Thanks to the continued impact of COVID-19 on the economy, The Housing Wire, tells us that approximately 10% of borrowers whose mortgages are backed by the Federal Housing Administration or the Department of Veterans Affairs, will be forced to have homes in forbearance.
The data comes courtesy of a new report from the Mortgage Bankers Association, which polled more than 50 mortgage servicers that collect payments on nearly 77% of the mortgage market.
According to those servicers, nearly 7% of the 38.3 million loans they service were in forbearance as of April 19, 2020
it should be no shock to rational individuals that now, we suddenly have a whopping 4.7 million mortgages in forbearance (aka not paying their mortgage payment). This is not a good thing. The assumption is that people are going to start paying their mortgages back on time once the virus goes away, but is that the case with so many jobs lost? And…how does the homeowner in forbearance bring everything current if they have no job to go back to?
What Is Forbearance?
Forbearance is a temporary postponement of mortgage payments. It is one of the ways loan owners and loan insurers negotiate to keep homeowners in their homes and one of the ways to avoid foreclosure.
We know that even if the coronavirus ends, some of these homeowners will fall by the wayside, and lenders will once again sell their non-performing loans.
Banks Required to Have Cash Reserves
For every dollar of loan that is in default, regulations require the banks to have cash reserves of $7. On $1,000.000 of bad loans, $7,000,000 is reserved. The banks can’t make new loans on that money. Selling distressed paper takes the weight off of their shoulders, improves their investor relations, and alleviates an aspect of unpredictability. How does it improve investor relations? No longer are they in the news for foreclosing on a family and kicking them out of their house. It is bad PR to see the borrower’s belongings out on the lawn.
Why Do Banks Sell Their Non-Performing Notes?
Banks are most definitely not in the business of real estate management, nor do they wish to be. It costs a lot of money to own a house in foreclosure. Maybe, $50,000 per house, and that’s a loss. Banks are not in the business to take losses.
The bottom line, selling notes is vital to the successful operation of a bank. The overhead costs of surveying and maintaining properties are too costly and not beneficial for them, while regulations by the federal government drive foreclosure costs sky high for the bank.
The buyers of non-performing notes and deeds have a lot of options to use with defaulted borrowers. They want the homeowner to start paying again on their mortgage. They can lower interest rates. They can reduce the amount of debt outstanding for those underwater, bringing the mortgage more in line with the real market value. They can forgive arrearages if the borrower makes timely payments for a period. The goal of the buyer of non-performing notes is to keep the family in their house
How to Invest in Trust Deeds
- Look at the most recent quarterly balance sheet that lists liabilities for any bank associated with FDIC insurance. See the many residential and multifamily loans.
- You can check the status of loans (30-60-90-120 days past due), in pre-foreclosure
- You can contact the bank directly to see if you can bid on those notes – you offer less than the face value of loans
- Smaller community banks are best to deal with
- Larger banks like Chase Bank may ask you to put down $100K plus just to be on their list to bid.
- Ask the smaller community banks to send a spreadsheet (called a tape) of all deeds of trusts that are 90-days past due. The spreadsheet says all the details (principal balance, monthly payment, property address, fees, etc.) You can bid on the entire list of “cherry-pick” the deeds you want
- All deeds are backed up by the property. You can also research to determine the value of the property.
- Ask the bank for a list of all their performing and non-performing notes up for bid.
- If you are interested in cash flow, you target discounted notes for notes that are past due (60-180 days past due) – the discount is on the principal balance of the mortgage (can sometimes get for 20 cents on the dollar)
For more information, contact the FDIC.gov website.
Bottom Line: As a buyer of notes and deeds, we can help people stay in their homes after “life” happens to them.
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We buy as-is. An investor will estimate the repairs needed to restore your property, arrive at an offer, and will purchase the property as-is.
When we buy houses fast, there are no fees! We don’t charge you a real estate commission, and we may take care of any other nagging financial problems such as back taxes, code violations, or past due water and sewer bills.