Effect of Pandemic on Note Business (Medium and Long Term)

[Andy Mirza]

What are the medium and long term effects of the pandemic on the note business?

My thoughts:

Our business is not going away. There were lots of reasons this was a good business before and there will be for the future. During the times of fear and panic, it's easy to get nervous about the future. I have a friend who's in sales for solar panels. If we go into recession, he is right to worry about the future of solar in the next year or two.

For note investors, the same problems that existed before with non performing notes are still there. If anything, a recession will push more loans into default and make more product available. Some issues to think about:

1. Government interventions

    a. Temporary Bans on Foreclosures and Evictions: we are in unusual times that will result in unusual government interventions. We'll have to be flexible and evaluate coming decisions so that we can evaluate and make the best decisions for our businesses. For the next month or two or whatever time we as a society need to transition to a new normal, to overcome this initial fear, I'm in favor of keeping everyone in place.

Regardless of how borrowers have acted in the past, they are still human beings and we all need to stick together, practice social distancing to "flatten the curve" until things settle down. I'm ok with postponing lockouts. I'd prefer that foreclosures and eviction hearings move forward so that everything progresses but we can stop short of the lock outs for now.

However, how will the public and government respond? New York and San Francisco are already talking about banning evictions. How long will they ban them for? Are foreclosures next? Something we all have to think about.

b. Government bail outs, cash infusions, assistance: If the government provides assistance in various forms, this should help borrowers make payments on their loans. Good for the short term, most definitely. How long will it last? Good for the medium term?

2. Recession: Most people talk about recession for at least a couple of quarters. Without including government intervention, I would prepare for more loan defaults, the potential for real estate values to drop, and less capital that investors are willing to make into riskier investments. Do non performing notes count as "risky?" Depends on your viewpoint, I suppose....

It makes sense for investors to anticipate that we're going into a recession soon and to adjust your business model accordingly.

3. The Way People Do Business: one of the biggest implications we might face is the change in how others do business. As note investors, we're already used to working from an office. We typically communicate with vendors and colleagues primarily via phone and e-mail. Things aren't so different this week for me than it was last month.

I read an article last week that stated that the pandemic will accelerate the move of a significant part of the work force to working remotely from home. This transition was already happening before, is rapidly becoming the new normal for a large number of people, and will likely not change back once the crisis is over. It made a lot of sense to me.

Will it be easier for our vendors or harder? What things will be easier and what will be harder?

I'm sure I missed a lot of other things but these were the immediate ones that popped out at me. Very curious and interested to hear from others on this topic......