The post-pandemic mortgage industry has been interesting to watch unfold. Record-low interest rates created incredibly high demand for new mortgages and refinancing while millions of borrowers were receiving assistance through forbearance, some of whom remain in forbearance today. These combative circumstances, coupled with high inflation and a competitive market, make it an extremely challenging time to be a note investor.
But challenging doesn’t mean impossible -- it just means things may have to be done differently in today’s new era. This is precisely why note investors should make these four moves before the end of 2021.
Inflationary markets are tough on the mortgage industry, particularly for fixed-rate notes because they aren’t able to hedge against inflation. For example, a 5% mortgage today is now battling 5% inflation, which in essence, zeros out any potential return. That’s why it’s a good idea to sell off any assets that carry additional risk or aren’t able to compete in today’s inflationary market.
Recapitalization doesn’t just strengthen your position through risk reduction and improving yield opportunities; it also provides liquidity -- something I believe will be extremely important as we enter 2022.
2. Get capital-heavy
I personally believe a massive opportunity is coming in 2022 and beyond, particularly in the nonperforming note space. Considering 1.2 million borrowers are still behind 90 days or more on their mortgage, including those in active forbearance, there are still a lot of loans that aren’t getting paid. Fannie Mae and Freddie Mac have both recently issued pools of nonperforming loans for sale, and other loan sales are starting to pop up in the market as well. For institutional buyers, this is good news. Smaller-scale investors, however, will have to wait a while before that inventory becomes available down the line.
While only time will tell how the nonperforming market will unfold over the next few years, if inventory increases, only those who have the money will be able to profit. Recapitalization is one way investors can increase their liquidity, but raising capital in the private market or through syndication is another opportunity. If you work with private lenders, now is the time to make sure your relationships are solid.
3. Establish systems and improve your operations
Countless businesses at the start of the pandemic used the “downtime” from a lull in business to focus on improving internal systems. This proved to be a great move for many, allowing them to have more efficient operations when business returned in 2021. Note investors should be using this time to do the same. Establish or find ways to improve how you operate your business. This can include the CRM used to manage your portfolio and contacts, marketing, reporting and bookkeeping, and beyond.
4. Continue to build sale sources
One of the most challenging aspects of note investing today is finding quality inventory. Increased competition from the desire to put the billions of dollars in dry powder to work and beat or at least keep pace with inflation have pushed prices up. Nonperforming loans, which were once sold for pennies on the dollar, are a far cry from the prices we saw from 2010 to 2015. That means investors need to work even harder to find new, worthwhile opportunities for notes.
Searching in the private market can be a lucrative opportunity, but private mortgage notes such as seller-financed properties aren’t right for everyone. Those who want to stick with institutional loans should continue to search for new potential sellers while nurturing past relationships so when the time comes, you have qualified leads.
The Millionacres bottom line
Sitting on the sidelines isn’t fun. Most investors want to be a part of the action and earning, not waiting for circumstances to change. There is definitely opportunity in today’s market -- it’s just not as abundant as in the past. Rather than fight current market conditions, work with them, using this time to prepare, systemize, liquidate, and find new sources.