ASK YOUR MAGIC 8-BALL!

[Sherman Arnowitz]

I recently participated in the bidding process on a pool of 180 non-performing second mortgages. It was a big hype because it was direct from a bank (through a broker) along with a substantial quantity of loans.

Word got around that everyone and their mother was going to bid on this pool of loans. I was asked by a few of my associates to join forces with them to hedge on winning the bidding. One of my associates was extremely confident he was going to win the bids.

In reviewing the loans, I noticed that overall, there was very little past due balances. Most of the loans had “last pay dates” from 2018 and on. I also noticed many of the loans were over $50,000, which I normally don’t bid on. Even with considering the above observations looming over my head, I ended up bidding on all the loans with my average bids hovering around $.48 on the dollar. It’s the highest I’ve bid on a pool of loans in close to 25 years of being in the business. To tell you the truth, I was nervous about winning the pool because how high my bidding was.

Well, I didn’t have to worry for too long. We were told someone bid on the entire pool and their bid was in the low $.60’s. WTF!!!

How can anyone with any experience in the second mortgage space think they can make a decent return on their money bidding so high? In 2018, we shared in the purchase of a large pool of seconds direct from a bank and paid about $.07 on the dollar for the loans. In 2020, we purchased a medium-sized pool and paid about $.25 on the dollar. When will this madness end?

The reality is it’s all about supply and demand, like what’s going on in the housing market. If you have a house, now’s the best time to sell. However, if the idea is to then purchase a house, you’re in trouble!

My advice for now is to wait it out. Align yourself with “bigger fish” in the pond. Investors who are buying larger pools of loans with the hope that they’ll select a portion of their portfolio to put on the market for sale.

Like the housing market, our market will begin to re-align itself in due time. The buyers of seconds who are paying exorbitant prices will soon realize they can’t make the kinds of profits they thought they could make. Hopefully, they’ll stop making these outrageous bids.

Banks, along with larger investors are slowly coming around starting to sell off their inventory. PNC is supposed to have a large portfolio that will be on the market before the end of the year.

Smaller loans are still available to buy. You just must wade through them to find the ones that make the most sense to buy.

Other suggestions are investing in other alternative investments. I've chosen to invest in financing mobile homes. It's not as lucrative as non-performing seconds, but it's been giving me a solid ROI of around 9-11%. It's also a good time to network with other investors to maybe strategize about pulling your money to be a part of larger pools to bid on.

Anyway, when I shake my “Magic 8 ball” and ask if investing in distressed seconds is still a good idea, I keep getting answers like “Outlook Good”, “Signs point to yes” and “Without a doubt”.