8 Coronavirus Pandemic Predictions (for Non Performing Notes)

(Read the April update to these predictions.)

This is a scary time. Coronavirus pandemic. Stock market in freefall. Recession already here or right around the corner. What’s going to happen next? No one knows for certain but we can make educated guesses based on history, what’s happening to others in front of us, and logic.

Join me as I look into our current situation and make some predictions for the non performing note business.

1. Fear and Hysteria Subside (2-4 Weeks)

2. Peak New Cases Reached (1-2 months)

3. What I’m Seeing Now

4. Predictions (2-4 months)

5. Predictions (4-12 months)

FEAR AND HYSTERIA SUBSIDE (2-4) WEEKS

I think we have a couple of more dark weeks coming up. This week will be especially hard for New York City, which is finding itself at the epicenter of new U.S. cases.

When people are afraid, their logical brains shut down and they aren’t as able to process things rationally. To get back to normal, people’s fear levels need to come down so that they can think logically again.

RUNNING OUT OF FOOD

One of the first signs of panic were the long lines at grocery stores and CostCo. In my household, we’ve always been well stocked and we didn’t need to make extra trips. Once people start seeing the grocery stores replenishing their stocks including toilet paper, they’ll calm down.

COVID-19

This article by the Business Insider is the best compilation of all the other info out there that I’ve been able to find. It has loads of charts and makes it easier to make sense of what’s going on. It’s worth a look.

In the U.S., we’ve been at a disadvantage because we haven’t been testing enough. Read this article from Reuters to learn more details.

Be prepared for the headlines as reported cases increase. With more and better testing, the reported cases will seem to skyrocket. The problem hasn’t necessarily gotten worse; we just will know about it because more people are being tested.

See the latest data from John Hopkins.

REACHING PEAK NEW CASES (1-2 MONTHS)

Once new cases of COVID-19 peak, I believe that we’ll have hit the bottom of this crisis. The government will do what it can to economically support businesses and people. Once the markets see that there are solutions to this crisis, they will stabilize. Once stabilized, we will be back on the path to economic recovery.

WHAT I’M SEEING NOW

FORECLOSURE AND EVICTION MORATORIUMS

States are postponing or cancelling foreclosure sales, hearings, and evictions. Some states are not. The responses are not uniform and, generally, coincide with state ordered lockdowns.

This is pushing back our timetable on some of our non performing loans and REOs from one to four months.

(For the record, I’m in favor of postponing lockouts (final stage of eviction where the sheriff enforces the change of possession) until the lockdowns are lifted and/or it’s considered safe enough for most people to go outside to conduct business as usual; while people are told to shelter in place or restrict movement is not the time to be moving.)

VENDORS

Some vendors are conducting business like usual. Some are slower to respond and act than before. Some of this I’m sure is due to the adjustment that office employees are going through as they transition to working from home.

BUYING AND SELLING NPNS HAS STOPPED

Loan traders have stopped trading. We accepted bids on a couple of our loans about 2 weeks ago from a fund buying real estate notes. Last week, the seller backed out of the trade. According to our broker, the seller backed out of another $20M trade he had going.

Because of the stock market’s free fall, no one wants to make a move until things stabilize. This also includes those who invest in note funds or do other types of alternative investing. They want to see what the market does and see things stabilize before committing funds.

EXISTING REO TRANSACTIONS CONTINUING; NEW ONES STOPPED

New real estate transactions seem to be stopping. Buyers are in the same mindset as others and are waiting for the situation to stabilize. A few transactions in progress are failing because buyers are backing out. (Fortunately, the one transaction we have in escrow is still proceeding.)

RE-PERFORMING FOR NOW…

We own mostly non performing notes and haven’t seen any problems with the re-performing notes that we do own. It’s probably too early to tell.

PREDICTIONS (2-4 MONTHS):

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

Foreclosure sales will resume. I believe that social distancing will become a new normal, at least through the end of the year. I’m unsure how this will affect the auctions themselves but foreclosures will have to continue in a functioning economy.

Government may intervene to help those who suddenly find themselves facing foreclosure because of the lockdowns and sudden losses of jobs. This is a good thing if it’s not a blanket moratorium on all foreclosures.

There’s a huge difference between the borrowers who haven’t paid a dime in ten years and the hard working borrower who has paid on time for years and lost his job because of the pandemic.

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

Like foreclosures, evictions need to be part of a fully functioning economy. Once it’s deemed safe for people to go about their business, evictions need to resume as well.

I anticipate that governments will step in to help people in pandemic induced eviction situations.

(I have a number of condo rentals that I owned before I became involved in real estate notes. For tenants that have been regular payers for years, I’m not going to immediately file for evictions for non-payment. We’ll talk to our affected tenants and most likely give them extra time to catch up when things get better. I believe that most other landlords will do the same, if they are able to do so.)

3. COURTS WILL RESUME NORMAL OPERATIONS

Right now, courts are postponing most hearing dates by at least 30 days and are completely shut down. We need a properly working court system for our society to function and they should be functioning once the lockdowns are lifted as well.

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

When fear subsides and markets stabilize, traders will come back out and start trading again. For non performing notes that are underwater, bids are based off of property values. If the real estate market seems stable, then non performing loans will trade more or less normally.

If the real estate market suffers, however, these loans could suffer in value as well.

Individual investors that stood on the sidelines during the worst parts of the crisis will start returning to note investing or whatever investing they feel comfortable returning to.

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

Under normal circumstances, a seller has an advantage when selling a vacant home over a seller who is selling an occupied property. The vacant property is easier to show potential buyers, the seller usually has no constraints or conditions, and it shows better.

The occupied property is more difficult to show because you need to arrange schedules with the occupants, it might look bad if it’s not in “staged” condition, and the seller usually has conditions such as certain move out dates or need to find a replacement property.

Now, buyers are postponing because of market and economic uncertainty. Sellers are backing out because they don’t want potentially infected strangers wandering around their house.

In 2-4 months, those that don’t need to sell, probably won’t. They will be less likely to want to let strangers come into their homes. Those that need to buy a home will be less likely to go into an occupied home. New social distancing norms will work against both buyers and sellers for occupied homes.

Vacant houses for sale will look much more attractive than they do in normal times.

PREDICTIONS (4-12 MONTHS)

6. FOREBEARANCE AGREEMENTS WILL BECOME COMMON

I believe that we’ll hear a lot of talk about doing loan modifications, which were common after the last financial crisis in 2008. I don’t think that it’s the best tool for most borrowers. A loan modification changes the terms of a loan which can include the rate and term.

This crisis is a specific, short term shock. Hopefully, most borrowers that need it will see some assistance from the government in the form of unemployment insurance or other direct aid or jobs that will come back. For most borrowers, a forebearance agreement will be the most appropriate solution.

In a forebearance agreement, the lender agrees to give the borrower additional time to make up the arrears (the amount that the borrower falls behind). For example, if a borrower missed 4 months of payments, the lender may agree to spread those out over the course of a year. The borrower would continue to make their regular payment plus extra to make up for the prior missed payments.

With government assistance, this will make it even easier.

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

Some borrowers will find it difficult to make their mortgage payments. Some, ultimately, will not be able to make their payments for an extended period of time. Anyone who owns these notes may see their income go down as the numbers of delinquent borrowers increases.

The effect of these defaults are impossible to predict at this time. We don’t know what the extent of any government intervention will be and how effective it will be. Each investor and fund is set up differently with various capital requirements and cash flow needs.

Best thing to do for those investors is be proactive with your borrowers and see what kind of solutions or agreements you can come up with ahead of time, instead of when it’s too late.

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

Some fellow note investors anticipate seeing a wave of defaults coming over the next 6-12 months. One thinks it will be worse than the 2008 crisis.

I don’t think so because:

1. A huge amount of loans at the time were made to poorly qualified borrowers

2. Loans made from 2009 to the present were made with far better quality underwriting to better qualified borrowers

3. The Federal Reserve and U.S. Government indicate that the stand ready to assist everyone

4. The economy was doing great (especially jobs) before this temporary shutdown and should be able to recover quickly

5. The most vulnerable loans are pre-2008 loans in which the borrowers have held on to this day and which affect privately held note owners and funds but not institutional banks.

What if I’m wrong? I’ll get flack for being an optimist but my consolation prize will be the fantastic position that our company will be in for investing in real estate notes in the next year or two! If we have waves of defaults over the next 3-9 months, we should start seeing these notes for sale in 6-12 months.

FINAL THOUGHTS

It will be interesting to look back on these predictions at the end of the year and see what was accurate and what was not. Until then, we all need to do what we need to do in order to get through this crisis and help those that we can.

(Let's back to doing stuff like this soon!)

I hope I’m mostly right for the sake of our country and everybody in it. I hope that we hit the bottom quickly, that we can save as many people as we reasonably can, and that our economy bounces back quickly than we might believe.

(See my update to these predictions, one month later.)

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).