Working With Note Payors in a COVID-19 World

My take on any crisis is that it stresses imperfections to the point that even hidden cracks reveal themselves. The COVID-19 pandemic is the perfect storm example of this. Even many healthy businesses have gone from strong performing to zero revenue. Employees and business owners are being hit hard. Those impacted and without cash reserves stand to be stressed beyond measure.

As an Investor who owns notes secured by real estate, I follow the data which shows that as of April 15th, 2020 - 1.5 million to 2.0 million homeowners (Black Knight) may have already become delinquent or requested forbearance plans on their mortgages. To put that into perspective, it took two years during the Great Recession before we saw 2 million homeowners become delinquent. Now we’re seeing those numbers in a couple of weeks.

While I hope this crisis blows over as quickly as it came about, I also know that hope isn’t a game plan. For that reason, I’m being proactive with my borrowers. Here’s my approach:

1. Reach Out – While I have a few borrowers I’m simply not worried about, I have others who have greater financial challenges. Either through my loan servicer or directly I plan to check in with each of them.

1. Be Human – People are scared. Make them glad their lender isn’t a faceless bank. Show empathy. Listen. Listening is a valuable skill: https://www.verywellmind.com/what-is-active-listening-3024343

1. Set Expectations – Without being overbearing, tell your borrower what you can and can’t do. I think it’s important to state that there are things you can and can’t do in order to establish clear boundaries.

1. Try to Solve Their Problem – This is the rewarding part. Person to person and knowing their story to try and find a creative path toward a solution. Some ideas:

1. Offer to accept partial payments. Loan servicers (let them know in advance) will place these in a suspense account until enough to credit a full payment arrives. It’s good to keep your borrower engaged by making at least some monthly payment amount. Work with your servicer to document this in advance, and set limits.
2. Offer forbearance. These days most large banks are offering no payments for several months (forbearance) but at the end of the forbearance period, the full balance of all missed payments is due. Personally I think these plans are doomed because even if the borrowers have gone back to work because they won’t have the lump sum payment. Again, work with your servicer to document this in advance, and set limits.
3. Offer a loan modification. The previous two options (partial payments and forbearance) will leave a shortfall. As I stated previously, expecting your borrower to have the lump sum when it’s due after forbearance is wishful thinking. Dangle the carrot out there that at the end of forbearance, assuming they now have the means to resuming making full monthly payments, you can move any outstanding balance to the end of the loan as a balloon payment, or you can extend the loan maturity date. Work closely with you Servicer and possibly an Attorney on any loan mod.

1. Suggest Resources – I’ve seen Servicers begin to point borrowers toward Local, State and Federal financial assistance programs. There are several already – and bound to be more before long. It’s smart to research these and offer options to your borrowers.

1. Other Ideas – Some landlords are already offering incentives for on-time payments such as grocery gift cards. Given where we are, if you want to show a valued borrower you care, I don’t see a reason you can’t act now to send grocery or other types of gestures. If not gift cards, maybe something board games for families with kids, puzzles, or homemade goodies.

At the end of the day, real estate is about people: real people living in real property managing life's real problems. I’ll be making sure my Borrowers know how to contact me and encourage them to reach out in advance of any issues. Communication, being human, and giving where you can are what will get us through these scary times.