Coronavirus Pandemic Predictions Revisited (1 Month Later)

I published the original blog post with these predictions a month ago on March 24, 2020. How have the predictions held up after a month? Let’s see….

These were the original predictions. (I’ve adjusted the timelines so that they’re current):

1. FEAR AND HYSTERIA SUBSIDE (NOW)

2. PEAK NEW CASES REACHED (0-1 MONTH)

3. WHAT I’M SEEING NOW

4. PREDICTIONS (1-3 MONTHS)

5. PREDICTIONS (3-11 MONTHS)

FEAR AND HYSTERIA SUBSIDE (NOW)

I know this one is hugely subjective. I don’t have any objective data to support this so it’s based on my subjective readings of the media, observations, and anecdotal evidence.

It certainly feels like fear is subsiding. We are collectively getting used to the new world of living with the coronavirus. Social distancing is the new normal along with new social distancing taboos.

I can still see the fear, anxiety and discomfort in some people’s eyes when I see them in the stores or on walks in my neighborhood.

RECOVERING FROM RUN ON GROCERY STORES

It took a couple of weeks for my local grocery store to recover from the initial shock of the waves of panicked shoppers. Now, everyone’s used to the social distancing requirements, I’ve seen more masks than ever, and it becomes a game to see which items have come back to the shelves and which haven’t yet.

This week, I saw the first rolls of toilet paper return to the shelves of our grocery store. There weren’t that many rolls but it was something! I took it as a sign that we’ve hit a turning point.

CHANGING HEADLINES

To me, the biggest indicator that this prediction has been accurate are the media headlines, which are shifting attention from the death counts and new infections to the worsening effects of the shutdowns on the economy. There are still stories about the former subject but I’m seeing more and more stories on the economic problems that we’ll soon have to deal with.

“Out of the frying pan and into the oven,” right? Social distancing worked. We haven’t overtaxed healthcare in the country except in a couple of places. Now, we have to deal with the economic consequences of the extended lockdowns.

GOVERNMENT STIMULUS

The government stimulus has been a good thing for some, hopefully, for most, and, hopefully, it will be effective to some degree, especially considering all of the extra debt our country is taking on. Like the stimulus packages from 2008, I’m afraid that a lot of money will be and has been distributed unfairly and a lot of people won’t get the benefits. We’ll see how effective the stimulus has been on the economy as things play out over the next few months.

KEY TO RECOVERY; OPEN THE ECONOMY

But the primary way to get the economy going again, is to re-open the states that have locked down. Government stimulus can only do so much because the economy is too big.

This time, our governors really need to do the difficult job of knowing when to pivot and pivot quickly, from life saving to economy saving.

(I’m not advocating a restriction free opening of the economy like it was before. Conferences, concerts, huge gatherings need to stay shut down until we know more but all businesses are essential to a robust economy. The discussion should be about safe vs unsafe not essential vs non-essential.)

ENORMOUS PRESSURE TO RE-OPEN

The headlines will start getting scary again but this time it will be because of the problems we’re facing with the economy. Governors will face increasing pressure to re-open as coronavirus deaths fall and the new grim headlines on the economy emerge.

In addition, it will be increasingly difficult to keep most people inside and locked down as weather gets better when the news is showing a receding threat due to the coronavirus. People won’t keep themselves locked up forever without a clear and present danger.

REACHING PEAK NEW CASES (0-1 MONTHS)

It looks like we passed the peak last week, even in the worst hit states of New York and New Jersey. John Hopkins data is showing a peak in COVID deaths as of last week and I’m sure the data experts will give us the exact date soon.

WHAT I’M SEEING NOW

FORECLOSURE AND EVICTION MORATORIUMS

Things feel like they’re starting to loosen up, in general, but it’s highly variable depending on the different states and the ways they’ve chosen to respond to the coronavirus crisis.

States are continuing to postpone and cancel foreclosure sales, hearings, and evictions. Some states are not.

Specifically, the states of California, Illinois, and Nevada are the most restrictive, in our experience. In Tennessee there aren’t any moratoriums and we were able to start a foreclosure during the last couple of weeks. Texas is starting to open back up.

So, how am I doing on these 8 predictions?

PREDICTIONS (1-3 MONTHS):

1. MOST FORECLOSURES THAT PRE-DATE THE PANDEMIC WILL RESUME.

I think we’re still on track for this one. Things are starting to loosen up and I believe things will continue to do so, especially when the perceived threat of coronavirus reduces in scope.

STATUS: Undetermined, but prediction is still looking good.

2. EVICTIONS THAT PRE-DATE THE PANDEMIC WILL CONTINUE.

Also looking good but not as certain. We have an eviction in California and all hearings have been postponed until June. I don’t think things will get pushed out further than June but we’ll have to wait and see.

STATUS: Undetermined, but prediction is still looking good.

3. COURTS WILL RESUME NORMAL OPERATIONS

Courts are in the same boat with the foreclosures and evictions. I expect that they’ll be one of the first institutions that re-open when lockdown restrictions are eased.

Last week, a Texas court granted our request and issued an Order for Sale. Now, we’re just waiting for the constable to issue a sale date.

STATUS: Undetermined, but prediction is still looking good.

4. LOAN TRADERS WILL START TO TRADE AGAIN (AND INVESTORS WILL INVEST) AS MARKETS STABILIZE

One of our main selling partners is aggressively buying non performing and performing notes right now in amounts that are bigger than normal for them. Another trading partner is sitting out on the sidelines to wait for things to stabilize.

Our perspective is that the note sellers that have to sell for liquidity or other reasons are the only ones selling. Those that don’t need to sell (like us) are waiting for the market to recover instead of taking a loss.

STATUS: Undetermined

5. SELLING A VACANT PROPERTY WILL PRESENT A BIGGER THAN NORMAL ADVANTAGE OVER SELLING AN OCCUPANT OCCUPIED PROPERTY

Sales are down across the board. Sellers are not listing their homes for sale like they normally do during this time of year.

One real estate agent I spoke to recently said that the buyers that are looking for a home now are serious buyers that need to buy or are taking advantage of low interest rates to lock in a good deal while they can.

We have vacant REOs going to the market soon and it will be interesting to see if this holds true for us.

STATUS: Undetermined

PREDICTIONS (3-11 MONTHS)

6. FOREBEARANCE AGREEMENTS WILL BECOME COMMON

This one has already come true in a big way. No one is talking about loan modifications like in 2008. It’s all about forbearance and Fannie, Freddie, FHA and VA have all joined in.

The big problems now are:

1. Note servicers that are required to make up the payments to investors are getting overwhelmed and need financial help.

No one seemed to think this one all the way through and, hopefully, there will be help on the way to the affected servicers who won’t have the means to back stop the overwhelming numbers of forbearances.

(Our notes are not federally backed and our note servicers are not required to make up for missed payments from borrowers. If the borrower doesn’t pay on one of our loans, we don’t get any money.)

2. TOO MANY forbearance requests

The director of the Federal Housing Finance Agency in charge of overseeing Fannie and Freddie expected 1 million GSE mortgages in forbearance by May 1. According to data from Black Knight as explained in this Housing Wire article, the number of mortgages in forbearance was 2.9 million.

What will this number look like in another month? I bet it’ll be a lot higher.

(By the way, if people can make their mortgage payments, they should continue to do so. Forbearance should be a last resort. Although we hear assurances about no penalties or impact on your credit, do you want to take the risk that future lenders won’t ask if you were ever in a forbearance plan and how that could negatively impact your ability to get credit?)

STATUS: Correct Prediction (at 1 month)

7. PERFORMING AND RE-PERFORMING LOAN PORTFOLIOS WILL SHOW SIGNS OF STRAIN

We’re already seeing this because of the huge amount of requests for forbearance.

Our portfolio is doing just fine. Most of our loans were non performing in the first place so our exposure to re-performing loans was very limited. Most borrowers weren’t paying us before and they are continuing to not pay us now.

We haven’t seen signs yet that other note investors, funds, or private equity groups are in trouble yet because of increasing defaults. The longer we see negative economic data for individual Americans, the more likely we’ll see distress with investors holding that kind of paper.

STATUS: Undetermined but likely to happen.

8. MORE DEFAULTS WILL EQUAL MORE OPPORTUNITIES FOR INVESTING IN REAL ESTATE NOTES.

I absolutely know that more defaults equal more opportunity for us and other well positioned note investors.

However, I initially didn’t think we’d see as many defaults now as we did in the Financial Crisis of 2008 because the loans originated since then have been of a far superior quality and for the other reasons I laid out in my first prediction blog post.

I’m now thinking that we’ll see more distressed real estate notes for sale in the upcoming 3-11 months because:

1. Government stimulus isn’t helping all who need it, will probably not be enough, and won’t be efficient in giving it to those who need it most or to whom it will have the greatest effect. The economy is too huge for the government to fully control it through stimulus and fiscal policy.

2. Shutting down the economy will have unknown consequences that have a good chance of being worse than we think. (Examples: current oil collapse, states burning through cash to pay unemployment benefits.)

3. Although the loans made since 2008 have been of a higher quality, there are still lots of legacy loans out there in the secondary market; borrowers who were barely hanging on after one or more loan modifications and/or bankruptcies will have a difficult time withstanding this shock.

4. Note investors with significant exposure to performing and re-performing loans will face increasing pressure to sell as the economy gets worse in the next few months.

5. Furthermore, note investors will continue to face liquidity concerns (especially if levered) that will get worse if the general economy gets worse.

FINAL THOUGHTS

We’re just about through the worst of things right now. Attention is shifting to a priority of fixing and dealing with the negative effects of the economy.

Governors will have to pivot sooner rather than later as mounting negative economic news causes increasing pressure to re-open their states. Government help might not be enough to stem the tide of mortgage defaults if the economy can’t recover quickly enough from the extended shutdown.

Join me next month as I re-visit these predictions, talk about the current state of the non performing note business, and make the best guesses about the future!

Andy Mirza is the Chief Operating Officer for , a company that creates and manages funds that buy, sell, and liquidate residential non-performing notes (defaulted mortgages).