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Changes in Mortgage Finance Represent Opportunity for Investors

Big Changes Will Affect Building Trends in the Second Half of 2018

Adapting to a changing economic and legal environment is important in every industry, especially real estate. Veteran real estate investors must learn and adapt to the changing environment. The note industry and note investors are no different. This article discusses some of the changes underway in the real estate industry, how they affect note businesses, and the opportunities they bring.

Trend #1: Lower-Income Earners Priced Out of Home Ownership

House prices are currently at record levels. Sales of new single-family homes in January 2018 were at a seasonally adjusted annual rate of 593,000, according to the U.S. Census Bureau and HUD. The median sales price of new homes sold in September 2017 was $323,000. The average sales price was $382,700. This roughly corresponds to a principal, interest, taxes and insurance (PITI) of $1,853 and, likely, a minimum yearly salary greater than $70,000 per year to afford a new home.

Investor Takeaway: People with lower incomes are being priced out of buying a new home.

Trend #2: Personal Debts are Rising While Savings Fall

Scott Carson, founder and CEO of We Close Notes, recently identified some potentially troubling trends in the economy and housing market:

  • According to the Board of Governors of the Federal Reserve System (FRB), the delinquency rate of consumer loans is rising after bottoming out in 2016.
  • Credit card defaults are likewise rising.
  • The default rate of single family mortgages has fallen to 4.05 percent, but the rate of decline is slowing and remains above average from 1992 to 2007.
  • The number of active mortgage loan officers in Q2 of 2017 increased by 1.77 percent nationwide over Q2 2016 and increased 15.81 percent for the top ten state-licensed companies year over year.
  • According to the U.S. Bureau of Economic Analysis, personal savings rates are at 3.1 percent, near a 60-year low.

Investor Takeaway: Carson recommended note investors look to buy in bulk, possibly as part of a buying group or club. He further recommended buying notes directly from banks. Note marketing and business systems will be extremely important to accomplish this. Carson commented the number of states requiring licensing may start to increase. Changes to Dodd-Frank legislation may change things also.

Trend #3: Changes in Mortgage Finance Present Opportunities in Brokering Seller Finance Notes

With changes in mortgage finance laws over the past decade, it has been more difficult to get financing on lower-cost houses. This has led to a rise in seller financing. Czarina Harris, founder of Note Inc., said seller-financing has been on a consistent increase year after year and we can expect this trend to continue into 2018. “We ended 2017 with a 13 percent increase from the previous year, which shows more homeowners are using seller financing as an alternative to conventional lending.”

Further, Harris noted 53 percent of new note owners seek to liquidate their assets within 18 months of origination, creating a great opportunity to start a note brokering business for new investors just getting started in note investing. 

“If someone wants to get into the note industry but doesn’t have the capital to purchase loans outright, brokering has always been the best way to get your foot in the door,” she said.

Trend #4: Changing Economic Trends Lead to Changes in Investment Focus

Garrison Gilbert, managing partner of InvestProPartners.com, said he is seeing a “sharp increase” in the number of bidders on and selling prices for houses up for auction. Furthermore, he noted, there has recently been an increase in the number of no-documentation, no stated income, and no-down payment loans. Real estate investors should consider this trend a red flag for the coming months.

“I’ve seen two real estate cycles and you see things start to repeat themselves,” Garrison said. He noted a recent small drop in prices in certain real estate niches and feels a correction may be starting already. He also thinks single family homes will be the first to experience a major decline in demand as he feels they are currently overbought and overpriced.

Garrison said that his company is responding to these changes by adjusting their focus to purchasing multi-family units based on cash-flow. They have also been improving their systems and raising capital, and recently opened a $25 million fund. 

“I’m still investing, but I’m trying to get cash-heavy because opportunities are starting to present themselves,” Garrison concluded. He added that his company is presently placing heavy emphasis on marketing and advertising through social media, attending conventions, and networking due to new opportunities he sees unfolding in today’s market.

In closing, the wise investor will keep their eyes open to changing economic conditions, prepare for changes when possible, and adapt their business practices as appropriate.


Bill Griesmer is the Managing Member of Stonegate Capital, which buys and sells performing and distressed notes. He may be reached at wjgriesmer@gmail.com.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.