Thoughts from the desk of Bob Repass…
Saturday, May 9, 2015. That is the day my daughter Kristin graduated from Texas Christian University. If only I could find the words to express how truly proud of her I am. It’s hard to believe that the journey she started four short years ago as we loaded up and drove to Fort Worth for “Frog Camp” to start her freshman year has come full circle and ended with much success.
Kristin graduated with a Bachelor of Science degree in Political Science with a minor in Criminal Justice. As of right now, she faces the daily question “…so have you found a job yet?”
Graduation weekend was an awesome time. We skillfully dodged the Texas rain and attended the morning commencement ceremony where the University Chancellor, Dr. Victor Boschini, addressed the Class of 2015 and challenged each of them to go out in the world and “Make a Difference!” Then we said good-bye to her friends and took pictures around various campus landmarks with family members and, of course, Kristin’s sorority sisters.
TCU’s mission is defined as “To educate individuals to think and act as ethical leaders and responsible citizens in the global community.” I’m confident Kristin is ready to take that mission to heart and fulfill it.
I am thrilled to say I am the proud father of a beautiful young woman, who I’m sure will find her own way to make a difference in the world!
The Trading Corner
Recap of NoteSchool’s Summer Summit Trust Class
By Martha Speed
If you weren’t able to attend the Trust class presented by Jeff Watson and Walter Wofford at the annual NoteSchool Summer Summit, you missed a great class! Here’s a recap of a few of the key concepts from the class:
- Trusts create firewalls. Who deserves to know what you own?
- Trusts provide privacy of ownership; don’t pattern your Trust agreement by using the same address or the same trustee.
- Trusts separate your properties; therefore, there is no domino effect for liens to be attached to all the properties you own.
- Trusts discourage litigation.
- Trusts are easier, quicker, & cheaper to establish than traditional entities such as LLC’s.
- The Trust beneficiary or Trustee can be a Limited Liability Corporation instead of an individual.
- Trusts allow you to control more than you own or own nothing but control everything.
There was also a great discussion with students that have been able to take eligible distributions from their employer-sponsored 401K plans and rollover to an IRA in order to self-direct. You may want to investigate this option in order to open a Self-Directed Retirement Account. Be sure to choose the appropriate IRA account and check taxes you could incur depending on the type of accounts you hold.
Most importantly, the Omega Asset Protection by Jeff Watson is available to all new NoteSchool mentor students, and Walter Wofford’s IRA class is on the NoteSchool member site. Take advantage of the great training offered from NoteSchool!!
Can You Still Buy Notes at a Deep Discount?
By W. Eddie Speed
At one of my recent presentations, I was asked, “Can individual investors still buy notes at a deep discount?” The question arose because someone had read that the large institutional buyers, like hedge funds, were paying “top-prices” for non-performing notes today. I immediately dispelled that myth for this person, but it got me thinking; “I wonder how many other people are being held back by this myth.”
The purpose of this article is to dispel the myth for you and also show you why this is shaping up already to be a record year for the non-performing note business.
We all know that when an asset is in demand, the supply of that asset affects prices. Assets such as real property and real estate notes have been and will continue to be in high demand by investors.
Anybody who has been in the real estate market for the past 10 years has seen dynamic changes in both supply and demand on real estate and real estate backed assets. In 2009, for example, REO sales had reached their peak supply and accounted for over 25% of market sales. Short sales were less than .5% of market sales in 2006 and grew to 9% of sales in 2013.
Many investors, both large and small, capitalized on the discounted prices that the large inventories provided. Since 2009, new government rules forced the real estate and real estate financing industries to adjust their actions and therefore made changes to the inventory of all real estate assets.
Today, according to the National Association of Realtors, REO foreclosure sales account for less than 9% of market sales while short sales account for less than 3%.
Since the demand for both REO’s and short sales remains high, investors are paying premiums to acquire these assets. In fact, according to the same NAR report, REO investors are getting about a 17% discount, while short sale investors are getting a 15% discount. Those discounts lower profits and raise risk.
Now, I’m not saying that there are certain markets where investors are getting better discounts than NAR’s national number, nor am I saying that some investors may be getting better deals than these. I am saying that the market conditions have raised prices for these because the demand is strong but the inventory is low.
The Dodd-Frank Act has pressured Banks and GSE’s to get non-performing assets off of their books quicker. This can’t be accomplished through a foreclosure or short sale, so it’s no surprise that they’re selling large pools of non-performing loans.
In fact, in the four months of this year, several large banks, along with Fannie Mae and Freddie Mac, have sold over $7 Billion in non-performing notes! When these entities sell off large volumes of notes, they package them into large pools and hold an auction.
The private equity hedge funds that buy these assets all have certain profit margin expectations, geographic target areas, fixed costs, and an eye for portfolio performance over individual note performance. In other words, the big funds have their own agenda and therefore their own goals with inventory.
Since these are sold in pre-packaged pools, the buyers are forced to buy pools of mixed assets. Inevitably, when they buy pools like this, there are certain assets that meet the investment criteria for that equity firm and others that do not. The assets that are not within the investment criteria are resold at a discount.
For example, let’s say that ABC Company is looking to purchase non-performing notes on high-end properties in the western states. This company ends up buying a large pool that contains high dollar notes in western states but also has hundreds of notes on lower end homes in the Midwest and Southeast. This investment company will carve out the assets it doesn’t want and sell them off at a discount.
These carved out assets present a unique opportunity. Unlike the large investment firms, small investors can apply special servicing, workouts, and solutions. The larger companies simply don’t have a tolerance for these assets and will liquidate this “dead weight” as quickly as possible at discounted prices. What’s dead weight to that large firm is gold for a small investor.
The fact that over $7 billion in non-performing assets has already been sold signals a large volume of assets that will be carved off and re-sold to small investors. There has never been a better time to buy these assets.
The Top Ten With…
There are many people behind the scenes that 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 a key member of our Customer Service & Fulfillment Team, Jesse DeLaGarza.
How long have you been with Colonial Funding Group/NoteSchool?
One year and seven months
What is your role at Colonial Funding Group/NoteSchool?
Customer Service, Administrative Functions, and Order Processing
Favorite TV Shows?
Favorite Movie of all-time?
The Outlaw Josey Wales
Last Book You Read?
The Dark Tower: The Gunslinger
Favorite Sports Team?
Cowboys, Rangers, Mavericks
The 3 people you would like to have dinner with (dead or alive)?
Albert Einstein, Neil Armstrong, Dirk Nowitzki
What do you like best about working at Colonial Funding Group/NoteSchool?
The entire staff is nice and helpful.
Capital Markets Update
Volatility Fatigue… Are you feeling it?
By Ryan Parson
While there’s nothing wrong with a traditional 401K plan, I got the sense recently from talking to an investor I know whose portfolio is structured in traditional investments that he’s getting tired of anticipating a possible market crash. He’s becoming increasingly concerned that something will take place, politically or economically, beyond his control, that will completely derail his financial security.
No doubt the market appears to be doing really well right now. Some investors are confident that their financial portfolios will continue to grow, and they very well may. Others, like the investor I spoke with, fear that we’re heading towards a significant correction. Does he have a right to be worried? What’s the true source of his unsettled feeling?
In my opinion, the reason he’s feeling this way is because he’s been through it before, as recently as 2008, and he realizes, since he’s got most of his money in traditional investments, that he has absolutely no control over what happens. It’s natural given the structure of his portfolio that a weariness has crept into his mindset that’s caused him to become restless and concerned. As he put it, “What goes up must come down.” Talk about a nagging sense of the inevitable.
This investor is experiencing what I call “volatility fatigue,” and most, if not all, investors go through it at some point or another. It’s particularly prominent when you think or feel there’s going to be a dramatic market shift that will destroy what you’ve built for your future. In this case, he’s exposed himself to a great deal of risk by being predominantly in stocks and bonds, and he’s starting to feel more worried about potential volatility even as the market inches higher.
In the conversation with this investor, it reminded me that his “volatility fatigue” may be an indication that his portfolio doesn’t have an appropriate mix of “alternative” (non-traditional) assets. I told him that maybe it’s time to explore some other asset categories to get some relief.
The upshot here is that true diversification in your portfolio becomes crucial if you’re invested primarily with traditional investments like stocks and bonds that are susceptible to the vagaries of the market. Diversification helps to mitigate volatility fatigue by having asset classes that are insulated from the traditional market roller coaster.
I suggest you ask yourself…
Am I feeling volatility fatigue?
Am I prepared if the stock market goes backward?
Do I have a plan in place to achieve as much scale as I can as quickly as possible with my portfolio?
(And if you’re an investor who’s already achieved some level of scale, what tools are you using to assess the risks your portfolio is facing?)
If you’re currently feeling “volatility fatigue,” and if you think you may feel even more of it soon, what are you doing to relieve some of that unrest?
Is it time to consider how having alternative assets in your portfolio can help reduce your concerns about being yoked to the market?
Even if you already have alternative assets in your portfolio, do you have the right balance? Will what you have continue to bring a sense of ease and comfort to you to avoid a future sense of “volatility fatigue” and begin feeling the security and peace of mind you deserve?
Quote of the Month
“Volatility may be rising simply because investors must digest more information every day.” – Alex Berenson
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