Feb192014
Investors buy non-performing loans to foreclose and obtain rental properties
Investors buy delinquent mortgages from lenders with plans to foreclose, boot out the mortgage squatters, and convert the property to rentals. This strategy may cause an increase in foreclosures nationwide.
REO-to-rental investment hedge funds exhausted the supply of homes they could acquire at auction or on the MLS for the prices they need to make the investment profitable. Desperate for more homes to add to their portfolios, investors turn to lenders to buy the non-performing loans on their books so these investors can foreclose on the delinquent borrower and obtain a rental property. This new strategy may cause a dramatic increase in the number of foreclosures.
I didn’t see this coming. Like most industry observers, I assumed that once house prices rose above levels where rentals provided reasonable cashflow returns, most seasoned professional investors would simply stop buying — and many have stopped, but the latest development is an innovative way of obtaining even more inventory at prices that make their business model work.
Souring Mortgage Debt May Be the Next Big Thing
By Reuben Brewer, February 15, 2014
Hedge funds were among the first to institutionalize the single-family housing space by buying up swaths of distressed properties. Now that good deals are harder to find, they’ve switched to buying soured mortgage debt. …
When the housing bubble burst, institutional investors quickly rushed in to buy up homes at fire-sale prices. The foundation for REITs like American Homes 4 Rent, Silver Bay Realty, and American Residential Properties were built during that period. Put together, these companies now own around 30,000 properties in key markets throughout the United States.
However, in the third quarter all three noted that they were slowing their purchase pace or shifting purchasing tactics in response to changing market dynamics. In other words, the opportunity that brought these REITs into existence is going away. This brings with it big questions about how these companies will continue growing.
In the post Bold California housing market predictions for 2014, I noted “The biggest demand cohort in 2013 was investors, many paying all-cash. With house prices 20% higher or more, these investors will not be nearly as active in 2014. In fact, I predict one of the big housing stories of 2014 will be just how dramatically and abruptly these investors pull back.” Prices no longer make sense for their business model, so they will stop buying houses.
But that doesn’t mean there isn’t opportunity in the housing market. Hedge funds have started to buy soured mortgage debt as a way to continue making money off of the housing bust.
Silver Bay, American Homes 4 Rent, and American Residential all have a pretty simple business model. Buying homes and renting them out is easy to get your head around and works well within the REIT structure. And as long as they don’t get overburdened with debt, they’ll be running fairly low risk operations backed by hard assets. You, as an investor, should get a steady stream of dividend payments along the way.
Many people either don’t like this business model or don’t understand it; critics claim this business will fail without considering the obvious: these are low-risk operations backed by hard assets. With no debt, the risk is minimal, and as long as the operators don’t obtain more debt than their cashflow can service, this will remain a low-risk operation.
The hedge fund push into buying bad mortgage debt is far more aggressive. There are all sorts of problems with the model of acquiring homes by foreclosing on delinquent homeowners. For example, according to RealtyTrac, it took an average of 564 days to complete a foreclosure in 2013. That’s a lot of time and legal headache.
Long foreclosure timelines are not a reason to avoid buying the bad debt. Remember, lenders don’t want to foreclose on these borrowers; the main reason foreclosure timelines are so long is because it serves lender’s interests to kick the can. The foreclosure process in some judicial foreclosure states is broken, but by and large, the main reason timelines are long is because lenders are not in a hurry — REO-to-rental hedge funds will be.
And don’t forget that foreclosed homes often need extensive repairs and updating before they can be rented out.
So what? These hedge funds formed to buy foreclosed homes. They know the problems, and they were designed to deal with them. I can’t believe this was listed as an objection.
Still, with home prices heading higher, the best way to build a portfolio of cheap homes may be taking on the extra risk of buying delinquent debt.
And this is exactly why this may become a popular acquisition method this year.
How will this impact the housing market?
This acquisition strategy, if it becomes widespread, will almost certainly increase the number and pace of foreclosures; however, none of those foreclosures will make their way to the MLS as for-sale inventory. There will be no flood of supply causing house prices to go down because all of this inventory will be held by the investment company for some period of time. Depending on how fast they boot out the delinquent mortgage squatters, some markets might get flooded with rentals, but assuming the squatters had jobs, they will also be adding renters to the demand pool.
If hedge funds start turning away from purchasing off the MLS, and apparently they are, then it will mean less competing bids on properties. Ordinary buyers will finally have the chance to obtain properties without competition from all-cash investors. Of course, the only reason this is true is because prices are so high that hedge funds won’t pay it, but for those who want a family home, they would be fighting against a hedge fund to obtain a house.
The uptick in foreclosures, if it does happen, will wet the appetite of realtors and homebuyers hoping to find more inventory, and housing bears will predict an imminent decline, but since these foreclosures will largely be gobbled up by the hedge fund with the non-performing note, it won’t have the price impact many are hoping for. For those waiting to see delinquent mortgage squatters get the boot, this new strategy is exactly what they are hoping for.
[dfads params=’groups=164&limit=1′]
[idx-listing mlsnumber=”PW14033733″]
301 EADINGTON Ave Fullerton, CA 92833
$399,900 …….. Asking Price
$430,000 ………. Purchase Price
7/7/2004 ………. Purchase Date
($30,100) ………. Gross Gain (Loss)
($31,992) ………… Commissions and Costs at 8%
============================================
($62,092) ………. Net Gain (Loss)
============================================
-7.0% ………. Gross Percent Change
-14.4% ………. Net Percent Change
-0.7% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$399,900 …….. Asking Price
$13,997 ………… 3.5% Down FHA Financing
4.27% …………. Mortgage Interest Rate
30 ……………… Number of Years
$385,904 …….. Mortgage
$107,108 ………. Income Requirement
$1,903 ………… Monthly Mortgage Payment
$347 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$83 ………… Homeowners Insurance at 0.25%
$434 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,767 ………. Monthly Cash Outlays
($425) ………. Tax Savings
($530) ………. Principal Amortization
$22 ………….. Opportunity Cost of Down Payment
$120 ………….. Maintenance and Replacement Reserves
============================================
$1,954 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,499 ………… Furnishing and Move-In Costs at 1% + $1,500
$5,499 ………… Closing Costs at 1% + $1,500
$3,859 ………… Interest Points at 1%
$13,997 ………… Down Payment
============================================
$28,854 ………. Total Cash Costs
$29,900 ………. Emergency Cash Reserves
============================================
$58,754 ………. Total Savings Needed
[raw_html_snippet id=”property”]
It seems to me that the banks should be able to provide a pretty good discount on these NPLs due to the fact that –if the homes are rented–they won’t pop up on the MLS which would push down prices which the banks definitely do NOT want.
Of course, these weird ways of addressing the problem just take more time, which means the market is still years from normalizing. In retrospect, it would have been faster to nationalize the banks, write down the loans, sell the bad assets at auction, and return to normal. This just drags things out forever.
Oh well.
When lenders get strong enough balance sheets to write down more of their hopelessly bad debt, selling the bad debt in bulk to REO-to-rental companies may be how they dispose of it. Those companies will pay more than the debt vultures will because they have a superior way of extracting value from it.
[…] – WSJ 24% of Canadians see homes as main source of retirement income – Globe & Mail Investors buy non-performing loans to obtain properties – OC Housing News Will Yellen Improve on Bernanke’s ‘Open-Meeting’ Record? – WSJ […]
Unfortunately, Debt is Rising Again
In a report released Tuesday, the Federal Reserve Bank of New York noted that aggregate consumer debt rose from last quarter, citing an increase of $241 billion dollars in the fourth quarter of 2013. The figure represents the largest quarter-to-quarter increase since 2007.
Data came from the recently released “Household Debt and Credit Report.”
Total household debt is on the rise as well, notching higher to $180 billion from Q4 2012 to Q4 2013. The rise is the first 4 quarter increase since 2008, as net household borrowing resumes.
The report makes comparisons to 2006, noting pre-financial crisis levels as a baseline. “Mortgage and home equity line of credit (HELOC) balances, in particular, grew more slowly in 2013 than in 2006,” the report said.
In 2013, balances fell for the lowest credit score borrowers. The report notes that lowered balances were a result of charge-offs from previous foreclosures.
The report commented, “All groups, even those with subprime credit scores, increased their mortgage balances in 2006. Now, the modest mortgage balance increases we see are mainly coming from high credit score borrowers.”
Younger consumers are borrowing more across all lines of credit, irrespective of loan types. “In 2013, the increased credit card and mortgage debt among the young and the riskless led to a turnaround in the trajectory of overall debt,” the report said.
We’re Americans, aren’t we?!? We’re entitled to the middle class life (as subjective as we define it). If achieving this demands credit, then so be it!
A down payment component (10%?) to the QM standard would have been nice, but the 43% back-end DTI based on real income and the real housing payment will sufficiently constrict credit to the “stretchers.”
That 43% DTI cap will be the primary barrier to another credit bubble. I expect we will see a lot of lobbying to remove it. Of course, if we do, it will be a disaster, but everything looks great while the Ponzi scheme grows….
JPMorgan banker jumps to his death
Third JPMorgan employee, fifth banker in three weeks to die
A prominent investment banker for JPMorgan Chase & Co. (JPM) jumped to his death from the roof of Chater House in downtown Hong Kong, the headquarters of JPMorgan’s Asian operations.
Witnesses told the South China Morning Post that said the banker, Li Junjie went to the roof of the 30-story Chater House in the city’s central business district and jumped.
The incident happened between 2 and 3 p.m. Tuesday in Hong Kong, or between midnight and 1 a.m. ET Tuesday.
Witnesses and emergency personnel saw the man leap to his death, the South China Morning Post reports.
Calls to JPMorgan’s North American headquarters were not returned.
Li’s death is the third unnatural or unusual death for a JPMorgan employee in three weeks, and the fifth odd death for a banker working in international finance in the past three weeks.
Former Federal Reserve economist Mike Dueker, 50, was found dead in an apparent suicide near Tacoma, Washington on Jan. 31. Dueker was chief economist at Russell Investments.
On Jan. 26, William Broeksmit, 58, a former senior manager for Deutsche Bank, was found hanging in his home, also an apparent suicide.
On Jan. 28, Gabriel Magee, 39, vice president at JPMorgan Chase’s London headquarters, apparently jumped to his death from a building in the Canary Wharf area.
Ryan Henry Crane, 37, executive director in JPMorgan’sglobal program trading, died Feb. 10. Details of the Stamford, Conn., native’s death have not been disclosed. He is survived by his wife, son and parents.
Crane’s death comes after a rash of suicides among three prominent bankers over the course of a week at the end of January and start of February, as well as the questionable suicide of a real estate finance executive said to have killed himself by shooting himself with a nail gun “seven or eight times.”
Purchase Applications Index Drops Another 6%
Mortgage applications continued to fall compared to a week prior and dropped 4.1% for the week ended Feb. 15, the Mortgage Bankers Association report found.
Overall, the refinance share of mortgage activity fell slightly to 61% of mortgage applications.
The refinance index declined 3% from the previous week, as the purchase index dipped 6% from one week earlier.
Meanwhile, the 30-year, fixed-rate mortgage with a conforming loan balance increased to 4.50% from 4.45%, while the 30-year, FRM with a jumbo loan balance jumped to 4.45% from 4.40%.
The 30-year, FRM backed by the FHA hit 4.16%, up from 4.13% a week prior.
Meanwhile, the 15-year, FRM escalated from 3.49% to 3.55%, and the 5/1 ARM increased to 3.20% from 3.11%.
Five Least Affordable Housing Markets in US
5. Los Angeles
This California city ranks at 54 on the affordability index, with a current median house price of $423,000 and an average monthly payment of $2,651 required.
4. San Diego
This city boasts an affordability index of 50, with a current median house price of $477,000 and $2,987 monthly payment required.
3. San Jose, Calif.
Making it into the top 3, San Jose records an affordability index of 47, in addition to a current median house price of $775,000 and a monthly payment of $4,856 required.
2. San Francisco
San Francisco is closely behind the No. 1 city and recorded a 42 affordability index, $682,000 median house price and $4,275 monthly payment required.
1. Honolulu
This is the only city not located in California and is also the top unaffordable market. Honolulu ranks 41 on the affordability index, with a current median house price of $671,000 and an average monthly payment of $4,203.
Priceline for landlords may determine your next rent
As demand for rental housing surges, a growing number of landlords are pricing their apartments based on a system similar to the one Priceline.com uses to determine airfare and hotel rates.
Using this “dynamic pricing” software, landlords can determine what to charge tenants based on real-time supply and demand. When demand is high, it signals the landlord to ask for higher rent on vacant apartments. When demand drops, it tells them to lower their rates.
“It takes the emotion and the stickiness out of rental pricing,” said Bryan Pierce, director of revenue management at Holland Partner Group, a multifamily housing management company.
The software that makes these decisions has been around for more than a decade, but adoption was slow — until recently. But as more homeowners turned into renters in the wake of the housing bust, many larger management companies began trying dynamic pricing to set rents more efficiently.
Dynamic pricing is now used to determine the rent of some 5 million apartments, according to Andrew Rains, president of the multifamily division at Rainmaker Group. That’s about 30% of rentals handled by professional property managers, says Rains, whose firm produces Rainmaker LRO, one of the more popular software packages used to determine prices. Two years ago, just 10% of those apartments’ rents were based on dynamic pricing, he estimates.
Brock MacLean, a vice president with Homes.com, a website that lists both sales and rentals, said the software helps landlords “eke out extra profits” by helping them keep units more fully occupied. Some renters may pay more if there’s a shortage of available apartments; other may pay less if there’s a surplus.
Blackstone, Hudson, Colony, Rialto etc. has been buying NPLs since 2010. BTFD (Buy The F…Dip). Its hard to tell, but many portfolios are bought at under 45 cents on the dollar. Wish it was my money making 25% IRR on these portfolios.
I think the key to success in the NPL business is having the right connections, especially at large banks. You can see that certain firms are “winning bids” like crazy, while others have had to close up shop due to the spigot being turned off.
For example, in our very own OC, Kondaur and Archbay couldn’t stay afloat, but there are others doing just fine (some would say thriving.) I wonder why that is?
http://www.ocregister.com/articles/div-567483-style-span.html
“Asked whether Kondaur was having a hard time buying (non-performing loans) at a price it likes, he said it is more a matter of banks “not even putting these assets out for bid.“
Problem is, the current home price model is based/dependent on the continuance of negative, real rates. Too bad.
Stocks Slide After Fed Uberdove Williams Pours Water On Untaper Hopes
As we observed yesterday, the market action over the past weeks can be summarized with one word: untaper. Specifically, in light of recent data, the Koolaid addicts had hoped that the crunch in the economy would be sufficient for the Fed to taper the taper, and slow down its removal of crutches, which ironically means that the media should have been focusing on the real causes of the winter swoon – i.e., the tapped out consumer and not blaming snow in the winter.
Alas, for all those who had hoped that Yellen would promptly shift to Untaper mode, Fed uber dove Williams has just one present: a glass of (appropriately) ice cold water.
FED’S WILLIAMS: ‘HURDLE IS PRETTY HIGH’ FOR CHANGING TAPER PACE
FED’S WILLIAMS SAYS NOW IS TIME TO FOR PULLING BACK QE
And keep in mind Williams is about as dovish as they come: there is hardly anyone on the FOMC who wanted the taper to taper more than Williams. End result: sharp pullback in stocks which after touching briefly unchanged for the year, have taken a sharp leg lower.
http://www.zerohedge.com/news/2014-02-19/stocks-slide-after-fed-uberdove-williams-pours-water-untaper-hopes
If anything this should indicate that The Fed sees something that we don’t see (yet).
Could it be Real inflation?
The only inflation we’ve seen has been in assets (the Fed doesn’t count this inflation) and some commodities.
Could it be Real threat to our currency?
We’ve seen this play out in the emerging markets like Turkey, South Africa, Brazil … these countries are in an economic depression, yet they’re forced to raise rates to protect their currency.
Could it be Real threat from those that own our debt?
Remember last June the BIS (Bank of International Settlements) ward the FED and others that the QE needs to end soon. Maybe the FED fears that other entities are gonna start dumping our debt into the market.
It’s going to be hard to believe that they’ll (The Fed) completely remove QE this year. However, when QE is gone, and the markets tank, The Fed will have much less credibility to do it again … I don’t know if they can do it again, and get the results they’ve received the last several years.
How can the fed prevent what it cannot see? just say’n
A battle is currently underway…
We have a massive .gov/bureaucracy that needs an uber-cheap $ to maintain its status quo vs the financiers who’re signaling that the point has been reached where they NO LONGER want to be paid back in cheaper $’s.
“The Fed will have much less credibility to do it again ”
I think this is a big part of it. I think the economy would have to really come off the rails before the fed would change course. To do otherwise would undermine what little credibility they have left.
Boatloads of uber-weak hands have been flushed-out of housing over the last few years, and newly established ‘insiders’ income streams have multiplied accordingly, especially over the last 2yrs.
So, considering the scope of the weak hands asset transfer to ‘insider’ hands that has transpired, and if it’s actually in the wind down phase as some suggest, the income streams will be worth more in a stronger $/purchasing power increases type of landscape, vs a weaker $/purchasing power decreases type of landscape, no?
Off topic I know…but there’s an interesting article in today’s NY Times about how mortgage servicing firms are once again messing up…So here we go again…
A growing number of homeowners trying to avert foreclosure are confronting problems on a new front as the mortgage industry undergoes a seismic shift.
Shoddy paperwork, erroneous fees and wrongful evictions — the same abuses that dogged the nation’s largest banks and led to a $26 billion settlement with federal authorities in 2012 — are now cropping up among the specialty firms that collect mortgage payments, according to dozens of foreclosure lawsuits and interviews with borrowers, federal and state regulators and housing lawyers.
These companies are known as servicers, but they do far more than transfer payments from borrowers to lenders. They have great power in deciding whether homeowners can win a mortgage modification or must hand over their home in a foreclosure.
“hey have great power in deciding whether homeowners can win a mortgage modification or must hand over their home in a foreclosure.”
This could be a way for lenders to wash their hands of the bad press from the increase in foreclosures bound to happen when they tire of the squatters.
Nervous Sellers Constraining Inventories in California
Sales of existing homes in California were essentially flat in January the California Association of Realtors® (C.A.R.) said on Wednesday. While inventories loosened a bit from December levels they are still constrained and many potential sellers are hesitant about selling, nervous about the impact of rising rates and tight lending standards on their ability to purchase their next home.
Homes sold at a seasonally adjusted annual rate of 363,640 in January, up 0.3 percent from a revised rate of 362,430 units in December but 13.8 percent below the pace of 421,780 units in January 2013. C.A.R. said it was the third straight month that sales fell below a 400,000 unit pace and the sixth straight month when sales were lower than a year earlier.
The supply of existing single-family detached homes for sale rose in January to 4.3 months from December’s Unsold Inventory Index of 3 as some home sellers listed their homes for the spring home-buying season. The index was 3.5 months in January 2013. C.A.R. noted a six- to seven-month supply is considered typical in a normal market.
C.A.R. President Kevin Brown said, “Supply conditions in the lower-priced segment were especially tight as inventory for homes priced below $300,000 fell 13.4 percent from the previous year, while inventory for homes priced $1 million and higher increased 11.1 percent from last year.”
The median price of an existing, single-family detached home fell 6.2 percent from December’s revised $438,090 to $410,990 in January. This was 22.1 percent higher than the median in January 2013, and was thus the 23rd consecutive month of year-over-year price increases and the 19th straight month of double-digit annual gains. The increase in the median was driven by sales of higher priced homes which made up a larger share of the market compared to a year ago.
[…] Investors buy non-performing loans to foreclose and obtain rental properties […]
[…] recently wrote about investors buying non-performing loans to foreclose and obtain rental properties. One of the questions this practice raises is why lenders are bundling and selling these loans to […]
[…] Sine the first method is politically and financially unpalatable, when loanowners fail to cooperate, the banks increasingly sell the non-performing loans to hedge funds, who generally foreclose and convert the property to a rental. (See: Investors buying non-performing loans to foreclose and obtain rental properties) […]