The note investing industry has seen a wealth of activity over the past couple of years. For Individual investors looking to jump into the note business for the first time or those looking to continue building their portfolio, there is no better time to jump in than now.
Since the start of the pandemic, many note investors were, and still are, awaiting a wave of distressed debt to hit the market, but that hasn’t stopped the acquisition and sale of residential mortgage notes.
The 2021 Market
Through the CARES act, banks were provided relief from reporting their distressed debt portfolios, keeping the wave at bay. The TDR & CECL relief, allowed some banks to blanket their troubled debt. So institutionally originated loans, which were supposed to go through a default process, charge off and then sail to the secondary market, did not move in that direction as banks suspended accounts.
The Opportunity: With the start of 2022, we are seeing an end to these reliefs, which mean some banks will start reporting their troubled debt and selling those loans to make space on their balance sheets for new originations.
Policies & Regulations
In 2021, government policies and regulations were created to relieve borrowers in times of crisis. The foreclosure/eviction moratoriums and forbearance played a role in keeping the foreclosure activity at a record low.
But despite the rise of the omicron variant, people and businesses are beginning to adjust and cope with the fluctuations of the coronavirus.
The Opportunity: The federal foreclosure moratoria expired at the end of September 2021, allowing the courts to resume the backlog of foreclosures. Add to this the fact that the CARES act has also been lifted and many homes that were in foreclosure prior to the moratoria can now get through the courts. That means many homes will be foreclosed, and note investors will begin to see some of that drip into the market.
Yet, with states offering mortgage and rental assistance and many people returning to work, the amount of inventory may not equate to the tsunami of defaulted loans that happened in 2008-09.
Real Estate Market Normalizing
Based on a report by The National Association of Realtors, although real estate has thrived, there are signs that a more normal and predictable market is on the horizon.
According to Black Knight’s September 2021 Mortgage Data, around 1.2 million homeowners have a past due date on their mortgages. It means many of these homeowners will either reinstate their loans or sell their houses. If even a tiny percentage of these 1.2 million homeowners decide to list their homes for sale, there will be a decrease in home values.
This normalization is also expected to show up in the note investing industry where individual investors are concerned. As housing prices increased, the acquisition price for performing and non-performing notes also increased. Individual note investors should see these prices normalize.
The Bottom Line
With the logjam of distressed debt reducing and prices normalizing in the real estate and note industry, 2022 will be a year of opportunities for individual investors. But, as always, it remains to be seen how the market develops and what it has for the seekers.
