Non Performing Loans on the way?

Question

As an engineer by trade, I like to keep stats on things

We track by month the number of loans we see come across our desk.  We are seeing around $1B+ a month in performing and non performing loans come our way. Currently pricing is still higher than we want and bid/ask spread is still a big divide. Yes there are deals out there though

So far this month we are seeing an uptick in NPL’s as Fannie released a $250M pool and the peerstreet BK has over $50M in NPL’s as well

We are also seeing a significant number of bridge and fix and flip loans run past maturity and our now considered in default ($250M).

While these pools may be too high for a one off investor, they are starting to make their way downstream, so as I always preach - be patient

For those getting started- it is harder today as 5+ years ago there were 1000’s of low balanced loans where you could get started in the space for under $25k. Unfortunately those days are mostly gone. Yes you can still find them but realize the pricing is going to be high.

What are others seeing ?

Chris Seveney · Answer

@Chris Seveney

Fannie Mae just released a $250M pool and now Freddie Mac released $600M pool….

GSE’s are smart and reducing their portfolios

Don Konipol · Answer

In the commercial space, we always stand ready to buy existing commercial mortgage notes up to $5 million - at the RIGHT price.  Meanwhile, we make new hard money loans at 12.75% interest rate for 12 - 24 months and charge 4 points for a 12 months and 6 for a 24 month.  So our total ROI projection on these is 16.75% or 15.75% per annum.  The existing notes we purchase  have to have a weighted expected ROI of at least that.  As I’ve mentioned before I have been successful “working” the note, so sometimes our returns on existing notes purchased at discount are much higher.

Chris Seveney · Answer

@Scott Mac

There is no heat map that I am aware of. As to location typically seeing it where the biggest ups were always get hit the hardest the fastest

Throw in insurance costs in the states you mentioned which is a major issue not being talked about and those areas are also most populated so makes sense to see more defaults there

Chris Seveney · Answer

The note landscape has changed significantly over the past five years. Up through COVID there were a ton of opportunities performing and non performing assets with balances under $50k. Thus if you had $20-$30k you could easily find notes to purchase. Due to the increase in home values, and many people refinancing -  we rarely are seeing loan balances that low. Most of the loans we are seeing on the market are much higher ($100k+). For those lower balances, pricing is high so the yields are very low.

There are still opportunities for the smaller investor but the days of 12-15% for a performing loan are almost nill. Expect it to be between 8-12%. We sell assets and are seeing people bid them at 15-18% on performing and are just saying thanks but no. For us we do not need to sell them as they are cash flowing, and sellers are in this position whereas buyers are sitting on cash doing nothing - so its either buy it at 10-12% or let it sit and collect nothing hoping things change - but on the lower upb market, I do not see much movement in that market even when things start to open up.

Scott Mac · Answer

Is there some kind of USA heat map of failures by commercial and non-commercial failures by city?

I mean for instance, are we seeing a waterfall from Nor.Cal. and a trickle from Florida or Chicago.

Also, it seems like a lot of bigger downs for the (speculative) financing comes out of just a handful of states, NY, FLA, Calf, TX, etc... and when a loan goes down those LP's are taking a loss too.

Doug Smith · Answer

We'll be watching closely. We originally started this company as commercial and residential NPL buyers before heading back into our lending and real estate investment roots. We did very well in the mid-late 2000s, but backed out of the space when LoneStar bought all 16 HUD traunches in the summer of 2014 for over 77% of the market value of the collateral. The big funds came in and started overpaying. The math simply no longer worked. If we find assets again in a range that makes sense mathematically, we'll go back in. I think the assets will be there, but I have concerns that many will be overpaying and we'll not get down to a number we can feel comfortable with...but we'll be watching closely.

Alan Nelson · Answer

Chris, thanks for the insight.  It seems that this time around there might be more opportunity for the big funds rather than the smaller investor.  Any guesses on how a smaller player might be able to participate this time around (as the opportunity presents itself)...besides investing in a fund?

Chris Seveney · Answer

@Peter Halliday

Good points. I just don’t see smaller balanced loans since Dodd Frank because loans cost mortgage companies money when they are under 100k so most lenders don’t lend on assets under 50-100k

You will find these in seller financed areas and some cfd’s but the cfd’s from 2008-2012 from Harbour and vision are mostly gone.

Where there will be opprtunities for lower priced assets is in the junior lien position

Peter Halliday · Answer

Well, to be on the opposite side.  There will be opportunities to help take smaller balances off the hands of people that want to get rid of them to purchase balance ones.  Plus, don't you think as those upstream buy, they'll always hit things they don't want.  Including smaller balances that may exist there too.

Scott Mac · Answer

Tick Tock on this...

I wonder if it will be enough to get government bailouts--like before?

Non Performing Loans on the way?

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