2023: A Golden Outlook for Non-Performing Loan Investments
NPLs represent a unique opportunity for investors this year—here’s what to know.
The start of the year presents an exciting opportunity to review financial goals and adjust your investment planning for the coming months. Those motivated to reshape their #investments in 2023 are uniquely positioned to capitalize on the expanding landscape of non-performing loans. Among the #investmentopportunities to emerge from the pandemic, non-performing loans offer an alternative strategy to diversify portfolios and enhance returns. Unsurprisingly, there has been an explosion of global interest among investors.?
Ahead, we unpack the complexities and potential of turning a discounted asset into a positive ROI in today’s evolving market and reveal why NPLs stand as one of the most attractive investments in 2023.
But first, what is a non-performing loan?
A #non-performing loan (#npl ) is a loan that is overdue by at least 90 days. In such cases, the borrower falls behind, fails to pay the agreed installments or interest, and is unlikely to make future payments.?
Why is this bad for banks?
A buildup of NPLs has traditionally been a problem for lenders, negatively affecting a bank’s balance sheet health and financial soundness. However, the long shadow NPLs cast can extend to entire economies. When banks cannot perform the role of financial intermediaries effectively, overall economic activity slows. Therefore, banks have learned to sell these loans to recover at least a portion of lost funds.
What’s in it for investors?
What makes non-performing loans attractive to investors is that NPLs are often sold directly at a discount. If payments get back on track, investors can achieve a positive return on their investment.?
For example, say an investor buys a $200,000 loan for $100,000. The investor can now negotiate more favorable terms with the borrower for repayment. Since the investor buys the loan at a discount, they can still achieve great returns with this type of investment. Alternatively, an investor might foreclose on the property for ownership. Doing so allows them to sell the property for a profit or keep it as a rental.?
Changing Market Dynamics
Historically, there have been real estate and mortgage market downturns. While triggered by different factors, ultimately, new highs and recovery have followed. With current pricing reverting to pre-pandemic levels, we anticipate a consistent flow of non-performing loans that translates to lots of opportunities and significant profits if you are paying less for portfolios. Climbing interest rates are impacting property values, demand, and affordability. Homeowners struggling with decreasing property values and higher adjustable rate mortgages will undoubtedly produce more NPLs in the coming months. Here are some of the factors behind investor opportunities in today’s market:???
Looking ahead, we foresee a dramatic rise in serious delinquencies and foreclosures caused by declining equity. Lessening housing demand and affordability issues will further trigger this acceleration of delinquencies.
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A Window of Opportunity for Savvy Investors?
So what’s the best action plan for 2023? Investors participating in the first half of 2023 are likely to generate generous returns. At DRI Fund, we’ve seen asset prices trending than last year, with a decline in trading value of as much as roughly 15%–22%. Buyers are also benefiting from the ability to pick and choose their NPLs rather than simply taking loans in unfavorable states. Finally, those wanting to fine-tune their approach can tap into DRI Fund's decades-worth of experience in the non-performing mortgage business and foreclosures.
About the DRI Fund?
The world’s economy has recently faced unprecedented challenges. DRI Fund’s ability to reconcile the forces of risk and return allows us to provide investors with an opportunistic strategy. NPLs provide low LTVs relative to the value of underlying collateral, a medium risk profile, great upside, and flexibility of resolutions. By pairing loans with equity investments, our portfolio has been tremendously successful in providing above-market-rate returns for investors.?
An Investment With Real Social Impact
Alongside the financial return of non-performing loan investments are social benefits that address pressing post-pandemic concerns. As a Community Development Financial Institution (CDFI) certified by the US Department of Treasury, DRI Fund implements a double bottom-line approach with attractive risk-adjusted returns and positive impact.
There is a common misunderstanding that NPL investments are, first and foremost, committed to foreclosures. However, investors have a great incentive to offer borrowers alternatives like a modification or short sale because these outcomes produce better returns. With an emphasis on keeping borrowers in their homes, DRI Fund’s current investment portfolio positively impacts borrowers of single-family homes, condos, planned units, multi-family, and select commercial properties. And if the homeowner’s financial situation improves and the NPL becomes a performing loan once again? Since the investor is in first lien position, they would get paid first if the borrower decides to continue making payments. In addition to recovering the loan payments, investors would benefit from immediate cash flow.?
Forecasting Non-Performing Investments in 2023 and Beyond?
As prices drop to 2017 levels, the timing is optimal for dip buyers looking to enhance future gains before delinquencies improve and prices begin to rebound. Considering the NPL market as a whole, now is a predictable pricing point. The closer we get to the presidential election, the more signs we expect to see of a normalizing market. That said, activity is presumed to remain fluid as we look to 2024 and beyond.?
Investor Next Step
Investing in NPLs can be highly lucrative. However, the inherent complexity makes it essential to have a sophisticated team versed in market nuances. To increase your odds of a successful investment, we invite you to visit DRI Fund here for more information.
Here’s wishing you a healthy and prosperous 2023!