Quote from @Chris Seveney:
Over the past few months, we've seen a noticeable uptick in non-performing loans hitting the market—particularly in the investor space.
DSCR and fix-and-flip loans are making up the bulk of this volume. We estimate nearly $200M/month of non-performing product is circulating across the platforms and networks we monitor. These are typically investor loans that were originated in the last 2–3 years and are now showing cracks, largely due to overleveraging, slowed market velocity, or project mismanagement.
On the owner-occupied side, we’re starting to see more inventory—but with a big caveat: many of these loans were originated during the COVID years at 3–4% interest rates. These borrowers aren’t always far enough behind to justify a meaningful discount, and the low rates can present a risk profile that doesn’t pencil out especially assuming they will file BK which many have done.
What are you seeing out there?
Are you noticing more non-performers hitting your desk? And with today’s economic backdrop—high consumer debt, inflationary pressures, and tighter credit—do you expect volume to keep climbing?
Would love to hear others’ perspectives.
Some DSCR products are becoming just flat out sub prime loans with better LTV's (for now anyway). They used to only be for experienced investors, with pretty good credit, with ample reserves, 75% LTV and ratio over 1.00, but preferably over 1.15. Anyone who has ever managed real estate knows that 1.0 DSCR is not breaking even, pretty far from it.) from it, so reserves, that is cash in the bank matters (and experience does not hurt) a great deal. But, there are programs that will allow a first time investor (who might not even have a primary home) to borrow at 80% loan to value with a 2 months of reserves on the SUBJECT property with say .80 DSCR. They are coming out of pocket every month to make the payment BEFORE the AC breaks. Before the roof leaks etc. and they can have 5000 in the bank after closing. and oh by the way, they have four more properties with the same .80 ratio that they used the same 5k as reserves.
Every investment banker I talk to tells me how hot DSCR loans are right now and everyone wants a piece, so the bid for these deals is juicy. If I had been savvy enough in 2006 to to be talking to Investment bankers would that have sounded much different then? This is a MUCH smaller slice of mortgages then true subprime so much different systematical risk then back then but it will still end poorly for a lot of the borrowers and for the end buyers of the debt.
And, I will add, it will not end well for those originators who only understand, and in most cases not licensed to sell anything but DSCR.
