What We Are Seeing In The Non Performing Loan Space

[Chris Seveney]

Over the past few months, we've seen a noticeable uptick in non-performing loans hitting the market—particularly in the investor space.

DSCR and fix-and-flip loans are making up the bulk of this volume. We estimate nearly $200M/month of non-performing product is circulating across the platforms and networks we monitor. These are typically investor loans that were originated in the last 2–3 years and are now showing cracks, largely due to overleveraging, slowed market velocity, or project mismanagement.

On the owner-occupied side, we’re starting to see more inventory—but with a big caveat: many of these loans were originated during the COVID years at 3–4% interest rates. These borrowers aren’t always far enough behind to justify a meaningful discount, and the low rates can present a risk profile that doesn’t pencil out especially assuming they will file BK which many have done. 

What are you seeing out there?

Are you noticing more non-performers hitting your desk? And with today’s economic backdrop—high consumer debt, inflationary pressures, and tighter credit—do you expect volume to keep climbing?

Would love to hear others’ perspectives.

[Don Konipol]

Quote from @Chris Seveney:

Over the past few months, we've seen a noticeable uptick in non-performing loans hitting the market—particularly in the investor space.

DSCR and fix-and-flip loans are making up the bulk of this volume. We estimate nearly $200M/month of non-performing product is circulating across the platforms and networks we monitor. These are typically investor loans that were originated in the last 2–3 years and are now showing cracks, largely due to overleveraging, slowed market velocity, or project mismanagement.

On the owner-occupied side, we’re starting to see more inventory—but with a big caveat: many of these loans were originated during the COVID years at 3–4% interest rates. These borrowers aren’t always far enough behind to justify a meaningful discount, and the low rates can present a risk profile that doesn’t pencil out especially assuming they will file BK which many have done. 

What are you seeing out there?

Are you noticing more non-performers hitting your desk? And with today’s economic backdrop—high consumer debt, inflationary pressures, and tighter credit—do you expect volume to keep climbing?

Would love to hear others’ perspectives.

I can only speak of the commercial mortgage market

In the last year two simultaneous issues
1- interest rates for good borrowers/property in the commercial space went from 4-5% to 7-9%.
This of course meant all those deals purchased at 5-6 cap would be running negative cash flow after debt service at same pricing.  So, those with fixed rate mortgages can only sell; at loss; those with variable rate have negative cash flow.
2- qualification for refinance much more stringent - some investors “trapped” in a negative cash flowing property worth 20% + less than they paid. 

We’ve seen a large increase in financing requests especially from borrower’s who 2 years ago would have qualified for institutional - bank type financing. 

Since there deals don’t pan out as refis we have approached current lenders with proposal for our purchasing their note at a discount.  While most lenders in this position are willing to discount, we’re finding they’re not willing to discount enough to provide the return we require as adjusted for the risk and current property values.  Many of these lenders are clinging to appraisals done 2-3 years ago utilizing 4.5 - 5.5 cap rates.   Many  of these incorrectly classified the property as better than it was so the appraisal was inflated value to begin with and with the increase in cap is even more out of wack.  

 The real estate “market” is not “smooth” with an instantaneous adjustment to new information.  People tend to “hang on” as long as they can either in denial as to changes in market value of hoping for the market to “comeback” and bail them out. Same with lenders.  

Chris, when I started buying notes back in 1980, I was paying something like 50 -55% of unpaid principal for PERFORMING notes, LOL.  Back the , with interest rates reaching a peak of 18%, sellers were owner financing at 9% to make the deal work.  After a couple years of they decided they needed cash, they were shocked to learn that their note was worth little more than half the value on the market.  But the better investment for the note buyer was defaulted notes - sometimes the property obtained in foreclosure was worth double to triple the note purchase price !  To discourage outside bidding, trustee sales were held in very remote locations; if anyone showed up to bid the sale was “delayed”.  This of course led to legislation aimed at curbing these abuses.