Friday, October 30, 2020

Non-Performing Notes: Are They Back? Eddie’s Theory - Real Estate NoteS...

Non-Performing Notes: Are They Back? Eddie’s Theory The “Shadow Inventory” The “Piper” Will Have to be Paid When Will We See This Inventory Uncover Why Savvy Investors Use Proven Mortgage Note Strategies for Massive Monthly Profits In Today’s Ever-Changing Market… Risk-Free! Discover more about NoteSchool and profiting without Tenants, Toilets and by taking our FREE one day class: https://new.noteschool.com/TV Latest Class Information: https://noteschool.com/3-day-classes/pop/ Download a Brand-New eBook by Eddie Speed It’s A Whole New Ball Game With Creative Financing https://lp.noteschooltraining.com/moneyball-getstarted https://youtube.com/c/noteschool https://www.noteschool.com/

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Brian Lauchner (00:06): All right. Welcome! Welcome! Welcome! So glad you joined us today for another great, absolutely live in the flesh, virtually NoteSchool TV. We're going to be digging into some of the hotter topics. Some of the content that really is applicable in today's marketplace and why you need to know this information today. We've got some really cool stuff that we want to dig into, but first, if this is something that you find valuable, this is something that you want to know, the latest and greatest information, and you want to hear it first ahead of your competition. Make sure that you're liking this video, make sure you're going and subscribing to the channel, but more importantly, probably than anything else is actually clicking that bell notification so that you're getting the notifications so that when we go live, you know about it first, you're getting this information before anybody else. Brian Lauchner (00:57): That's a huge benefit to you and we're going to get into it. Feel free to, as we're going through this slide, man, leave your questions, leave a comment. If it's something that we can tie into what we're talking about today, we'd love to address those here, live on the show. And so every single Wednesday, you're going to see us. I'm going live at 11:00 AM central time. Absolutely every Wednesday, so make sure you mark it on your calendars or watch for that notification to come across your screen. Here is the gist today, what are we going to be talking about today? We are going to be talking about the Non-Performing Loan Side of the Business. Is it back? What does it look like? Where is the opportunity? And probably most importantly, why it is probably the absolute game changer for your business moving forward. Brian Lauchner (01:41): And today we have a very special guest, the one and the only Joe Varnadore, who's going to pop up on the screen well he's a veteran of over 30 years in the Note Business and absolute pro. And we've brought him on to really talk a little bit more about the Non-Performing Note Side of the Business, where the inventory is, you know, is it coming back? What does that look like? Moving forward to Joe, if you'll join us on the screen, how you doing? Joe Varnadore (02:07): I'm doing great, man. How are you this morning? Brian Lauchner (02:09): Is living The Dream as always living, living The Dream as always. And so tell us a little bit about what are your thoughts about this Non-Performing Note Piece and just share a little bit about what your thoughts are, where you think it's going, where the opportunity is? Joe Varnadore (02:24): So great, Brian. So here's the, here's what I wanted to do and how I wanted to start this. Right? So I wanted to give you a little history lesson, right? We're going to go all the way back, well, from 1980 to 2006 delinquencies on single family, residential first mortgages was less than 1%, right? So for a period of 26 years, even through, you know, the crazy things that happened such as mortgage interest rates in 1980, and by way, I started in the business Joe Varnadore (03:00): Back in 1990. So but anyway, when the rates were, you know, 20% on mortgage interest rates, so all of this, but delinquencies were very, very low. So then we have the Boom that starts in what, 2004 and Eddie and I, Eddie Speed, founder of NoteSchool. We talk about this and we call what happened in this great recession. We call that kind of a Crash in Slow Motion cause it really started in 2004. And then it just kind of built up until the housing market crashed in 2007 and then the the banking debacle in 2008. And then this led all the way through really until about 2014. So what did that look like? So after 2006, moving forward, we know that somewhere between 11 and 12 million non-performing first residential mortgages were in the United States in the system in the banking system in the United States. Joe Varnadore (04:04): Right? That's a lot. So that looks like somewhere around 20% of the loans that were out and we know why, right. We remember the great recession and, you know, anybody could get a loan. It was the whole pulse thing. And if you could fog a mirror, right, all of that stuff. So over the past, what seven, five or six years we've seen that start to clean up? Well, what happens unbeknownst to everyone, even at the end of February of this year you know, we had this pandemic that kind of slapped us around a little bit. So, you know, we know that unemployment went from virtually very little, all the way up to where there was almost 40 million people that were unemployed. And so it started this whole ball rolling again, of people not being able to pay their rent number one, and most importantly, people not being able to pay their loans on their house, their mortgages on their property. Right? So it has become a thing again now, hopefully, and I certainly don't believe in, it's not the consensus, that NoteSchool that we're going to have, you know, 20%, you know, 11 million loans that are non-performing again, but it's somewhere around half of that. Right? Brian Lauchner (05:28): Okay. So, when you're looking at, then the opportunity you're saying there's still a massive opportunity was clearly triggered by this pandemic, this Black Swan type of event. Joe Varnadore (05:41): Right. Brian Lauchner (05:41): Why is either this market cycle shift different or what inventory is different today than it was maybe for example, in 2008, like why does this one look a little bit different? Joe Varnadore (05:54): Great question. So here's what all of that look like. Housingwire put out a great article here about three weeks ago, and it was talking about this very thing. So, I'm not saying there's going to be a massive number. There's a massive number of Non-Performing Loans that you can buy today, but it's on the horizon. We'll talk about that. And we'll kind of wrap that up at the end of the podcast today. But so here's the way this article starts. So by the end of January, by the end of December of this year, when the forbearances run out and the moratoriums on foreclosure and all of those things happen, then there's going to be this pile of stuff out there. And the way the article was titled as the Piper is going to have to be paid, Right? Brian Lauchner (06:48): Okay Joe Varnadore (06:48): So what does all of this look like as far as numbers, right? So what is the different government sponsored entities like Fannie and Freddie and HUD and FHA and VA. These are those GSEs, right? So those folks that are, that have done that, or they've gone into what is called a forbearance, Brian. So that means that they get a break on making payments. Now, oddly enough, Brian those folks that are in a forbearance situation, and it's a GSE, a government sponsored loan, a government insured. Those really don't show up as being in the delinquent pile, right. Because they're saying, well, we're giving them, you know, we're giving these folks a break. And so with those loans, they don't have to pay the Piper because what's going to happen is those payments will be just stacked on the back end of that. Joe Varnadore (07:55): So if you had 340 payments left and give your 10 months, well, it's going to be 350 payments left at the end of that. Right? Brian Lauchner (08:03): Okay. Joe Varnadore (08:05): And by the way, just some quick numbers here, FHA HUD reported last week, that FHA alone as 1,000,300 and 60,000 of those of those loans. Right? And then you've got a Fannie Mae to $194 billion in delinquent loans. So it, depending on who you read and what you read, what we can ascertain from all of this is that inventory is somewhere in the 5 to 7 million loan range. Okay. Brian Lauchner (08:44): Wow. Joe Varnadore (08:45): Yes. So here's the difference in the GSE loans and then the Commercial Bank Loans, like you're working with Bank of America or PNC or Wells Fargo. Those, and I had a friend of mine, Brian. He we went to school together. I live in a little small town in South Florida called Okeechobee. Right? And everybody knows everybody. And so he calls me and he says, you know, my lender and it was a commercial bank. And he says, they, you know, they've offered me this. I don't have to make a payment for three months. And I go, so it's not like a Fannie or Freddie loan he's no, It's and he gave me the name of the lender. Right. And I said, Hmm, we need to find out something because he was all excited. So I get on the phone with him and we call the lender, Right. And so they said, Oh yes, Mr. Jones, you know, you don't have to make a payment for the next three months. And I kind of look at him and I go, and they go but, he goes, but what? And he goes, well they said, but you got to pay $4,500 in three months. So yeah. He could not make a $1,500 payment for the next three months, but the fourth month he's got to make a $4,500 payment. Brian Lauchner (10:01): So let me just jump in here, because this is where I think a lot of people, especially when they're newer, if this is a newer market cycle for them, that they may not grasp is a lot of times people don't understand that forbearance is not forgiveness. And I'm not just talking about the investors. I'm literally talking about the homeowners who somebody talked to him and said, yeah, you don't have to make a payment. Like this example that Joe's talking about, it sounds so good. But the problem is when you look at just the math here, like if you can't afford, let's just use easy math, a thousand dollars a month today, if you can't afford it because of your situation, there's this forbearance program that'll allow you to forego that. But it's a three month a forbearance or a six month forbearance, well, at the end of that six months, you haven't been paying on that seventh month. Brian Lauchner (10:48): And now you have to have all $6,000 plus the thousand for the seven months. So the psychology here is if you don't have a thousand dollars today, why do you think you're going to be signing up for something to where you'll magically have $7,000 in the future? And this is especially important seeing that the majority of Americans don't have a thousand dollars in savings. They're not setting aside large payments on a monthly basis. And so you can start to see when Joe talks about these troubled loans, right? Some of them aren't even reported in some of the numbers because of the programs that they're in, but it really shows you this group of, of loans that are sitting there, that they're not really, they're not in trouble as far as like, Oh, look, they're being foreclosed on right now. They're just sitting in this gray area. Brian Lauchner (11:33): Right? And I think that's really, what's really important is first of all, understanding the difference between forbearance and understanding that it's just a delayed you know, program. It's not actually forgiveness. You can imagine how many Americans think they're not ever going to have to make this payment again. Right? Joe Varnadore (11:48): Right. Brian Lauchner (11:49): And so it just kind of adds to the numbers. And I just want to make sure I clear that up just in case anybody's brand new or they're not grasping that it's really important to understand there's this massive inventory sitting there and, and Joe's going to kind of talk a little bit more about that. Go ahead, Joe. Joe Varnadore (12:01): Yeah. So with the forbearance pile, we know there's somewhere around three and a half to 3.7 million loans in forbearance. Right. That's got it, but that's got to change. That's, you know, that's going to have to, it's going to have to come out of forbearance at some point in time. And we're looking at the end of the year. For the ones that are with commercial banks. Well, again, that's that number is somewhere in the 3 million ish range. So those are the ones that at some point in time, it's going to have to go from being, you know, they're not paying right. They're in a kind of a forbearance situation. What happens, you know, in three months when, you know, the Piper has to be paid and they owe $9,000 in past due payments, what happens at that point? And so the banks, and here's the other thing, that most people don't realize is that the banks, the big three, right? Joe Varnadore (13:00): I think it's Wells Fargo and JP Morgan Chase, and maybe I think it's City Bank, right? So they have gone in a position to where they are raising their loan loss reserves from like five and a half billion trillion, billion trillion dollars, right. In a billion dollars in January to where they have re increased those reserves up to about $32 billion. Now, Brian, here's the significance of that, when you're a commercial bank the Fed gives you some leveraging techniques, right? So when you've got to take money out of your lending category on this side, and you've got to move that over here to cover bad loans, non-performing loans. That means you can't loan this money out. You can't count that in your pile over here that you can make loans against. So that basically is money that has to sit over here in dry cash, unless there's, they're thinking of a significant event then it's they wouldn't be doing that. Joe Varnadore (14:12): Let me share something else with you guys. We've got one of our students out in in California and he does, you know, his name is Seth and he does a lot of he's a great NoteSchool student. And he brought a deal to us here the other day and he and I were talking about it. So here's a person that I'm looking at the deal sheet right here. So here's a person that buys a house in February, 1st payment is due in March. The house, he buys it for 395. He's, he has, he gets a VA as a VA entitlement. So he gets a VA loan. And so he gets a zero money down VA loan, which is really about 1% Ryan. So he's got about $4,000 in it. So he gets the loan and he has not, he still hasn't made a payment, his first payment on that. Joe Varnadore (15:03): So he takes it into a forbearance. So he's lived in the house for what, nine months now. And I'm looking at his forbearance amount here and it's $9,691 now, principal and interest. So that will be thrown on to the back end of the loan, and what we're seeing and what Seth is seeing specifically, is he seen eight deals like this in the last, I don't know, in the last 30 days, where he's seeing more situations like this, where someone, you know, bought a house and, and by the way, the Fed put out a a message here about three weeks ago that says, when originating a loan, if it's a G if it's a government sponsored any loan, a VA and FHA or Fannie or Freddie whatever it is, in a GSE realm that you have to, the borrower has to sign a document saying that you will not take that in to forbearance within the first 90 days. So Brian, if that were not happening over and over and over again, like Seth's experience here, it would not, that message or that bulletin would not have been put out there to people that are originating GSE loans. Right? So it is a hopefully it's not as tsunami coming, right? Hopefully it's just kind of a little bit of a way that's kind of pushing forward there, but that's the kind of thing that you don't see on the nightly news, right? Brian Lauchner (16:37): Yeah. And I think that I've heard you use this phrase before, you keep talking about these different kind of chunks of inventory, right? You've got like Seth's example where you have all these assets sitting out there on a zero down VA loan. So you can imagine that this, person's not going to go list this with a real estate agent to play water, right? Like they're underwater, they're in trouble. The real estate agents can't help them. The majority of investors across the country who think like a wholesaler, we think, Oh, I need this thing at 70 cents on the dollar. They can't help them. It's going to take a very unique skill set. Well, we call becoming a Deal Architect. It's going to take a Deal Architect to go out and actually be able to buy this thing at retail or over retail and turn it into a solution for the seller, but profit for the investor, the Deal Architect. Brian Lauchner (17:24): But you've got that group of people. Then you also have this entire group of people over here. That's like, you know, it's all these landlords that have tenants that aren't paying that now, maybe they can't afford their mortgages. And so I want you to talk about this term and I want you guys to listen carefully cause, this took me a minute to get, but they call it the Shadow Inventory. And the Shadow Inventory is something that we need to discuss because a lot of people have this mindset that things are going really good right now, Brian, like, what do you mean? There's going to be this big wave of problems. Like there can't be, the market's going up and up and it's probably going to go up forever. Right? But the reality is, there's this looming inventory sitting there. And so I want Joe to talk a little bit about what he calls Shadow Inventory and go a little bit more into detail into that so that you know, what you should be focusing on in the marketplace right now. Joe Varnadore (18:13): Couple of things here and starting out with this Seth deal, right? That is, can we do something with that deal with Creative Financing? And the answer to that is absolutely, because Seth can sell this house for, he can take it over something we call Subject To, and he can then resell that what we call a Penalty Box Buyer. Brian, that's going to be another episode, right? Brian Lauchner (18:38): Yeah. Joe Varnadore (18:38): But, we can work with this person because the house, he could probably resell it for around 420, and then wrap the underlying and do all of that. But here's the other piece of this, before I get into this other Shadow Inventory here, but here's the other piece of what I wanted to share with you guys. And I'm going to read this here for you. It says that, and I took this, wrote this yesterday sellers in major Metro areas like San Francisco, Chicago, Philadelphia, New York, Seattle, Tampa, have had to reduce their asking prices to sell their properties. Joe Varnadore (19:15): Highest drop is in red hot Denver. I mean, Denver has been hot, 41% of sellers had to reduce their asking prices in Denver. Okay. So we think that it's up, right? But the challenge there's challenges out there. The market is speaking, it's speaking in many different languages, right? That's the way it looks right now. So the other part of this and the Shadow Inventory that Brian was referring to, refers to all of these pile of landlords. And we kind of talked about this in last week's episodes. We call them Burnt Out Landlords, right? BOLs. So these are the folks we know that there is about, I don't know, it's around 20 million landlords out there that own from one unit up to four, right? So single family, they own one house, a single family house they use as a rental and maybe a duplex, which is two units. Joe Varnadore (20:17): So they own three units. So that's what they own. We know that about 35% of the folks didn't landlords out there that were surveyed did not receive a rent check in September. That's the snowball effect when you're not getting paid as the landlord, then how do you continue month after month? Remember, this has been going on since March. So we're well into this. So we've got these, these landlords out there that are not receiving their rent checks. So those guys, when the, we call them Burnt Out Landlords, they're folks that they're in trouble as well, and they need to sell, they need to do something with that asset. And what, you know, we teach it at NoteSchool is the fact that yes, you can work with somebody like that. Even if they have very little equity, because we do we teach buying on terms or is that he would say buying on terms, right? Joe Varnadore (21:17): We teach how to buy on terms, and then how to sell on terms. And we'll get that in an episode in the next week, or so, maybe the next week's episode they're talk more about that and what that looks like. But there is a pile of inventory. Brian, the thing that shocked me about these landlords that are, you know, there's about 20 million doors out there representing about 15 million new landlords over the last 10 years. And you know, most of them, 70%, self-manage their properties. And I'm just like, you know, why? why would you want to end what they've done really is they've bought themselves a business, and that was never their intent to do so. Their intent was to have a have passive, true passive income. And that's the beauty of the NoteSpace. That's the beauty of doing what we know and that's the performing side of the business. So guys, as we start to, you know, kind of draw the conclusions here, it's the simple fact is, is there is plenty of inventory out there. A lot of folks say, well, you know, there's no inventory, there's inventory. If, you know where to look for that inventory, you've got to, you know, kind of look through the gaps. Brian Lauchner (22:36): Yeah, absolutely. And I think that we're painting two pictures here. We've got the whole side of, there's a bunch of failing loans because either tenants aren't paying or they bought a house and they couldn't pay, think about all the commercial buildings that are sitting out there that people aren't paying rent on. So you've got all these that yes, we could be acquiring on terms. There is a huge opportunity there, but the other benefit of the Non-Performing Side are Notes that, Hey, once they go delinquent, the banks use a process to lower the value on their books so that eventually they will sell these off for pennies on the dollar. And this is why it's so important that you learn this skillset specifically in the fourth quarter of 2020, because Joe is going to talk a little bit about when the wave is coming, but specifically this quarter it's important because Non-Performing Notes is going to be your lowest barrier to entry into whatever your strategy is. So if you could acquire a Note at a deep, deep discount, because it's not paying, you could rehab it so to speak or add value to it, to make it performing again. Or you were to take that asset back. Well, now you have a rental property or a flip that you acquired at a substantially cheaper price than you would have at a wholesale price. Right? So Joe, talk to us a little bit about maybe the charge off process and more importantly, when are we going to see this inventory hit the marketplace. Joe Varnadore (23:55): Yeah. Great topic here guys. So back in, you know, so after the great recession, right? And we saw for those of you that were in the business back, you know, from 08, 09, 10, 11, 12, you saw REO inventory, right? Real Estate Own banks had foreclosed on properties and they were selling them. And Hey, as investors, we were buying those that, you know, 30, 40 cents on the dollar, 50 cents on the dollar. That kind of went away and then banks decided that, well, it wasn't we really, and there's a, there's a specific category of properties where the properties are worth less than $125,000 in as is value that they really don't want to to foreclose on. And there was a pile of those and we were buying those at a substantial discount sometimes as little as 15 to 20% of the, as is value of the property. So that's the background. So let's move forward to today. Brian Lauchner (24:54): Hold on, Joe, I gotta jump in here because as a full-time wholesaler for many years, flipping houses, getting the rentals done on these strategies, I'm happy to buy something at 50 or 60% of the value happy to. Right? In almost any situation. And you are saying with Non-Performing Notes, I have an opportunity to get in at 15%, 20%, 30%, like. Joe Varnadore (25:18): Probably not today, right? Get in it, it's somewhere between 30 and 60%, does that sound okay? Brian Lauchner (25:27): You know what? I think I can work that into our leads here. So tell us more about tell us more about this. Joe Varnadore (25:33): Yeah. So understand, that when this thing started back in, you know, back in March, so most people, Brian, made their March payment, right? It was not a big deal. And so now you've gone from March to April, May, June, July, August, you know, you've moved forward. So as this thing has gotten deeper people have not been able to make their payments. So here's the way that it generally works with the way of bank charges off loans over time, so that they can eventually sell those at 30, 40, 50% of value. So typically a lender, a bank is not going to start the charge off process until the loan, the borrower is 90 days past due. So you've got from 0 to 90 days, and then it hits that 90th day in the 91st day, the lender starts saying, okay, this is serious. Joe Varnadore (26:36): And in their accounting processes, through the Fed and the way that the, you know, the, all that works, they are then allowed to start charging that off. So, Brian let's just typically say that you had Joe home buyer or home owner who they made their March payment. They didn't make their April, May or June. Right? So in July that became Delinko officially delinquent. And then the lender started charging that loan off. So they start in July, they charge, it may be down 8%. So they maybe they're charging it down 10% a month. So you go July, August, September, October, November, December, right? That's six months. So after about six months, they have charged the value of that long down on their books, through their accounting system, to where now, that loan is worth about 50% of value, actually, it's worth 50% of the as-is value of the property, not the unpaid principal balance. Joe Varnadore (27:42): So you've got a $200,000 house, right? The borrower's delinquent, then it starts to be charged off. So the bottom line is, is when can we buy that Non-Performing Loan for a hundred thousand dollars, 50% of as is value. That's going to be somewhere in the January range, right? So if you're looking to buy at a 50% discount, then that's on the horizon. That's coming up. And guys, it's already mid October, you know, two and a half months, we're going to see this dam, you know, the breach in the dam. And that's going to start opening up and we're going to see these loans, these houses, these loans on there, that we're buying now understand, again, Brian, we're buying the Non-Performing Loan, but here's the good news NoteSchool. We've done tens of thousands of Non-Performing Loans back in the day, we know a thing or two about Non-Performing Loans. Joe Varnadore (28:46): We know how to buy them, right. We know how to price them. We know how to work them out. There's only three things that can happen when you buy a Non-Performing Loan, right? You're either going to modify the loan. If you think the borrower can start paying again, they just need a little bit of help. We can get a deed in lieu, which means the borrower is just throwing their hands up. And they're saying, we just want out no more. Right? And we get the deed in lieu of foreclosure, meaning we get the house. Or in some cases we're going to have to literally go in and foreclose, but that's okay too. Right. It's just part of the process. You know, we, we teach you how to build you know, build a budget, understand that it's just like buying an ugly house. Joe Varnadore (29:30): Like Christina and Tarek bought an ugly house on Flipper Flop. We buy an ugly house, we fix it, and then we resell it, and we make a profit. You buy an ugly note, a note that is delinquents, severely delinquent non-performing. And then we go through the process. If we modify the loan, Brian, we get a shiny new re-performing loan, which we can enjoy the cashflow on. If we get a deed in lieu or we get at the foreclose, then we're getting the house. And then because we're buying that at anywhere from 30 to 60% of value, we have multiple exit strategies, right? We can, you know, do what we need to do, and we can resell it with seller financing. If you just love being a landlord, you can become a landlord again. You can do all of those things, right? That's the whole process. But the key is, is we're buying it at a tremendous discount. Brian Lauchner (30:29): Man. That is that's huge, Joe. And I really appreciate you kind of filling us in on this side of things and really what I really take away from this. And what I would encourage most of you to look at is that if there is an opportunity coming, like I said into the year, beginning in the new year, why I said a minute ago, it's most important that you're hearing this in the fourth quarter of 2020, because you literally have we're about two and a half months from the end of the year, that gives you about two and a half months to get the education you need, get the resources to line up your capital. All of this stuff really get prepared so that when the opportunity presents itself, you can actually strike, right. Obviously the better the deal. It is the faster it's going to go. Brian Lauchner (31:10): And so you're going to want to be prepared. And so I will say this first of all, just say, thank you, Joe, for spending some time with us today, talking about Non-Performing Notes, we're going to spend more and more time talking about these topics, as you would imagine, over the next couple of weeks coming months, we're going to dig into this more and more and more. But this is a huge opportunity that I think literally every investor can relate to. They can see the opportunity and they're going to be able to go out. And those who have that knowledge, they're going to be able to jump on that. And so I'm going to wrap up this this episode of NoteSchool TV and just kind of say, thank you so much for joining make sure again, to like, and subscribe and definitely go out and click that notification button so that when we go live, you know about it, for those of you who are like, I want to know more about NoteSchool. Brian Lauchner (31:54): I want to get involved a little bit more, get a little bit more education from you. If you'll go to www.NoteSchool.com/TV, I'm doing a one day class that is really a deeper dive into all of these topics. We're going to help get you equipped and get you educated so that you can actually go out and take action. Just go to www.NoteSchool.com/TV and sign up for the class that we've got coming up is going to be an absolute blast. Yeah. David just said, Non-Performing Notes is going to be absolutely huge, and it is. So thank you guys for spending some time with us. We will catch you next Wednesday because every Wednesday we go live at 11:00 AM central time here on NoteSchool TV to bring you the latest and the greatest news in the investing space specifically in the Creative Financing and the NoteSpace. We'll catch you guys next Wednesday, have a great week. David (32:43): Thanks everyone.
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