In todays email:

• 💬 State of the market: Inventory and existing sales remains low.

• 🙈 Featured Video: Risk factors when buying mortgage notes.

• 💥 Show me the money: Profiting from notes in bankruptcy. 

• 🥶 Cool Tools: How to avoid the trip to the county recorders office.

State of the Real Estate

There are a few takeaways from the current real estate market and interest rate environment that I would like to highlight in today’s newsletter.

MICRO LEVEL: The demand for mortgages increased for the past 2 weeks despite the wild swings in mortgage rates. The rates have been all over and have ranged from 6.5% up to around 7.0%. Of course the bank failures have twisted the picture to some degree since many feel like the federal reserve will not increase interest rates and possibly reduce the rates in the coming months. I have listed some of the weekly highlights below.

MACRO LEVEL: To put all this in perspective and to demonstrate the rapid change in affordability that we have seen over the past 9 months lets look at how much more a house cost per month as the rates rose from 3.5% versus 6.5%.

$500,000 house costs $915/month more

$400,000 house costs $732/month more

$300,000 house costs $548/month more

HOUSING INVENTORY AND SALES

The existing home sales declined for a 12th straight month and is lowest reading since October 2010. As of January 2023, the seasonally adjusted annual rate was 4.0 million (see Existing Home Sales graph below). At the same time, the median existing home sales price increased slightly to $359,000 and the unsold existing homes are 980,000 which is about 2.9 months inventory at the current monthly sales pace (see Total Housing Inventory graphs below comparing 1 year to 5 year). As you can see from the graphs, we are still at historically low inventory in the US and in my opinion the main reason the housing values have not come down substantially to date.

Featured Video 

Mortgage note risk factors

In this video, I discuss some of the risk factors to consider when buying mortgage notes. Like every investment there are risk but are easily mitigated with proper due diligence. Here is a short list of some of the main risk factors to consider.

• DEFAULT RISK: Borrower stops making payments which would reduce the value of the note.

• MARKET RISK: Mortgage notes are affected by the changes in the interest rates. If interest rates rise, the value of the note could decrease. Additionally, if the real estate market declines the value of the property securing the note decreases which could also affect the value of the note.

• CREDIT RISK: The creditworthiness of the borrower is an important consideration when buying mortgage notes. If the borrower has a poor credit history or a high debt-to-income ratio, there is a higher risk of default.

• LEGAL RISK: There is always a risk of legal disputes when buying mortgage notes. For example, if there are issues with the foreclosure process, the value of the note could be negatively impacted.

• LIQUIDITY RISK: Mortgage notes can be difficult to sell quickly, which could be problematic if you need to access your funds quickly.

• DUE DILIGENCE RISK: It's important to conduct thorough due diligence before buying mortgage notes to ensure that you are aware of all risks and potential issues associated with the investment. Failing to do so could result in unexpected losses and unlike the other risk factors mentioned above this one can be controlled by you.

Show Me The Money 

Profiting from notes in bankruptcy

In this weeks newsletter, I will show you an example of a non-performing note that was 81 months behind on payments (yes that is nearly 7 years) and the borrower was in Chapter 13 bankruptcy.

Since the note was in bankruptcy we could not talk to the homeowner directly but instead reached out to the debtors bankruptcy attorney to explain that we were willing to discuss options to get the borrower back on track. The attorney talked to the borrower and they wanted to lower their interest rate. So I made a proposal that not only reduced the interest rate by 3.55% but also reduced the total debt (or payoff) by over $31,000. The attorney was satisfied and presented to the borrower and they agreed.

I then ask the attorney to provide us financials of the borrower to makes sure they had the ability to pay and how much they could afford each month. After some back and forth discussions, we agreed to the terms spelled out below and gave the borrower a 12-month forbearance to permanent modification. Basically what this means is that if the borrower pays according to the forbearance agreement for 12 months then the permanent modification would kick in and remain fixed for the life of the loan.

There are many possible exit strategies (see example below) and we decided that we would keep the note for long term cash flow which will net us over $244,000 over the next 20 years.

SUMMARY: There are many solutions you can provide homeowners to keep them in their homes and get them paying again and create a win-win solution.

Cool Tools

eRecording is the cool tool of the week. How does recording work and what are the best platforms?

eRecording is the process of submitting documents for recording online and having them reviewed, recorded, and returned back to you the submitter electronically. You can easily save time and money by recording all of your documents online by eRecording. After the county reviews and approves, the documents are quickly stamped and recorded for public record. Say goodbye to mail and trips to the courthouse.

In the past, I would send an assignment of mortgage to be recorded and it would take 2-3 weeks to get back and many times I would get it back with a note attached that said I had done something incorrectly. Very painful when you get the document back only because of improper margins and now you have to go through the whole process again and wait another 2 weeks. With eRecording, you can conveniently submit documents for recording and pay fees right from your desk and get results in days not weeks. eRecording reduces the amount of time needed to record documents and saves money by eliminating the need for checks, postage, ink, paper, and envelopes. Plus there’s no fear of being lost in the mail. Finally, you can see your recording history and download the recorded document at anytime. I have listed below 2 companies that I would recommend. I have personally uses CSC eRecording Solutions. See the interface example screenshot below to get an idea of how it works. Very simple.  

CSC eRecording Solutions has 2224 available counties for eRecording (https://www.erecording.com)

Simplifile has 2453 available counties for eRecording (https://www.simplifile.com) Interface for eRecording platform

🖐️ IF YOU HAVE A QUESTION YOU WANT ANSWERED, PLEASE RAISE YOUR HAND BY SUBMITTING TO: [email protected]

Last weeks POP QUIZ was…What is a corporate advance?

ANSWER: A corporate advance is essentially a fee charged by a lender to cover servicing-related expenses that were paid with servicer funds. This charge typically occurs when we pay something on behalf of the client like taxes or insurance that were not paid through escrow.

This weeks POP QUIZ: Why don’t we as the note buyer get a traditional appraisal to determine the value of the property?

Check out next weeks newsletter for the complete answer.

We would love to get your feedback and your thoughts! Let us know which topics are of interest or where you need more clarity. You can just respond to this email directly…we like to make it easy 😌 or email [email protected]