What does this mean for real estate investors?
There's no denying our country is in challenging economic times and that millions of homeowners, renters, and investors will be negatively affected, but there are ways that real estate investors can participate in the current crisis, helping both the financial market and homeowners during these challenging times. Over the next several months and potentially years, there will likely be an increased number of distressed assets, both in the form of real estate (such as real estate owned, or REO, properties) and in the form of mortgages (as non-performing loans).
Many times when banks have pressure to maintain liquidity and meet certain debt ratios, they sell a portion or all of their delinquent mortgages at a discount. While large institutional buyers like PennyMac (NYSE: PMT) and other hedge funds mostly make up the buyers for these loans, many of these non-performing mortgages can trickle down to smaller or mid-size investors.
Because the non-performing note buyers are purchasing the mortgage at a discount and often aren't required to follow the same guidelines and regulations as a bank to meet certain debt and liquidity ratios, they have more flexibility to work with the borrower to meet a positive resolution. This can include extending an established forbearance plan, entering into a new forbearance plan, or modifying the loan, if necessary, while still achieving desired yields and returns.
Properties valued under $100,000 make up the largest share of delinquent mortgages at this time, with a total delinquency rate of 9.4%, and will likely be the first of the properties to make it to market. While the housing market remains relatively strong at the moment, there is a high likelihood that homes will flood the market once forbearance plans expire, especially if the virus and shutdowns continue.
No one hopes this trend of increased delinquencies continues. I believe most Americans want our economy and world to return to normal. But in the event that things continue as they are for the foreseeable future, it's important to know how to participate as an investor, understanding where the opportunity lies to not only help be a part of the recovery and solution but to do so profitably.