Why now’s the time to consider buying non-performing loans
With home prices climbing, it’s unsurprising that more Americans are borrowing more money to afford one. The Federal Reserve Bank of New York reported that US mortgage balances rose by almost $1 trillion in 2022 for an outstanding total of $11.9 trillion. In the last quarter alone, mortgage balances accounted for nearly two-thirds of the total growth of newly accumulated consumer debt nationwide. By the end of the year, housing-related loans made up 73% of the total $16.9 trillion US consumer debt, and mortgages transitioning into 90 days or more of delinquency saw an uptick of 0.15%. In its National Delinquency Survey sampling almost 40 million first-lien loans, the Mortgage Bankers Association noted that 3.96% of all outstanding mortgages on a seasonally adjusted basis were behind after a quarter-to-quarter increase in 60-day and 90-day late payments. On a seasonally adjusted basis, the share of borrowers 90 days or more late on their payment grew to 1.38%, up 11 basis points according to the survey.
What does this mean for non-performing loan (NPL) investors moving forward in 2023? With the rate of unemployment expected to reach 5.2% by the end of the year, late payments should also trigger an increase in NPLs. The surge will likely see NPL prices fall, giving investors options to collect handsome profits.
The effects of rising interest rates and low supply
Despite a runup in interest rates, home values are largely holding thanks to the market’s tight inventory. Recent reporting reveals that new mortgage originations are down 47% compared to the year before. While this chill in the market might not signal a meltdown, it’s triggering financial troubles for US mortgage lenders, especially those dealing with non-qualified mortgages. Some, like First Guaranty, have filed for bankruptcy; others, including Sprout Mortgage and tech startup Reali, have shut down. Then there are those lenders navigating these challenging times with layoffs, like Angel Oak, Lower, and Keller Mortgage. But while lenders may be desperate for business in current market conditions and low demand, the potential for higher delinquencies is concerning. Savvy investors have the opportunity to capitalize on lenders looking to unload non-performing loans by purchasing NPLs directly from lenders at a discount. As the Realfin State of the Market Report points out, “traditional lenders are less willing and able to hold on to non-performing debt.”
Location matters for non-performing loan buyers
Real estate values are fluctuating differently across the country. As a result, those looking to invest in non-performing loans are encouraged to seek out regions with rising values, high demand, and the convenience of expeditious legislation. Some of the most favorable states in the US housing market include Texas, Georgia, Minnesota, Missouri, Montana, Nebraska, Nevada, New Hampshire, Tennessee, Texas, Utah, Virginia, Washington, and Wyoming. Arguably most noteworthy is Florida. This investment destination ranks as the third-populous state and is now officially the fastest-growing state in the US. Florida also forgoes state income tax, which is a bonus for investors wanting to reduce their tax liability on any profits or capital gains earned from renting or selling their investment.
Keep Federal Housing Administration loans on the radar
The coming year looks ripe with opportunities for non-performing loan buyers as borrowers deal with higher living costs. One area investors are encouraged to watch out for is Federal Housing Administration (FHA) loans, with more than 80% of FHA purchase volume being first-time homebuyers who likely have limited savings and stretched budgets.
In case you missed it...
Check out our complete forecast of NPL investments for 2023, including a deep dive into the complexities and potentiality of turning a discounted asset into a positive ROI in today’s market.
Until next time,
The DRI Fund