All Forum Posts by: Paul Birkett

It's getting increasingly difficult to find positive news for the Real Estate market...or the economy as a whole:

1. 80% of commercial tenants missed April Rent. May will be worse
2. 3 million residential mortgages are already in forbearance. Many will fall into foreclosure
3. Construction sites are quiet as more than 1,000 banks mark construction loans as "past-due". That's more than $100Bn of distressed loans.
4. Forced sellers in the mortgage market and a risk-off approach to new lending means that only the most well-qualified borrowers will secure new loans.

We are about to enter the best buying opportunity since the great recession. This is the new greater recession

Jobless claims in the U.S. jumped to 3.3 million between March 15 and 21 — an increase of 1,064% from the previous week according to the Dept of Labor. The jump in claims is the largest single-week increase on record, resulting from a nationwide slowdown tied to the coronavirus. 

Let's hope the stimulus package has the desired effect. 

Dept of Labor - Unemployment Statistics

Mortgage Update: Outlook is not good.

The economy continues to shudder to a halt. As I write, lower manhattan looks like a ghost town. My local coffee shop typically turns about $1,000/day. Yesterday, Carlos had taken $92 with $15 in tips. In Manhattan, that buys 2 subway rides and a sandwich.

So what?

Carlos lives with his extended family in a 3-unit building where he rents 2 units and lives in the basement. His tenants have asked if they can pay late. You can probably guess where this is going.....

A small portion of our loan book consists of performing mortgages (~5%). Almost all are late.

What next?

1. Expect up to 25% of mortgages to go delinquent in the next 90 days. 20% of the workforce are employed in leisure, retail and consumer-facing services. They are all missing paychecks.

2. So far, 11 states have issued debt collection, eviction and foreclosure advisories or moratoriums (requesting creditors to cease recovery activities). Most states will follow.

3. Delinquent borrowers living pay-check to pay-check will not be able to catch up. Whether it's 3 payments or 5 or 10....how can you pay when you have no job?

4. We could see a repeat of 2008. I guess its a 30% probability

Paul Birkett

Mortgage Update: Outlook is not good.

The economy continues to shudder to a halt. As I write, lower manhattan looks like a ghost town. My local coffee shop typically turns about $1,000/day. Yesterday, Carlos had taken $92 with $15 in tips. In Manhattan, that buys 2 subway rides and a sandwich.

So what?

Carlos lives with his extended family in a 3-unit building where he rents 2 units and lives in the basement. His tenants have asked if they can pay late. You can probably guess where this is going.....

A small portion of our loan book consists of performing mortgages (~5%). Almost all are late.

What next?

1. Expect up to 25% of mortgages to go delinquent in the next 90 days. 20% of the workforce are employed in leisure, retail and consumer-facing services. They are all missing paychecks.

2. So far, 11 states have issued debt collection, eviction and foreclosure advisories or moratoriums (requesting creditors to cease recovery activities). Most states will follow.

3. Delinquent borrowers living pay-check to pay-check will not be able to catch up. Whether it's 3 payments or 5 or 10....how can you pay when you have no job?

4. We could see a repeat of 2008. I guess its a 30% probability

Paul Birkett

Mortgage Update: Outlook is not good.

The economy continues to shudder to a halt. As I write, lower manhattan looks like a ghost town. My local coffee shop typically turns about $1,000/day. Yesterday, Carlos had taken $92 with $15 in tips. In Manhattan, that buys 2 subway rides and a sandwich.

So what?

Carlos lives with his extended family in a 3-unit building where he rents 2 units and lives in the basement. His tenants have asked if they can pay late. You can probably guess where this is going.....

A small portion of our loan book consists of performing mortgages (~5%). Almost all are late.

What next?

1. Expect up to 25% of mortgages to go delinquent in the next 90 days. 20% of the workforce are employed in leisure, retail and consumer-facing services. They are all missing paychecks.

2. So far, 11 states have issued debt collection, eviction and foreclosure advisories or moratoriums (requesting creditors to cease recovery activities). Most states will follow.

3. Delinquent borrowers living pay-check to pay-check will not be able to catch up. Whether it's 3 payments or 5 or 10....how can you pay when you have no job?

4. We could see a repeat of 2008. I guess its a 30% probability

Mortgage Update: Outlook is not good.

The economy continues to shudder to a halt. As I write, lower manhattan looks like a ghost town. My coffee shop typically turns about $1,000/day. As of 15 minutes ago, Carlos had taken $92 for the day. He had collected $15 in tips. That buys 2 subway rides and a sandwich.

So what?
Carlos lives with his extended family in a 3-unit building where he rents 2 units and lives in the basement. His tenants have asked if they can pay late. You can probably guess where this is going.....

A small portion of our loan book consists of performing mortgages (~5%). Almost all are late.

What next?
1. Expect up to 25% of mortgages to go delinquent in the next 90 days.

2. So far, 11 states have issued debt collection, eviction and foreclosure advisories or moratoriums (requesting creditors to cease recovery activities). Most states will follow.

3. Delinquent borrowers living pay-check to pay-check will not be able to catch up. Whether it's 3 payments or 5 or 10....how can you pay when you have no job?

4. We could see a repeat of 2008. I guess its a 30% probability

What are we doing about it?

1. We have pulled bids on several new trades. Everything is repricing and nobody knows what the right price is.

2. We are ceasing all foreclosure and debt collection activities. I'm the only one in the office

3. We are preparing for the largest influx of non-performing paper we have seen since 2008.

Things will get better but we expect a very tough 6 months ahead. We will do everything we can to save another 2,000 families from foreclosure. I'm worried it won't be enough.

Mortgage Update: Outlook is not good.

The economy continues to shudder to a halt. As I write, lower manhattan looks like a ghost town. My coffee shop typically turns about $1,000/day. As of 15 minutes ago, Carlos had taken $92 for the day. He had collected $15 in tips. That buys 2 subway rides and a sandwich.

So what?
Carlos lives with his extended family in a 3-unit building where he rents 2 units and lives in the basement. His tenants have asked if they can pay late. You can probably guess where this is going.....

A small portion of our loan book consists of performing mortgages (~5%). Almost all are late.

What next?
1. Expect up to 25% of mortgages to go delinquent in the next 90 days.

2. So far, 11 states have issued debt collection, eviction and foreclosure advisories or moratoriums (requesting creditors to cease recovery activities). Most states will follow.

3. Delinquent borrowers living pay-check to pay-check will not be able to catch up. Whether it's 3 payments or 5 or 10....how can you pay when you have no job?

4. We could see a repeat of 2008. I guess its a 30% probability

What are we doing about it?

1. We have pulled bids on several new trades. Everything is repricing and nobody knows what the right price is.

2. We are ceasing all foreclosure and debt collection activities. I'm the only one in the office

3. We are preparing for the largest influx of non-performing paper we have seen since 2008.

Things will get better but we expect a very tough 6 months ahead. We will do everything we can to save another 2,000 families from foreclosure. I'm worried it won't be enough.

In theory, yes....but it will take several months for the reality to hit home. There is still a housing shortage across most of the nation...but it won't feel like one in the next 12 months or so. See below...double digit declines in starts and permits. Bad in the short run...but good for pricing in the longer run. Stay safe out there.

8.00 am in Grand Central today; Monday, March 16th. You would be forgiven for thinking it was Christmas Day....except, of course, Christmas Day is quite busy at Grand Central.

It seems the entire of NYC is working from home as we finally start to take the virus seriously. I'm sorry to admit that I was one of those who thought it was much ado about nothing. I could not have been more wrong. I hope we are facing a "short-sharp-shock", I am worried that we are facing something more serious. Overnight, the fed cut rates from 1.0% to zero and has announced a $700 million liquidity program which will see it buying Treasuries and mortgage assets in an effort to reassure investors.

As I write, investors seem anything but reassured. Key stock indexes are down about -8%, Bonds (TLT) are up 5% and the panic continues.

Our inbox is filling with questions from investors asking:

1. Is my investment safe, is this 2008 all-over-again?
2. Is this a good time to refinance my own mortgage?
3. Are you still planning on paying 8%....does this mean you will reduce your target payout?

The good news is that we are 92% in cash as we prepare for some large purchases in the coming months. I think those purchases could now become larger and the pricing will likely be lower as sellers seek sources of liquidity and quality counterparties.

As to where rates go from here, it is my view that low rates are here for quite some time (maybe years)...though they may not find their way to the mortgage market for several months.

Why? The global economy is coming to a shuddering halt. The 2008 financial crisis saw consumption fall off a cliff. The economists call this a demand-side shock caused by job and income loss...dampening demand. This time we have a demand and a supply-side shock: my colleagues shopping in NY and NJ this weekend found supermarkets with empty shelves, even Amazon is out-of-stock on many key items. American Airlines announced it will reduce capacity by 30% and that may last through the peak summer season. Others are following suit.

Add alt text

Business hotels around our offices in downtown manhattan are offering 50% - 70% reductions to fill rooms....yet it seems they remain empty.

A stalled Economy

Restarting a stalled economy is very difficult. It's a chicken-and-egg situation. Demand is slow to re-ignite because people hoard cash just in case things get worse. Supply is slow to re-ignite because vendors are worried there will be no demand. Remember, 88% of US companies employ fewer than 20 people. The lay-offs have already started in hospitality, transport and retail. The longer the current shock persists, the more difficult it will be for our favorite coffee-shops, restaurants and other small businesses to re-open.

Mortgage Delinquencies

It will be difficult for many households to keep up with all their payments. The median American household has just $11,700 in savings. Some homeowners will quickly fall behind on mortgage payments as they prioritize other expenditures (food, healthcare, gas, phone and auto payments). We fully expect a wave of mortgage delinquencies (and hopefully a federal program to help deal with them). In 2011, we saw delinquencies spike from the 30-year average of ~3% to a peak of 11%.

Add alt text

That peak took 2 years to reach. This one might be much faster.

Outlook

The key drivers for the next 90 days will be:

1. Facts: Do we see any evidence of sustained containment? All eyes are on China to provide some clue to what might happen next. The graph from John Hopkins below shows total cases in China in orange and total recoveries in green. The yellow line shows new cases outside of China. It looks like we are 2+ months behind China and given the slope of the curve, it's probably going to get a lot worse before it gets better. We could be battling this thing well into fall.

Add alt text

1. Confidence: Until we see new infections peak and patient-recoveries grow, I don't expect much in the way of confidence. I expect asset sales to stall as people prefer to hold hard cash over anything else.

What does that mean for the mortgage business? I expect more defaults, more loan sales, and probably lower prices. Though its early days, I am seeing slight discounts for quick-close deals. I expect those discounts to grow in the coming days....but time will tell.

Does it mean we will be reducing our investor payouts? No, we have no plan to make any changes at this time...but who knows what the future holds. A couple of months ago, people were asking me if we would be increasing our payouts! The answer was "no" then too.

We will stick with 8% paid monthly and best-efforts liquidity. So far, we have had just 1 redemption and 1 investor switch from reinvesting his monthly payment to taking it in cash.

Let's hope those affected make a speedy recovery and we see a federal program to support those who get behind on their mortgage payments so we don't see a 2008-style mortgage crisis all over again.

8.00 am in Grand Central today; Monday, March 16th. You would be forgiven for thinking it was Christmas Day....except, of course, Christmas Day is quite busy at Grand Central.

It seems the entire of NYC is working from home as we finally start to take the virus seriously. I'm sorry to admit that I was one of those who thought it was much ado about nothing. I could not have been more wrong. I hope we are facing a "short-sharp-shock", I am worried that we are facing something more serious. Overnight, the fed cut rates from 1.0% to zero and has announced a $700 million liquidity program which will see it buying Treasuries and mortgage assets in an effort to reassure investors.

As I write, investors seem anything but reassured. Key stock indexes are down about -8%, Bonds (TLT) are up 5% and the panic continues.

Our inbox is filling with questions from investors asking:

1. Is my investment safe, is this 2008 all-over-again?
2. Is this a good time to refinance my own mortgage?
3. Are you still planning on paying 8%....does this mean you will reduce your target payout?

The good news is that we are 92% in cash as we prepare for some large purchases in the coming months. I think those purchases could now become larger and the pricing will likely be lower as sellers seek sources of liquidity and quality counterparties.

As to where rates go from here, it is my view that low rates are here for quite some time (maybe years)...though they may not find their way to the mortgage market for several months.

Why? The global economy is coming to a shuddering halt. The 2008 financial crisis saw consumption fall off a cliff. The economists call this a demand-side shock caused by job and income loss...dampening demand. This time we have a demand and a supply-side shock: my colleagues shopping in NY and NJ this weekend found supermarkets with empty shelves, even Amazon is out-of-stock on many key items. American Airlines announced it will reduce capacity by 30% and that may last through the peak summer season. Others are following suit.

Add alt text

Business hotels around our offices in downtown manhattan are offering 50% - 70% reductions to fill rooms....yet it seems they remain empty.

A stalled Economy

Restarting a stalled economy is very difficult. It's a chicken-and-egg situation. Demand is slow to re-ignite because people hoard cash just in case things get worse. Supply is slow to re-ignite because vendors are worried there will be no demand. Remember, 88% of US companies employ fewer than 20 people. The lay-offs have already started in hospitality, transport and retail. The longer the current shock persists, the more difficult it will be for our favorite coffee-shops, restaurants and other small businesses to re-open.

Mortgage Delinquencies

It will be difficult for many households to keep up with all their payments. The median American household has just $11,700 in savings. Some homeowners will quickly fall behind on mortgage payments as they prioritize other expenditures (food, healthcare, gas, phone and auto payments). We fully expect a wave of mortgage delinquencies (and hopefully a federal program to help deal with them). In 2011, we saw delinquencies spike from the 30-year average of ~3% to a peak of 11%.

Add alt text

That peak took 2 years to reach. This one might be much faster.

Outlook

The key drivers for the next 90 days will be:

1. Facts: Do we see any evidence of sustained containment? All eyes are on China to provide some clue to what might happen next. The graph from John Hopkins below shows total cases in China in orange and total recoveries in green. The yellow line shows new cases outside of China. It looks like we are 2+ months behind China and given the slope of the curve, it's probably going to get a lot worse before it gets better. We could be battling this thing well into fall.

Add alt text

1. Confidence: Until we see new infections peak and patient-recoveries grow, I don't expect much in the way of confidence. I expect asset sales to stall as people prefer to hold hard cash over anything else.

What does that mean for the mortgage business? I expect more defaults, more loan sales, and probably lower prices. Though its early days, I am seeing slight discounts for quick-close deals. I expect those discounts to grow in the coming days....but time will tell.

Does it mean we will be reducing our investor payouts? No, we have no plan to make any changes at this time...but who knows what the future holds. A couple of months ago, people were asking me if we would be increasing our payouts! The answer was "no" then too.

We will stick with 8% paid monthly and best-efforts liquidity. So far, we have had just 1 redemption and 1 investor switch from reinvesting his monthly payment to taking it in cash.

Let's hope those affected make a speedy recovery and we see a federal program to support those who get behind on their mortgage payments so we don't see a 2008-style mortgage crisis all over again.