​How Do Dropping Foreclosures Affect the Note Market?

The number of active residential foreclosures dropped in 2015 to its level before the Great Recession. This milestone was reached because almost half the foreclosures at the beginning of the year were either completed or returned to performing status.

At the start of 2015, there were about 881,000 active foreclosures in the U.S. By the end of the year that number was down to 689,000, the first year since 2006 that the inventory was below 700,000.

One of the reasons for the drop, besides an improving economy, is that the major loan servicers are making a more concerted effort to find alternatives to foreclosure. For instance, 99,000 foreclosure alternatives were completed in November 2015 alone. These include permanent loan modifications, deeds-in-lieu of foreclosure, short sales and repayment plans. Since there were 24,500 foreclosure sales last November, that means non-foreclosure workouts were four times as common as sales that month.

While this is great news for troubled home buyers, what does it mean for tote buyers who rely on troubled assets for their business model?

The short answer is that for the near-term future, there will be no shortage of product. In spite of this recent trend there are still hundreds of thousands of non-performing notes coming to market from the huge backlog built up since 2008. In addition, for investors willing to take a smaller yield for a less risky asset, there are lots of performing notes to choose from.

So in spite of the current wave of fewer foreclosures and more workouts, the note-buying space will be a good place for investors for several years ahead.