Be The Bank

023 - That's Not Cheap Money!

• Justin Bogard • Season 4 • Episode 23

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Be The Bank S4 Ep23 - That's Not Cheap Money!
 
 On episode 23 of season 4, Justin Bogard and Richard Thornton went to some Real Estate conferences recently and share what they learned!
 
 Key Takeaways:

  1. Re-Performing Loans (RPL)
  2. RPL Borrower Today vs RPL Borrower 10yrs ago
  3. Avg Home Owners spend 47x more than Avg Renters

Resources and links discussed

About the Host

Justin Bogard – Note Investor specializing in performing Residential Real Estate Debt. He finds deals and acquires them for his own portfolio as well as educates investors while walking them through the process of owning a Real Estate Note!

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Narrator:

Interested in real estate. How about wealth? Well, they go hand in hand. And here you'll learn all about it. About it. Welcome to Be The Bank, a podcast where we discuss and debate the topics centered around real estate investing. Your host, Justin Bogar, shares insights into investing in real estate to create real wealth and passive income for you and your family. He'll share stories of real estate investments done right, walk you through the process of owning a real estate note, and most importantly, educate you so you can be the bank. The bank. This is be the bank brought to you by Bright Path Notes. Now, here's your host just in Bogar.

Justin Bogard:

Happy Wednesday to you. It is episode number 23 on the Be the Bank podcast. It's episode is brought. This episode is brought to you by Bright Path Notes, and today I'm going to have my friend, my colleague, my partner, uh, in real estate crime. Mr. Richard Thornton's gonna be on with me today. We're gonna be talking about Reperforming loans, the good and the bad, and we're gonna be talking about some conferences that we went to. So stay tuned. Hi, Richard.

Richard Thornton:

Hey Justin. How are you? I'm

Justin Bogard:

Doing very well. Thank you for asking. How are you, sir?

Richard Thornton:

Great. Uh, you know, I want this, I want this announcer's voice. He's, he's got this smooth voice that talks and does things right. And I And how do you get a voice like that? Are you, you know,

Justin Bogard:

I don't know. Are you saying I have it? Cause I don't think I have it.

Richard Thornton:

I don't have it. No. I don't know.

Justin Bogard:

I, I think you just have a iconic tone and you're like, That fits radio or that fits television, or I know that fits the announcer at the, at the local arena game.

Richard Thornton:

Welcome.

Justin Bogard:

That's

Richard Thornton:

Right. Well, good. So what kept you busy this last week?

Justin Bogard:

Wow. Let's see. I've been a couple conferences. I've been to the Co D Lane Summit out in, in Cour d'Alene, Idaho. I went to the Note Expo conference. And you were there as well in Dallas, Texas. That was last weekend. Mm-hmm.<affirmative>. And you have also gone to another event, and I believe it was in Las Vegas. Did you even go to an event or did you just party?

Richard Thornton:

Yeah. Na, National Private Lender Conference. Yes.

Justin Bogard:

I mean, it was a big party, right? It was in Vegas.

Richard Thornton:

Yeah. Well, it kind of is, but you know, that's how you get deals done. I mean, these guys is hard. Anything. It's, well, it's, yeah, it's a different, um, it's different than what we're used to in that they all stand around and talk about who, you know, what terms they have for this or what terms for they have for that. And, and I mean, you learn a ton about different programs and what people have to offer. And then you go home and you can, uh, you know, raise money. Uh, you can, I'm sorry, you get deals that fit their boxes. And

Justin Bogard:

Every time I go to these conferences and there for a couple of days, I try to take notes and then I try to reread my notes to recap from what I, from what I heard. Because in the moment I'm listening to it, I'm digesting it, I'm analyzing it in my head, I'm, I'm processing it and going through it. Then a couple days later, after you get back, because you've missed so many things with work and there's a pile on your desk that you have to go through, you kind of forget about things. So it's always good to write things down and pick notes and, you know, kind of on the airplane ride back when I go to these events, I always kind of revisit my notes. Be like, Oh yeah, that was a good thing. That was a good thing. So, and you had done the same thing. You had wrote a good, some good notes down for us to talk about with our broadcast that we actually recorded a little bit before this and we're gonna talk about today.

Richard Thornton:

Yeah. Um, I, I do typically do that because it's, as you say, easy to forget

Justin Bogard:

Oh yeah.

Richard Thornton:

And the contacts and who's got this and Yeah. And whatever. And yeah, so,

Justin Bogard:

So one of the big topics that we have been hearing about and heard more regularly at Note Expo this year was the Reperforming loan product alongside with the nonperforming loan product. And I kind of wanted to focus today's conversation, Richard, on the REPERFORMING aspect. Mm-hmm.<affirmative>. So, as you know, the Great Recession put real estate in a big downward spiral caused property values to plummet pretty much overnight, which caused folks to be underwater with their mortgage very, very quickly,

Richard Thornton:

Blah, blah, blah,

Justin Bogard:

Blah, blah. So they had a balance that they owe the bank, the property value went below that balance, and immediately they were underwater with their mortgage. Mm-hmm.<affirmative>. So it caused a mortgage meltdown. I mean, that was the mortgage meltdown. Right. And how you bought those loans were, you looked at the value of the house and said, I'm going to bid on that loan based on the value of the house.

Richard Thornton:

Right.

Justin Bogard:

Today's market is different as far as a non-performing loan. And I'll get back to the Reperforming just a second. So stay with me.<laugh>. The values of the houses are rising. I know they've come back down a little bit, but all in all, they're still appreciating in value. They're still going up and up and up and up. And by the way, if you would like to watch the video cast of this on the Bright Path Notes YouTube channel, we highly encourage you to do that cuz you can see all my hand gestures and you can follow along with me.

Richard Thornton:

Mm-hmm.<affirmative>.

Justin Bogard:

So now when a nonperforming loan becomes nonperforming, the house value is much higher than the debt that's owed. And so if they do have an arrearage balance, if they do have corporate advances that the lender has made on behalf of the borrower, meaning they've paid down property taxes, they've gotten the insurance up to date, or they have a pile of late fees and interest arrearage that's accruing, that's all combined into the unpaid balance called the legal balance, a legal collectible balance. And so that's the number that you actually bid on Richard, as opposed to the house value. Cuz house value is much higher than legal Balance. So that's where we're at today with the difference between the nonperforming then nonperforming now. So the Reperforming loans back then, the mortgages were underwater, so lenders were that bought those loans were forgiving debt. So they can be, uh, the count can be, um, what they wanna call it, uh, not paid in full, but the count is kept current. Right. They can modify the loan, they can, they can do things with the loan to make sure that they, the count looks current. Okay. And they forgave some debt. So that Reperforming loan, you had this fear because the real estate was, was so low in value compared to what it used to be. You, you saw a lot of Reperforming loans struggle mm-hmm.<affirmative>. And so you have a few of them that would sneak through, they'd make very consistent payments and they'd be able to make that payment continue forward. But there were still issues with jobs and things like that. Fast forward to today, we got property values that are rising at a very, still, Still. Yeah. Even though things have come down a little bit in the super overinflated markets, they've, they've tapered down, but they're still overall growing and growing, growing mm-hmm.

Richard Thornton:

<affirmative>.

Justin Bogard:

And so now when lenders are reevaluating these loans with these high legal balances that are still well below property values, they're able to modify these loans. But the borrower has so much equity in the game that it doesn't really matter if they, if they eventually struggle with it, it's not as much of a risk as it is when it, when it was through the great recession. So that's one part of the Reperforming loan cycle. So Richard, the other part of the reperforming loan cycle that's right now is the loans that were in forbearance during covid. So there was 8.3 million loans that went through forbearance during Covid, and they had a lot of relief. They had 15 to 18 months of relief of not having to pay their mortgage if they were, you know, a, a loan that was made by a, you know, a major bank, not a private loan that, that we talk about and we invest in. And so those loans now are reperforming. Right. But they weren't reperforming in the sense that they really had a true default. It was, it was the, the government that kind of allow allowed this, uh, moratorium, if you will, to happen. So now those loans, you see a good strong pay history with that I'm all in.

Richard Thornton:

Yeah, I, I agree because it's, it's higher grade product. Um, if you look at the stats, um, the, as you just said, there's a whole lot more equity in the market this time, uh, during the period of the pandemic versus the period of the great recession. Right. Great recession, um, housing prices plunged, uh, this time they've actually increased as, as you mentioned, um, you've got a lot more equity, You've got a lot more people who are able to refinance out and redo their loans. And so that's getting rid of a lot of the, the, uh, debt. Um, but it's also much more middle America. So you've got a lot of homes that are in the 125 to$250,000 category, much nicer homes, um, that had forbearances on for very good reasons. And, uh, I think that's something that we all really need to focus on.

Justin Bogard:

Yeah. It's not very performing loans had a bad stigma to it because it was looked at as, hey, if they defaulted once, why wouldn't they default again? Right. Right. And that logically makes sense, right? Mm-hmm.<affirmative>, if somebody struggled, it might, but people have different financial things that happen to them for different reasons. And it's not all bad. It's not all self-inflicted, if you will. It's all just circumstance. It could be job related, maybe, maybe they're a trades person and they just, they temporarily lost their job from one employer for a few weeks and they picked it back up a few weeks later. Like it's just, it's not, it's not all bad, is what I'm saying. So the Reperforming product that's gonna be coming through, and of course you need to put on your proper real estate hat, you need to put on your lens, do your due diligence, look through the deal to make sure that it's, it's actually doing what it's supposed to be doing. Mm-hmm.<affirmative>. But there's gonna be some really strong deals in those and, and that reperforming market's gonna be pretty strong for people like us to buy in. So we're, we're not, obviously we're agreeing on this and we're not afraid to buy this product, but there's gonna be a certain, uh, stipulation that I'm gonna have when I look through it. So somebody asked me the question, I'm not sure if it was in Coeur d'Alene or No Expo, and they said, What, what do you wanna see in a reperforming loan? You know, obviously I wanna see, you know, skin in the game. I wanna see some equity that the borrower has. I wanna see that property value up there. I wanna see the terms and everything, but I also wanna see probably at least 10 to 12 months of pay history that shows me, Hey, these guys have made it through an entire year without a blip on the radar and I think this is good to go.

Richard Thornton:

Right. And so I think one other factor that isn't talked about a whole lot, and this is brought up somewhat at the, uh, private lending conference that I was at Yeah. Um, is that, um, rates are going up, we know that mm-hmm.<affirmative>, um, across the country, uh, first time and second time, third time, uh, borrowers, buyers, um, have, their buying power is being restricted anywhere from 25 to 40%, which means that obviously they're able to buy less, but they're still there. And you have, um, even though there's a lot of builders who are building in the market and building into this, uh, higher rate period, um, they're going to be building less, which is actually overall going to tighten demand. Okay. Which is not have out of the recession at all. You had, matter of fact, if anything, you had people bailing out right and left to get rid of the house because you had so much re on the, on the market. This is gonna be the opposite. I think a lot of that is gonna be just sopped up by Bill and Mary homeowner who wanna buy a new home,

Justin Bogard:

Wanna build a new home,

Richard Thornton:

Wanna, excuse me, wanna buy a new home. So, um, the, the builders are going to pull back, They are already pulling back. Some of it is because of supply chain. Yeah. They just can't get the sinks and things like that. Um, that's still going on. Uh, but some of it is, is that their bankers are now pulling back and saying, Hey guys, don't get out there too far. You know, we're not gonna, you, you have this draw schedule, or now I'm gonna slow down your draw schedule. So they're, they're gonna restrict the number of houses that you've got out there. Well, there's still plenty of money in the market. Mm-hmm.<affirmative>, it's more expensive money, but there's still a ton of money out there where there wasn't before. And all of that, uh, comes up and says that there's gonna be a tighter market in the future.

Justin Bogard:

Yeah, it makes sense. Banks are probably seeing, hey, look, property values aren't going gangbusters like they did, you know, a few years ago during Covid. Right. And they're also seeing like, hey, the affordability factor is a problem. We see the interest rates kicked up pretty much three, three and a half percent within a six month period.

Richard Thornton:

Mm-hmm.<affirmative>, it also means that the rental market is going to get stronger.

Justin Bogard:

Yeah. It's gonna get stronger.

Richard Thornton:

Definitely. People can't move into houses like they wanted to and move outta outta renting. So guess what? They're gonna have to sit

Justin Bogard:

That's right. That's right. And it, it'll, it'll improve. Right. The renting market will be a little bit stronger, I think, temporarily, and I think it'll start balancing back out once, um, we get through and realize this is normal.

Richard Thornton:

Right. Right. And so it's the new normal for right now, but, um, oh, I mean, once again, rental starts will also slow. Yes. There's coming a lot on online right now. Yes. This I would get absorbed, but this time next year, most of that's gonna be built out. And then what, you know, um, if, uh, Cade Thompson and these other prognosticators, uh, as as we have talked about are accurate, they spent millions of dollars trying to, um, build their models. Yeah. We'll be pretty much the same way this next October or November that we are right now, which means that you're gonna have a whole lot of demand and not a lot of product.

Justin Bogard:

Yeah. I don't, I don't think there'll be a swift change in either direction myself. Right. I, you know, along with the non-performing we've been talking about for at least a year and a half to two years, you and I have been saying the same thing about we, we see a slow drip of it coming through mm-hmm.<affirmative>, we've heard about everything falling into this funnel and no one's has released the valve yet. Well, the valve is starting to release and a few things are falling out right now. So we're starting to see some product, we'll start to see some more product, but it won't be like in complete waterfall. Uh, like, it, like it was interesting stat I read today. I just, it just joed in my memory today, Richard, about Black Knight financial data and some numbers and said, you know, the start of September foreclosure starts in September was only like 18 or 19,000 a foreclosure starts. And during the worst times, I believe when we were like 11 and a half percent default rate, I think there was nearly like a hundred thousand, um, foreclosures going on, maybe 200,000, uh, in one month

Richard Thornton:

Mm-hmm.

Justin Bogard:

<affirmative>. And so that's just, that's just kind of mind boggling. Right? Right. The difference between then and now it's, it's 10 x, right? Mm-hmm.<affirmative>, if you have 200,000 in one month and 20,000 this month, that's, that's 10 times the amount, right? Mm-hmm.<affirmative>. So it's, it's just mind boggling how it was then versus now. So I think the same thing with pricing and appreciation depreciating, I think it's gonna be a slow change. Like I think that houses will continue to appreciate, they'll come down a little bit and they'll come back up. They'll kind of teeter, like you look at a graph and how it goes up and down, up and up, and it's gonna be trending though that up and down in a positive direction. And so I agree with you. I think next year's not gonna look any different. It's gonna have some interest rates. A couple, maybe a couple quarters in a row probably go up and it'll probably come back down, then it'll probably go back up again and it'll be fluctuate. I think we mentioned this before in the broadcast about maybe half, half a percentage point. So 50 B, 50 bps as you would say. Right. Um, so yeah, I don't see much changing. I do see the rental market getting a little bit stronger, but then I also see so much opportunity for seller financing. It's, it's ridiculous how much opportunity there is for seller financing. If you have a property, investment property and you can sell that thing with seller financ financing. Oh, oh man, you're gonna be sitting pretty good because eventually the interest rates will probably come back down to probably four to 5% and we'll call that probably normal. Mm-hmm.<affirmative> here on out. Just imagine if you're getting interest rates right now at eight 9%, um, and you're, you're the bank on them, Right. You're gonna hold those for 20, 30 years. Right. That's awesome.

Richard Thornton:

Right. So something else that they presented at this, um, uh, mortgage banking, uh, conference, which I thought was interesting. Um, and they were quoting from several studies, and I'm sorry I can't, um, uh, come up with those studies at the moment. But, but they said that, um, over the last 10 or 15 years, they've proven that homeowners spend almost 47 times more. They have it and they spend more than renters. So you can say, Well, gee, Fannie Mae, Freddie Mac, federal government has all been pushing, uh, home ownership and, and the American dream, and why have they been doing this? Yeah. Well, that's one of the reasons why, I mean, think of what an engine that is to build the economy. If you've got all these people out there building things, um, you know, adding onto their houses, uh, and and all this and, and spending more than the average renter, that's, that's a huge driver in the economy.

Justin Bogard:

Yeah. That's, that's a pretty phenomenal stat. You wouldn't think about that until you, until you hear the number we said 47 times.

Richard Thornton:

Right.

Justin Bogard:

That's incredible. That's incredible.

Richard Thornton:

Right. And, and that's, and that's an average. That's, it's, that's not happening to, to everybody. But I mean, logically you can think of it if you've got an apartment and got two or three bedrooms and you know, you don't have a lawn demo, you don't have a wall to paint, you don't have a this to repair. And I mean, it's not just all going towards that, but yeah. The people who are moving to homes have more disposable income, more to spend more to spend it on, and it's a huge driver of the economy.

Justin Bogard:

Switching topics just a little bit, but on the same lines of notes, I'm wondering the folks that have gotten a helo on their house at the peak of the real estate boom recently, right?

Richard Thornton:

Right.

Justin Bogard:

If they're using all of that HeLOCK, they could be a little bit of trouble. Meaning it could be During the pandemic real estate maybe went up there, maybe their house went up$50,000 in value and they go out and they get a helo. Right. That means they get a low rate from the bank and they pay interest only payments to them. Maybe it's on a year, uh, recall, or maybe it's on a 10 year recall. If they, if their value of their house that's going back down. Well, the bank, the bank has the right to change those numbers if they want. They have the, they have the right to, to call that line of credit and say, Hey look, you know, you need to pay this back because you actually, we can't give you 75,000. We, you know, it's, we can only only give you 50 because the prices of your real estate has changed. So I can see that being a problem for some people that have over levers themselves, uh, during this time. I

Richard Thornton:

Can, I mean, most helos that I know of are done, they're capped at 70 to 75% loan to value. So you're right. Value comes down, Oops. Now they're 85% loan to value. Yeah. Um, a lot of it depends on, Cause I know this from years ago, cuz I had a HeLOCK, I used it for flipping houses and Yeah. Um, the bank can, they, they, they can't demand that you pay them back immediately. What they can do is they can cut your line and say, Look, you had a$500,000 line, you've drawn down 200, we're not gonna let you draw down anymore.

Justin Bogard:

Right? Yeah, exactly. Yeah. Until they, they made their payback period reach maturity when they're supposed to. Yeah, you're right. I, I misspoke there.

Richard Thornton:

No, I don't think you misspoke. I just think it's, uh, that's the way I've seen most of them. Yeah. Um, done. But, but nevertheless it does increase people's risk in the market. Cuz now they've got a, rates are going up and then all the helos are floating rate. Yep. And they're usually one 50 over or something like that. Well, one 50 over right now is gonna be like seven or 8%. So that's not cheap money.

Justin Bogard:

That's not, that's not cheap money. I think that's the name of our podcast.<laugh>. That's right. Episode. Thats not cheap money.

Richard Thornton:

So what are your thoughts about nonperforming?

Justin Bogard:

Uh, I think they're good. I think they're good opportunities. We, we've talked about this before, it's really gonna be a nicer product I think as far as the home. Mm-hmm.<affirmative>, I think the price point's gonna be in between the 1 75 to three 50, um, priced home, which in Midwest is a nice house. Mm-hmm.<affirmative>, that's a nice, nice piece of property in the Midwest area. It's probably not that nice in California and, and other places where the property values are significantly higher. But I like it. I, I think it's a great product and so I'm pretty excited to see now it's gonna take more capital, right. To take down some of these deals. We're not gonna see a lot of, you know,$10,000 deals here and there. It's gonna be higher price stuff and I'm looking forward to seeing it.

Richard Thornton:

Yeah. I think a lot of people are gonna have to do them sort of in their own backyard and in a drivable distance so they can go kick the tires. They can actually look at, um, the house, see if it's been trashed or not estimate what it's gonna take to put into it. Um, because unless you're, you're willing to set yourself up in some foreign city with a contractor that, you know, a contractor partner and target that, that foreign, I say foreign city, I mean out of state, you know, for where you are<laugh>. Um, and, and not everybody, not everybody has a wherewithal to do that. Right. Um, it can be difficult. So it's gonna be a little bit more that's gonna restrict a lot of the npls on our level. If you wanna buy'em in pools, that's a whole nother game.

Justin Bogard:

Yeah. A whole nother game.

Richard Thornton:

It's game that we'd like to participate in a little bit, I think. And

Justin Bogard:

Exactly. Yeah. Give us unlimited supply of, uh, of line of credit and we will do some damage on that line. Yeah.

Richard Thornton:

Well also when we get our funds started, we should, we should let people know that we are starting a fund for performing reperforming and non-performing, mostly performing notes. And we'll probably be paying, uh, 8%, 7%, 8% rate. If you are interested, why give either Justin or I a call?

Justin Bogard:

Absolutely. And we are outta time for today's episode. Don't forget to go to the Bright Path Notes YouTube channel to check out the video recording of this podcast and all the previous podcast episodes before that. So I'm Justin Bogar, this is episode number 23, and my partner here to my screen right, looks like left, uh, as I'm looking at the camera on backwards here is Mr. Richard Thornton. So thanks Richard, for being on today, and we're gonna catch you guys on the next episode.

Richard Thornton:

All right. Take care. See

Justin Bogard:

You.

Speaker 4:

Bye.

Narrator:

Thanks for listening to Be the Bank. We hope you learn something from today's show. If you enjoyed this episode, please rate and review us. Plus check out our Bright Path Notes channel on YouTube and follow us on Facebook and Twitter at Be the Bank and on Instagram at Be the Bank podcast. Be The Bank is sponsored by Bright Path Notes. Thanks again for listening.

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