What We Are Seeing In The Non Performing Loan Space
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
7e investments53 Reviews
What We Are Seeing In The Non Performing Loan Space
Most Popular Reply
Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votesQuote 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.
17 Replies
- 1yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
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.- 1yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @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.
Oh man that brings back courthouse steps memories. on the west coast Trustee companies ( foreclosure mills) they would stick to courthouse.. but when a private attorney was doing it you had to read the notice well they could have a venue that is in the door way of some obscure place at a weird hour.. then like you said if you showed up all of a sudden it was postponed. although I have to say I snagged a few at the alternate locations. In my little Money renting business we have funded some folks ( quite a few ) that the take out was DSCR.. And frankly some of what I am seeing in that space reminds me of 07 sub prime lending.. you know income based only no real credit or tax return etc etc.. I can think of two off my borrowers from 3 or for years ago that took me out with DSCR and I have become aware that they are losing their entire portfolio's.. AS we know when you do those loans everything is automatically cross collateralize.. And what I see is mis management or not being in market and not really understanding how PMs' work or that you cannot eat off of rents with a highly leveraged portfolio.. all income MUST be put back into the property plus usually have to contribute capital to keep your portfolio healthy. From what I see on a small slice I think the DSCR guys and some of the less experienced investors who are taking down those loans are going to see major headwinds and defaults.
- Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes1y
@Chris Seveney I dont see a ton of note inventory like you do, but what I'm seeing on the origination side is correlated with your observations on the NPL DSCRs. I'm seeing a lot of deals that just dont pencil, lots of imagination and misplaced optimism on rents and expenses, and a general lack of liquidity.
On a daily basis, I'm talking with investors who are wanting loans that stretch deals to the absolute max of solvency while having little to no cash or liquidity. Deals are being held together by shoestrings where if anything goes wrong, the investor is going to be in a bind. I'm talking no reserves whatsoever while borrowing at absolute max leverage, all while not having the personal income to absorb any extended vacancies or drop in rents. Its like everyone is in such a hurry that theyre stacking risk on risk in a "make it or bust" race to have X doors or retire at 28 or whatever.
Same goes for hard money and flips - I'm seeing situations where investors are getting into deals via hard money that theyre only exit path is selling the property and where margins are unreasonably tight. There's no margin of safety and little borrower skin. A lot of investors have been looking for bridge loans and extensions to buy them time because theyve termed out on their HML but cant refi and cant sell unless at a loss.
A trend Ive noticed in the past two months is that appraisals are getting more conservative compared to the past year or two. Appreciation has slowed dramatically and properties under-appraising is becoming more common.
My guess is that we'll see two things happen in the next year or so: 1) DSCR loans are going to get stricter with experience requirements, and 2) DSCR loans are going to require higher DSCR ratios. Generally, LTVs are pretty healthy because everyone has a ton of equity, and FICOs have been really solid for the past few years (I suspect this may be artificially inflated by the covid response, though).
The risk-stacking combo I see most currently is inexperienced investor + little/no cash + DSCR ratio of 1.01x + not great personal financial situation (low income/high personal DTI). These borrowers are one eviction or layoff away from missing several loan payments and getting trapped.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1y
Quote from @Patrick Roberts:
@Chris Seveney I dont see a ton of note inventory like you do, but what I'm seeing on the origination side is correlated with your observations on the NPL DSCRs. I'm seeing a lot of deals that just dont pencil, lots of imagination and misplaced optimism on rents and expenses, and a general lack of liquidity.
On a daily basis, I'm talking with investors who are wanting loans that stretch deals to the absolute max of solvency while having little to no cash or liquidity. Deals are being held together by shoestrings where if anything goes wrong, the investor is going to be in a bind. I'm talking no reserves whatsoever while borrowing at absolute max leverage, all while not having the personal income to absorb any extended vacancies or drop in rents. Its like everyone is in such a hurry that theyre stacking risk on risk in a "make it or bust" race to have X doors or retire at 28 or whatever.
Same goes for hard money and flips - I'm seeing situations where investors are getting into deals via hard money that theyre only exit path is selling the property and where margins are unreasonably tight. There's no margin of safety and little borrower skin. A lot of investors have been looking for bridge loans and extensions to buy them time because theyve termed out on their HML but cant refi and cant sell unless at a loss.
A trend Ive noticed in the past two months is that appraisals are getting more conservative compared to the past year or two. Appreciation has slowed dramatically and properties under-appraising is becoming more common.
My guess is that we'll see two things happen in the next year or so: 1) DSCR loans are going to get stricter with experience requirements, and 2) DSCR loans are going to require higher DSCR ratios. Generally, LTVs are pretty healthy because everyone has a ton of equity, and FICOs have been really solid for the past few years (I suspect this may be artificially inflated by the covid response, though).
The risk-stacking combo I see most currently is inexperienced investor + little/no cash + DSCR ratio of 1.01x + not great personal financial situation (low income/high personal DTI). These borrowers are one eviction or layoff away from missing several loan payments and getting trapped.
Have an investor who I call is the "bucket accountant" - they have 300 doors and just throws income in a bucket and does not know how each property is doing. Has $5M+ in loans maturing in next 6-12 months and when we talk with them they have no plan or strategy except "refinance to get more money to cover expenses" but they are already at around 70% LTV. Also mentioning they should sell an asset is like giving up a child. They refuse - unfortunately they are blinded by the future and do not realize they will most likely end up losing it all the way the portfolio is being managed.
7e investments53 Reviews - 1yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Patrick Roberts:
@Chris Seveney I dont see a ton of note inventory like you do, but what I'm seeing on the origination side is correlated with your observations on the NPL DSCRs. I'm seeing a lot of deals that just dont pencil, lots of imagination and misplaced optimism on rents and expenses, and a general lack of liquidity.
On a daily basis, I'm talking with investors who are wanting loans that stretch deals to the absolute max of solvency while having little to no cash or liquidity. Deals are being held together by shoestrings where if anything goes wrong, the investor is going to be in a bind. I'm talking no reserves whatsoever while borrowing at absolute max leverage, all while not having the personal income to absorb any extended vacancies or drop in rents. Its like everyone is in such a hurry that theyre stacking risk on risk in a "make it or bust" race to have X doors or retire at 28 or whatever.
Same goes for hard money and flips - I'm seeing situations where investors are getting into deals via hard money that theyre only exit path is selling the property and where margins are unreasonably tight. There's no margin of safety and little borrower skin. A lot of investors have been looking for bridge loans and extensions to buy them time because theyve termed out on their HML but cant refi and cant sell unless at a loss.
A trend Ive noticed in the past two months is that appraisals are getting more conservative compared to the past year or two. Appreciation has slowed dramatically and properties under-appraising is becoming more common.
My guess is that we'll see two things happen in the next year or so: 1) DSCR loans are going to get stricter with experience requirements, and 2) DSCR loans are going to require higher DSCR ratios. Generally, LTVs are pretty healthy because everyone has a ton of equity, and FICOs have been really solid for the past few years (I suspect this may be artificially inflated by the covid response, though).
The risk-stacking combo I see most currently is inexperienced investor + little/no cash + DSCR ratio of 1.01x + not great personal financial situation (low income/high personal DTI). These borrowers are one eviction or layoff away from missing several loan payments and getting trapped.
The risk-stacking combo I see most currently is inexperienced investor +
little/no cash + DSCR ratio of 1.01x + not great personal financial
situation (low income/high personal DTI). These borrowers are one
eviction or layoff away from missing several loan payments and getting
trapped.
sounds like your describing the average tenant !! - Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes1y
Quote from @Chris Seveney:
Quote from @Patrick Roberts:
@Chris Seveney I dont see a ton of note inventory like you do, but what I'm seeing on the origination side is correlated with your observations on the NPL DSCRs. I'm seeing a lot of deals that just dont pencil, lots of imagination and misplaced optimism on rents and expenses, and a general lack of liquidity.
On a daily basis, I'm talking with investors who are wanting loans that stretch deals to the absolute max of solvency while having little to no cash or liquidity. Deals are being held together by shoestrings where if anything goes wrong, the investor is going to be in a bind. I'm talking no reserves whatsoever while borrowing at absolute max leverage, all while not having the personal income to absorb any extended vacancies or drop in rents. Its like everyone is in such a hurry that theyre stacking risk on risk in a "make it or bust" race to have X doors or retire at 28 or whatever.
Same goes for hard money and flips - I'm seeing situations where investors are getting into deals via hard money that theyre only exit path is selling the property and where margins are unreasonably tight. There's no margin of safety and little borrower skin. A lot of investors have been looking for bridge loans and extensions to buy them time because theyve termed out on their HML but cant refi and cant sell unless at a loss.
A trend Ive noticed in the past two months is that appraisals are getting more conservative compared to the past year or two. Appreciation has slowed dramatically and properties under-appraising is becoming more common.
My guess is that we'll see two things happen in the next year or so: 1) DSCR loans are going to get stricter with experience requirements, and 2) DSCR loans are going to require higher DSCR ratios. Generally, LTVs are pretty healthy because everyone has a ton of equity, and FICOs have been really solid for the past few years (I suspect this may be artificially inflated by the covid response, though).
The risk-stacking combo I see most currently is inexperienced investor + little/no cash + DSCR ratio of 1.01x + not great personal financial situation (low income/high personal DTI). These borrowers are one eviction or layoff away from missing several loan payments and getting trapped.
Have an investor who I call is the "bucket accountant" - they have 300 doors and just throws income in a bucket and does not know how each property is doing. Has $5M+ in loans maturing in next 6-12 months and when we talk with them they have no plan or strategy except "refinance to get more money to cover expenses" but they are already at around 70% LTV. Also mentioning they should sell an asset is like giving up a child. They refuse - unfortunately they are blinded by the future and do not realize they will most likely end up losing it all the way the portfolio is being managed.
Extend and pretend. Lots of that going around right now. Just look at the posts on this forum. Everyone is always, "you'll be refinancing in 6/12/18 months so dont worry about that stuff because rates are coming down". I was in a small local mastermind last year and one of the attendees was a multifamily CRE guy. He kept talking how rates had to come down because operators cant survive with 7% rates and that everyone would be refinancing to stabilize in the next few years.
Personally, I do not see a base case where the ten year returns to sub 3%. If anything, almost everything points to inflation right now. Additionally, I think things are just fine with rates where they are at the moment. Artificially low rates incentivize bad capital allocations, creating exuberance/frothiness that leads to poor decision-making. The end result of rates that are too low is capital destruction that only becomes recognizable after the damage is done.
- Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes1y
Quote from @Jay Hinrichs:
Quote from @Patrick Roberts:
@Chris Seveney I dont see a ton of note inventory like you do, but what I'm seeing on the origination side is correlated with your observations on the NPL DSCRs. I'm seeing a lot of deals that just dont pencil, lots of imagination and misplaced optimism on rents and expenses, and a general lack of liquidity.
On a daily basis, I'm talking with investors who are wanting loans that stretch deals to the absolute max of solvency while having little to no cash or liquidity. Deals are being held together by shoestrings where if anything goes wrong, the investor is going to be in a bind. I'm talking no reserves whatsoever while borrowing at absolute max leverage, all while not having the personal income to absorb any extended vacancies or drop in rents. Its like everyone is in such a hurry that theyre stacking risk on risk in a "make it or bust" race to have X doors or retire at 28 or whatever.
Same goes for hard money and flips - I'm seeing situations where investors are getting into deals via hard money that theyre only exit path is selling the property and where margins are unreasonably tight. There's no margin of safety and little borrower skin. A lot of investors have been looking for bridge loans and extensions to buy them time because theyve termed out on their HML but cant refi and cant sell unless at a loss.
A trend Ive noticed in the past two months is that appraisals are getting more conservative compared to the past year or two. Appreciation has slowed dramatically and properties under-appraising is becoming more common.
My guess is that we'll see two things happen in the next year or so: 1) DSCR loans are going to get stricter with experience requirements, and 2) DSCR loans are going to require higher DSCR ratios. Generally, LTVs are pretty healthy because everyone has a ton of equity, and FICOs have been really solid for the past few years (I suspect this may be artificially inflated by the covid response, though).
The risk-stacking combo I see most currently is inexperienced investor + little/no cash + DSCR ratio of 1.01x + not great personal financial situation (low income/high personal DTI). These borrowers are one eviction or layoff away from missing several loan payments and getting trapped.
The risk-stacking combo I see most currently is inexperienced investor +
little/no cash + DSCR ratio of 1.01x + not great personal financial
situation (low income/high personal DTI). These borrowers are one
eviction or layoff away from missing several loan payments and getting
trapped.
sounds like your describing the average tenant !!Unfortunately
- Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes1y
I don't look at notes, but everything everyone here has said, I am feeling or seeing. For the first time I can ever remember, this year I am seeing a lot of flips that are 80-95% finished. I never take the time to see why, but I'm expecting either their HM timed out, market not supporting their optimistic exit price, lost their full time construction jobs, got deported, or their trades are trying to make up for other lost jobs.
I'm also now seeing our HML wanting $30-$50,000 reserves from fix and flip investors. That's a surprise to mean who thought they can borrow everything and flip with no money down. They lenders have good insight I expect or have been burned, so increasing requirements.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1y
Quote from @Bruce Lynn:
I don't look at notes, but everything everyone here has said, I am feeling or seeing. For the first time I can ever remember, this year I am seeing a lot of flips that are 80-95% finished. I never take the time to see why, but I'm expecting either their HM timed out, market not supporting their optimistic exit price, lost their full time construction jobs, got deported, or their trades are trying to make up for other lost jobs.
I'm also now seeing our HML wanting $30-$50,000 reserves from fix and flip investors. That's a surprise to mean who thought they can borrow everything and flip with no money down. They lenders have good insight I expect or have been burned, so increasing requirements.
We work with the institutional HML and the programs are evolving and as Patrick mentioned the experience factor is playing a bigger role. We are also seeing larger contingency requirements in the budgets as well as reserves.
We just got $7M in loans under agreement that are 95% finished as you mentioned - most are maturity defaults as they have not been able to sell it fast enough and it took longer to build, especially in SW florida which got hit by the storm last year
7e investments53 Reviews
Ditto. A lot of HML fix n flip and DSCR NPLs lately. Particularly seeing an uptick in Multi-family NPLs.
Wouldn't touch Covid originated loans with a ten foot pole, and there's a ton of FHA NPLs out there.
Seeing an influx of HECMs, and sellers are loosening their belts somewhat.
- Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes1y
I'm not a lender so can't really speak to what is happening, but it doesn't really surprise me....
investors make the same mistake EVERY cycle "it's good now, it will stay this way forever"....so let me buy this deal, at this rate, with these numbers thinking the market will remain the same way until the end of time.
NOPE
Doesn't work that way.
I'm super low risk, always have been. I'm not leveraging much at all and staying at the mid range house pricing.
- 1yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Luka Milicevic:
I'm not a lender so can't really speak to what is happening, but it doesn't really surprise me....
investors make the same mistake EVERY cycle "it's good now, it will stay this way forever"....so let me buy this deal, at this rate, with these numbers thinking the market will remain the same way until the end of time.
NOPE
Doesn't work that way.
I'm super low risk, always have been. I'm not leveraging much at all and staying at the mid range house pricing.
some of the same dynamics I think have been happening as they did in 06 07 with mortgage brokers and writing sub prime loans or call loans in 5yrs.. dont worry we will just refi when rates drop.. I hear that a lot when the rates rose so quick. Mortgage brokers telling their cleints not to worry we will just refi in 2 to 3 years.. well we are now 2 to 3 years and rates have not come down that much .. - Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1y
Quote from @Jay Hinrichs:
Quote from @Luka Milicevic:
I'm not a lender so can't really speak to what is happening, but it doesn't really surprise me....
investors make the same mistake EVERY cycle "it's good now, it will stay this way forever"....so let me buy this deal, at this rate, with these numbers thinking the market will remain the same way until the end of time.
NOPE
Doesn't work that way.
I'm super low risk, always have been. I'm not leveraging much at all and staying at the mid range house pricing.
some of the same dynamics I think have been happening as they did in 06 07 with mortgage brokers and writing sub prime loans or call loans in 5yrs.. dont worry we will just refi when rates drop.. I hear that a lot when the rates rose so quick. Mortgage brokers telling their cleints not to worry we will just refi in 2 to 3 years.. well we are now 2 to 3 years and rates have not come down that much ..Working with someone to refi a MF property a month ago and they wanted to wait (not sure why as they are coming up on maturity) - but they thought they had other options, could have gotten a loan at 7.5% now taht same bridge loan is 8.25%. On a 4 million loan thats a big delta - people like to dream and not take action, but shold have taken it when they had the chance.
7e investments53 Reviews
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.
Some DSCR products are becoming just flat out sub prime loans with better LTV's (for now anyway). They used to only be for experienced investors, with pretty good credit, with ample reserves, 75% LTV and ratio over 1.00, but preferably over 1.15. Anyone who has ever managed real estate knows that 1.0 DSCR is not breaking even, pretty far from it.) from it, so reserves, that is cash in the bank matters (and experience does not hurt) a great deal. But, there are programs that will allow a first time investor (who might not even have a primary home) to borrow at 80% loan to value with a 2 months of reserves on the SUBJECT property with say .80 DSCR. They are coming out of pocket every month to make the payment BEFORE the AC breaks. Before the roof leaks etc. and they can have 5000 in the bank after closing. and oh by the way, they have four more properties with the same .80 ratio that they used the same 5k as reserves.
Every investment banker I talk to tells me how hot DSCR loans are right now and everyone wants a piece, so the bid for these deals is juicy. If I had been savvy enough in 2006 to to be talking to Investment bankers would that have sounded much different then? This is a MUCH smaller slice of mortgages then true subprime so much different systematical risk then back then but it will still end poorly for a lot of the borrowers and for the end buyers of the debt.
And, I will add, it will not end well for those originators who only understand, and in most cases not licensed to sell anything but DSCR.
Hurst Real Estate, INC4.991 ReviewsQuote from @Jay Hurst:
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.
Some DSCR products are becoming just flat out sub prime loans with better LTV's (for now anyway). They used to only be for experienced investors, with pretty good credit, with ample reserves, 75% LTV and ratio over 1.00, but preferably over 1.15. Anyone who has ever managed real estate knows that 1.0 DSCR is not breaking even, pretty far from it.) from it, so reserves, that is cash in the bank matters (and experience does not hurt) a great deal. But, there are programs that will allow a first time investor (who might not even have a primary home) to borrow at 80% loan to value with a 2 months of reserves on the SUBJECT property with say .80 DSCR. They are coming out of pocket every month to make the payment BEFORE the AC breaks. Before the roof leaks etc. and they can have 5000 in the bank after closing. and oh by the way, they have four more properties with the same .80 ratio that they used the same 5k as reserves.
Every investment banker I talk to tells me how hot DSCR loans are right now and everyone wants a piece, so the bid for these deals is juicy. If I had been savvy enough in 2006 to to be talking to Investment bankers would that have sounded much different then? This is a MUCH smaller slice of mortgages then true subprime so much different systematical risk then back then but it will still end poorly for a lot of the borrowers and for the end buyers of the debt.
And, I will add, it will not end well for those originators who only understand, and in most cases not licensed to sell anything but DSCR.
Oh, to add one more thing: Most of these loans have 3-5 year pre-payment penalties up to 5%. No big deal, you get a .375% lower rate to get your DSCR to .80 instead of .78 to get the deal done. now, prices drop, tenant tears up the house, no money to fix, oh crap have to sell but more or less under water even after putting down 20% due to closing costs and PPP that I was told was no big deal. Poof. It all evaporates.
Hurst Real Estate, INC4.991 Reviews- Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes1y
Quote from @Jay Hurst:
Quote from @Jay Hurst:
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.
Some DSCR products are becoming just flat out sub prime loans with better LTV's (for now anyway). They used to only be for experienced investors, with pretty good credit, with ample reserves, 75% LTV and ratio over 1.00, but preferably over 1.15. Anyone who has ever managed real estate knows that 1.0 DSCR is not breaking even, pretty far from it.) from it, so reserves, that is cash in the bank matters (and experience does not hurt) a great deal. But, there are programs that will allow a first time investor (who might not even have a primary home) to borrow at 80% loan to value with a 2 months of reserves on the SUBJECT property with say .80 DSCR. They are coming out of pocket every month to make the payment BEFORE the AC breaks. Before the roof leaks etc. and they can have 5000 in the bank after closing. and oh by the way, they have four more properties with the same .80 ratio that they used the same 5k as reserves.
Every investment banker I talk to tells me how hot DSCR loans are right now and everyone wants a piece, so the bid for these deals is juicy. If I had been savvy enough in 2006 to to be talking to Investment bankers would that have sounded much different then? This is a MUCH smaller slice of mortgages then true subprime so much different systematical risk then back then but it will still end poorly for a lot of the borrowers and for the end buyers of the debt.
And, I will add, it will not end well for those originators who only understand, and in most cases not licensed to sell anything but DSCR.
Oh, to add one more thing: Most of these loans have 3-5 year pre-payment penalties up to 5%. No big deal, you get a .375% lower rate to get your DSCR to .80 instead of .78 to get the deal done. now, prices drop, tenant tears up the house, no money to fix, oh crap have to sell but more or less under water even after putting down 20% due to closing costs and PPP that I was told was no big deal. Poof. It all evaporates.
Yep, this is the same kind of stuff that I'm seeing. A large part of what I do is educating and guiding investors on these kinds of things. I lose a lot of deals because of it, but I'm not about to be the guy who cons some new investor who's basically one step away from a FTHB into a loan that's going to sink them in the next few years.
This is going to end badly for a lot of people who overlevered themselves in the past few years. I dont think property values will drop severely, but it's clear to me that cash has been drained from the system by the Fed and it's showing up in the personal financials in a lot of borrowers. There's no margin of safety - the deals I'm seeing are just one bad stretch of a few months away from insolvency. Theyre doing ok right now when the wheels havent come off yet, but they dont have the ability to survive a rough patch. Reminds me of the adage "never forget the 6ft tall man who drowned crossing a stream that was 5ft deep on average".
I think I said this earlier, but when some of these DSCR loans start going bad, I think one of the major changes will be that ratio minimums increase to 1.25x or something like that. Just covering the PITI isnt enough - you have to allow for vacancy, capex, turns, the unexpected, etc. I dont know that requiring reserves will solve it because reserves will be spent in short order on the downpayment on the next property.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1y
Quote from @Jay Hurst:
Quote from @Jay Hurst:
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.
Some DSCR products are becoming just flat out sub prime loans with better LTV's (for now anyway). They used to only be for experienced investors, with pretty good credit, with ample reserves, 75% LTV and ratio over 1.00, but preferably over 1.15. Anyone who has ever managed real estate knows that 1.0 DSCR is not breaking even, pretty far from it.) from it, so reserves, that is cash in the bank matters (and experience does not hurt) a great deal. But, there are programs that will allow a first time investor (who might not even have a primary home) to borrow at 80% loan to value with a 2 months of reserves on the SUBJECT property with say .80 DSCR. They are coming out of pocket every month to make the payment BEFORE the AC breaks. Before the roof leaks etc. and they can have 5000 in the bank after closing. and oh by the way, they have four more properties with the same .80 ratio that they used the same 5k as reserves.
Every investment banker I talk to tells me how hot DSCR loans are right now and everyone wants a piece, so the bid for these deals is juicy. If I had been savvy enough in 2006 to to be talking to Investment bankers would that have sounded much different then? This is a MUCH smaller slice of mortgages then true subprime so much different systematical risk then back then but it will still end poorly for a lot of the borrowers and for the end buyers of the debt.
And, I will add, it will not end well for those originators who only understand, and in most cases not licensed to sell anything but DSCR.
Oh, to add one more thing: Most of these loans have 3-5 year pre-payment penalties up to 5%. No big deal, you get a .375% lower rate to get your DSCR to .80 instead of .78 to get the deal done. now, prices drop, tenant tears up the house, no money to fix, oh crap have to sell but more or less under water even after putting down 20% due to closing costs and PPP that I was told was no big deal. Poof. It all evaporates.
Sidenote I heard one of the biggest players who starts with a K has stopped all loans on condos in florida. If that is the case my guess is there will be many to follow...
7e investments53 Reviews
Join the conversationCreate a free account to reply, vote on answers and follow this thread.