years, lenders now are more likely to bundle and sell mortgage-backed, non-performing notes rather than foreclose upon them.
These non-performing notes will be great candidates to do true modifications with principal balance reduction.
If we can buy the notes at deep discounts, we can afford to forgive principal and lower payments thus creating a win-win situation for both borrower and lender.
If you are not adding the note buying business to your real estate investment business in 2015, you are leaving both money and opportunity on the table.
Millennials Drive Rental Demand
Millennials continued to express a preference toward renting over buying in 2014. That preference is driving demand in key metro markets such as Washington, D.C., New Orleans, and San Francisco. Investors would do well to keep close tabs on metros favored by millennials as rental demand in those markets is expected to stay strong.
“The younger generation should be surging into the home-buying market, bolstering demand, and they’re not,” said Dowell Myers, a demographer at the University of Southern California who has consulted with the Obama administration on the problem. “They’re underemployed, underpaid, and they have no savings,” Myers added. Members of the millennial generation– Americans born from the early 1980s to the early 2000s–are marrying and starting families at a very low rate, and their savings are meager.
Millennials–the nation’s second biggest generation behind baby boomers, accounting for 69 million people–will have significant impacts on housing as they consider whether to buy or to rent. “The millennials generation is the key to a sustained real estate recovery,” said Daren Blomquist, Vice President of RealtyTrac.
Current market conditions such as tightened credit standards, down payment requirements, and increased mortgage insurance premiums should open the door for seller financing to fill the void in this underserved market of potential homeowners.
The Top Ten With…
There are many people behind the scenes who drive the engine to make our companies successful. In our continuous Top Ten series, this month we turn the spotlight on one of these people, so you can get to know them better. This month, the spotlight is on one of the key members of our Road Crew, Ben Haught.
How long have you been with Colonial Funding Group/NoteSchool?
What is your role at Colonial Funding Group/NoteSchool?
Favorite TV Shows?
Favorite Movie of all-time?
The Count of Monte Cristo
Last Book You Read?
Washington’s Secret Six
Favorite Sports Team?
The 3 people you would like to have dinner with (dead or alive)?
You mean besides Eddie Speed? Jesus, George Washington, and Benjamin Graham…
What do you like best about working at Colonial Funding Group/NoteSchool?
Working with like-minded people who have similar goals in mind, while helping people achieve what they call success and being a part of a growing industry.
Capital Markets Update
Addicted to Routine?
By Martha Speed
We often live life without thinking because we are accustomed to our routine. I personally do much better with a routine schedule but find myself doing the same things, and asking, “Where did the time go?” The only way to experience something NEW is to change for the sake of changing. Many times, the four-letter word FEAR is what keeps me from changing. Is that you?
Waiting until the last minute
Don’t Procrastinate! More than double the IRA contributions are made at the last minute, tax-filing deadline, April 15th, than are made at the beginning of the year. If the funds are not in your IRA, you may delay making an investment and miss out on returns you could have made which add up over time. Make your contribution early!
Paralysis of Analysis
Don’t fall prey to paralysis of analysis in regard to the type of account to open or making an investment. Consult with a financial planner now to determine the best type of account you qualify for depending on your age and income level.
Don’t let money sit idle in your account! Contributions and Investment earnings benefit you more the earlier you open the account and start investing. Take advantage of the tax free or tax deferred interest compounding over the years. Think about it this way: you are rewarding yourself with a Tax deferred or Tax Free Loan!
Don’t fear failure! The Goal is to GROW your business or your IRA and with growth comes challenges. A willingness to do something NEW can break old habits and increase your knowledge and your pocket book.
If you need assistance in regard to the type of account that is right for you, contact anyone of our IRA custodians to answer your questions and get the ball rolling. Need help buying an asset or have questions about an asset? Feel free to contact me or call/email Tim or Michelle at Colonial’s trade desk [email protected] and put your money to work!
The Power of Habit: Why We Do What We Do in Life and Business by Charles Duhigg
Quote of the Month
“Knowledge has to be improved, challenged, and increased constantly, or it vanishes.” – Peter Drucker