The Sale of Non-Performing Notes May Change Your Business
“The sky is falling,” says Chicken Little. The sky may not be falling, but, there are signs that experienced real estate flippers would do well to notice. Astute business people know that when something becomes “popular,” it is time to start looking for the exits. Before the stock market peaks, there is a noticeable increase in “water cooler” conversations about hot stocks. When real estate loans were so easy to get, hairdressers could qualify multiple high end properties, or when rap mix tapes and CD sales out of car trunks impacted traditional record store sales, it was clear that an adjustment was about to occur in the marketplace. Have you noticed that “flipping” has become sexy? Have you noticed all of the shows about flipping real estate, which has never happened before? Have you noticed the increase of the seminars, workshops, and gurus selling their wares that will guide you to riches by flipping homes?
Freddie Mac and Fannie Mae have began selling their “Non-Performing Notes” to institutional investors. First of all, what are Non-Performing Notes and where did they come from? Here is a quick primer.
When a person decides to purchase a home, often times Fannie Mae or Freddie Mac will insure the loan, which allows the borrower to have a lower down payment. When the borrower stops paying on the loan, thus defaulting on the loan, the lender, goes to Freddie Mac or Fannie Mae to collect on their “mortgage insurance policy.” So, Freddie Mac/Fannie Mae pay the bank according to the dictates of the policy, and the lender transfers the note to Freddie Mac or Fannie Mae as consideration for collecting on the policy. So now, Freddie Mac and Fannie Mae has an inventory of defaulted, non-performing notes, which are backed by the homes.
Now, Freddie Mac and Fannie Mae are selling these Non-Performing Notes back to some of the same institutions that originated the loans in the first place. Now, this is where it gets interesting.
These borrowers have not paid on the notes for up to 6 years. And the stated expectation/hope of Fannie Mae and Freddie Mac is that the institutional purchasers of the notes will work with the borrowers so that they can keep their homes. Yea, right.
Freddie Mac Non-Performing Loan Sales by 6 months
To date, assuming that each loan represents a property, over 75,000 properties backed by Non-Performing-Notes have been sold to institutional investors by Freddie Mac (37,787) and Fannie Mae (37,640). That represents over 5% of the annualized housing starts. We cannot expect that the Non-Performing Note sales are over. More sales will come.
So, what are the institutional investors going to do with these notes? Will they work something out with the borrowers? Will they foreclose? If they foreclose, what will they do with the properties? Will they sell them one at a time or sell in bulk, like they bought them? Who would want to buy them, $1 billion at a time, like they were bought? Is it possible that home builders could purchaser these homes in bulk and rehab them, as a way to grow their business that has not reached the pre-bubble levels?
Major home builders have the economies of scale for labor and material to rehab properties that local “fix and flippers” will not be able to compete with. And, it is the local companies that are getting some of their financing from friends and family IRAs and 401Ks. The sky may not be falling, but, there are things on the horizon to start noticing. As surfers say, “Its not the shark you see that is the problem.”
http://fanniemae.com/portal/funding-the-market/npl/index.html
http://www.fanniemae.com/portal/about-us/media/financial-news/2015/6235.html
http://noteinvestor.com/buy-notes/billions-non-performing-notes-selling-2015/
http://www.tradingeconomics.com/united-states/housing-starts
http://www.freddiemac.com/npl/non_performing_loan_offerings.html
http://www.housingwire.com/articles/37530-fannie-mae-announces-winners-of-non-performing-loans-sale
