December 2020 Mortgage Delinquencies Signal Future Opportunities For Note Investors
The mortgage figures are in from the final month of 2020, and they make for interesting reading. According to a press release from the Mortgage Bankers Association, roughly 5 million households did not make their rent or mortgage payments in December, and 3.5 million renters and homeowners feel at risk of losing their home.
In total, 18% of all mortgage holders received permission from their lender to delay or reduce their monthly payment in December.
That could signal there’s an impending influx of distressed notes hitting the open market for companies like Revolve Capital to snap up and present to our customers. But before we get into what these figures mean for the distressed note industry, let’s take a deeper dive into those figures.
American Homeowners Still Struggling to Make Ends Meet Amid the Pandemic
While those figures quoted above may seem worrying for American homeowners, December 2020 actually marked an improvement in the housing market. While December 2020 mortgage delinquencies (and missed rent payments) totaled around 5 million households, that was down from 6 million back in September.
Of course, December marked the rollout of the second stimulus bill that included $25 billion in dedicated rental assistance, $600 in direct stimulus checks, $300 per week in enhanced unemployment benefits through March, and an extension of the CDC eviction moratorium to January 31.
Now we’re in February; it’ll be interesting to see what happens to mortgage delinquency figures while we wait for President Biden to push through the next set of stimulus measures.
It is still unknown how Biden plans to approach student loan debt. Why is this important to mortgages? Well, it seems that young homeowners are disproportionately affected by the recession. According to the MBA data, 43% percent of student debt borrowers missed their Q4 2020 payments, up from a Q3 2020 report of 40%.
Housing Market Holds Its Breath Over Biden’s $1.9 Trillion American Rescue Plan
The next indication for student loans and the housing market will come when Biden unveils his American Rescue Plan’s intricate details, which will pump an additional $1.9 trillion into the economy.
Early reports suggest that direct checks, enhanced unemployment benefits, rental assistance, mortgage forbearance programs, and a federal eviction moratorium are set to continue, which would help keep people in their homes.
But one of the key sticking points is student debt. No definitive details have been released of President Biden’s intentions. But whatever he decides will have a knock-on effect on the housing market.
Biden is said to support up to $10,000 of debt forgiveness per borrower. But progressives within his party are pushing for $50,000 or more.
If he were to cut a massive slice of debt off these borrowers, they would be much more likely to start repaying their mortgage. However, if he offers $10,000 or less, it may make no material difference, and those with considerable student debts could continue to miss mortgage payments.
So what does this all mean for the distressed note industry? Let’s take you through the main talking points.
How December’s Figures May Shape the Distressed Note Industry in 2021 and Beyond
If you haven’t yet seen it, it’s worth spending a couple of minutes reviewing Chaz’s video discussing how COVID is affecting the distressed note market. He eloquently explains that recessions inevitably bump up the number of delinquent mortgages, increasing the number of available distressed notes further down the track.
During these periods, banks are much more motivated to get these bad loans off their books. This is because a considerable percentage of bad debt on their balance sheet will see their credit ratings slashed with the major agencies.
What that means in practical terms is they’ll willingly take an even bigger haircut on the distressed loans they sell off. It’s a basic case of supply and demand. A flood of products into the market equates to lower prices.
That’s why the distressed note industry is considered “recession-proof.” While distressed notes are sold off by the banks regardless of economic conditions, they almost have an inverse relationship with the economy for note buyers. That is to say, when the economy tanks, delinquencies go up, and banks increase the number of notes they sell, which in turn lowers their prices.
In other words, the current economic downturn will create a buyer’s market when banks start to offload distressed loans that are 12, 18, and even 24 months delinquent over the coming months and years. Some banks like to keep the homeowner in place because, while they are there, they at least maintain the asset. However, when delinquencies skyrocket, they are forced to shift as much bad debt as possible.
Of course, technically speaking, banks have all the same options that we do as owners of distressed notes, such as loan modifications, deed in lieu, or foreclosures and evictions (to name but a few). But they don’t have the infrastructure to handle distressed loans. They certainly aren’t going to foreclose and then fix and flip thousands of homes, for example.
To them, it makes far more sense to sell their distressed loans for a steep discount rather than get stuck with thousands of non-performing loans that ruin their credit rating.
That’s where we come in.
Apply to Revolve Capital to Receive Early Access to Some of the Best-Value Distressed Notes Since 2008
Here at Revolve Capital, we take advantage of these market conditions to increase our note portfolio at better prices, which we can then pass on to you directly. You can then use any of the available distressed note strategies to make far greater returns than your typical investments.
Of course, the banks will try and work through these distressed loans over the rest of this year as the economy recovers with the vaccine rollout, and they hope homeowners start paying their mortgages again. But there were 4.5-5 million 12-month-delinquent mortgage loans before the pandemic hit. With the expected additional 5-6 million we’ve just spoken about, we’re talking about 10+ million distressed loans on the books of major banks.
No bank is going to be able to work its way through all of that bad debt. So once they’ve addressed the loans that are easiest to coax back into a performing state, they’re going to start selling what’s left over. This process will take about 3 to 4 quarters.
Thus, we expect to ramp up our acquisition in Q3 2021 and beyond. Those who aren’t already verified buyers with us by that point will miss out on the biggest opportunities since the 2008 recession. These note opportunities will be available for less than 24 hours in some cases.
Therefore, you need to take action now to ensure you’re in the best position to take advantage of the impending buyer’s market for distressed notes. We are already starting to see prices drop, and experienced note investors are gearing up for another busy period in the industry.
How Can You Get Started with Note Buying at Revolve Capital?
To get started, you can head over to the buyer application page to fill out your details. Once you’ve signed our NDA and had your application verified by our team, you’ll gain access to our regularly-updated portfolio stratification page.
If you want to learn more about the process of purchasing a distressed note, you can visit our FAQ page. If you have any further questions, please don’t hesitate to reach out to a member of our friendly team who’ll be more than happy to handle your inquiry.
Here at Revolve Capital, we can’t wait to start working with you.