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232: Real Estate Volatility Ahead?

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Buck: Welcome back to the show everyone. Today my guest on Wealth Formula Podcast well he’s making his 150th appearance on the show no I’m just kidding but he’s been on a lot. He’s a good friend of mine and the show, Mr. Jorge Newbery who you probably know through one of any number of businesses that he has started and that we’ve participated in one way or another as a community. There was initially American Homeowner Preservation which later on became AHP Servicing which deals with non-performing debt and there’s a fund there which we’ll talk about a little bit more today and there was also REO which we’ve been talking about a little bit on this show as well. It’s a good opportunity for people looking to get their hands a little bit dirtier and potentially you know kind of rack up a few real estate professional hours at the same time and so that’s been great too. Then wait where there’s also Debt Cleanse right we talk about debt cleanse forgot about that one. Jorge here is you’re still rocking and rolling man welcome back to the show.

Jorge: I appreciate that buck and actually it’s 151st.

Buck: You know the funny thing I mean the funny thing about you is you know you’ve got all these businesses and I feel like you’re I think you’re actually like five or six years older than me I think you’re like 51 or something right?

Jorge: 54. 

Buck: Okay well you only look five or six years younger than me. Older than me but you look younger then but I feel like I used to have the energy to start businesses like this but as soon as I hit like 44 it kind of just died and I don’t know what kind of supplements you’re taking but I think I think I need some of that. Jorge so you know today I wanted to get your feedback. Again people are very very curious what’s going on you know in the housing space and because you deal with notes with mortgages etc I’m curious what is the latest? Are you seeing anything different from you know a couple months ago when you were last on in terms of you know increases in distress or you know what’s happening around the country?

Jorge: Sure. Significant increases in distressed mortgages and just to stress economic distress in general in our country I mean that’s apparent from the headlines and you know there’s been measures put in place forbearances stimulus and whatnot that have tried to kind of delay this with the hope that you know after two weeks with the original but after a few months everything gets back to normal and I think it’s increasingly apparent that things aren’t getting back to normal anytime soon and that there will be some significant economic pain in this country which is unfortunate but it’s what we have and so for a company like AHP that does mean that there’s an increased amount increased supply of distressed mortgages that attractive prices we’re already seeing that and we anticipate the fourth quarter and next year that that will only increase significantly and that means opportunities to both help families that are struggling by buying these at a discount and sharing those discounts with them and also to earn a good return for our investor.

Buck: You know let me let me ask you this. So try to give us some perspective and some flavor on that because I mean you you know you started AHP or as American Homeowner Preservation like you know right around the last major economic crisis and you know obviously as time went on over the next decade or so things really really really tightened up you know and now it sounds like what you’re saying is okay well things are loosening up there’s more inventory, can you give us a sense sort of at a you know quantitative level like what that’s looking like?

Jorge: Sure so you’re right we started buying mortgages a decade ago and the the supply at that point and that was about two years after the crisis really became got going there was a massive supply of distressed mortgages and we were a tiny company that was work was working with a very limited amount of money and we were able to right away go and buy from the biggest banks in the country. Citibank was selling to us within a few weeks of us getting started. And then as as the economy improved and the pricing on distressed mortgages became more competitive and the supply became became dwindled that you know wasn’t so easy to buy and buy as attractively as we were and go back a year ago it was very difficult AHP had a lot of money in the bank and very few favorable opportunities to to deploy that money that’s all changed in the last six months you know right away there was an immediate change but June July August we’ve seen a lot of opportunities to purchase I think that’s just the beginning 

Buck: Do you feel like it’s like back at maybe like 2012 levels or 2014 or is it still not like that?

Jorge: No for distressed mortgages yeah I’d probably call it 2012 and and going backwards so we’re going to be probably at 2010 levels in six months.

Buck: So tell me how that’s working because obviously you know there was it’s interesting because I think you know I kept hearing about banks and mortgages that that like you know the big ones at least like chase and wells fargo and stuff they were allowing mortgages to be essentially you know it wasn’t like they weren’t tacking on the payments to the end of the loan they would you know they they would forgive and say they wouldn’t report late payments and for three months or so but at the end of that three months they expected you to pay all of it back is that sort of what happened here?

Jorge: Yes that’s very much what’s what’s happened and there’s been but now it’s been extended and so that forbearance period has been extended but not forgiven and and some instances they’re putting them you know go three months and then they’re all due or then they’re paid back over three or six months or in some of the government-backed loans it’s put onto the very end of the loan and so there’s different iterations of the same goal which is to take those payments which would be now move them to some point in the future and give the borrowers some extra time to get through this challenging period.

Buck: yeah I mean if they move them to the back I mean I feel like people have a better shot but I mean you got these people you know like these major banks that are expecting a payment you know to get caught up and the economy has not substantially you know improved and and you know talk a little bit about what the government’s input on this has resulted in and you know what what we can expect to see in the next couple months.

Jorge: The challenge with some of the government programs is some of the everybody hears on the news you know hey there’s a big forbearance program but know for the forbearances it only applies to government-backed loans generally is where it’s you you have to do it. With privately held loans you can voluntarily offer forbearances and we’ve done that I think most servicers have done that just because you recognize that otherwise you know a lot of people just won’t are unable to pay and but I think what’s the unknown and the challenge is how long this is going to go for because the to to have this go for another year on top of the six months that it’s already passed it creates a lot of you know somebody’s taking a hit here and you know can’t be the the mortgage holder the servicer the the homeowner and the government those are the players and who’s gonna ultimately pay for us and that’s an unknown question at this point.

Buck: Yeah what’s interesting too is you know I come from the apartment space and you know we’re trying to kind of see how that plays out as well but so far there is very very little distress in the multi-family market you know across the country and you know as a asset manager myself on a lot of these I look at it and I think well maybe it’s because of all of these government programs and stuff I think that has added to it a little bit I mean that has helped a little bit but I think part of it also depends on demographics right where you are and I think you know what your market is you know ours happens to be working class in these areas like Texas and Arizona and for some reason you know these people seem to be doing okay and paying their rents. Talk about if you would just the differences that come to mind when you think about you know why there would be distress in you know in mortgages across the country as a whole but not necessarily with rent payers why would why would that be?

Jorge:  I think there’s well I will agree when this first started a lot of people were concerned that the amount of families defaulting on their mortgage are unable to pay their rent would be very would be 30% plus and that hasn’t yet happened overall and it so it has been less I think it’s been less than any than everyone expected but that doesn’t mean that people and maybe it’s because of stimulus or other types of programs but at other at some point you know if a family does lose a job or an income that does make it is going to create challenges and I don’t think there’s it’s tough to differentiate between homeowners and renters but I think there’s a lot of of struggles out there that you know maybe they haven’t come to the forefront yet but they will.

Buck: Yeah what about the demographic issue are you seeing in mortgages specifically either you know the types of homes or across the country in different areas like varying levels of distress

Jorge: I think it’s just there’s more of a concentration in lower moderate to neighborhoods those are ones where I think there’s less of a financial safety net number one and number two there’s just probably more job losses that have affected those you know those of more modest means

Buck: Yeah and what about what about on the upper end of stuff Jorge I’ll tell you the reason I’m thinking about this is you know I live in Montecito which is you know 93108 zip code it’s probably one of the wealthiest zip codes in the country and you know the single family market here is on fire right I mean it is you know probably going literally houses are selling for probably 20 more than they were listed for in pre-covid and we’re talking about multi-million dollar acquisitions and to me that has a lot to do with people wanting to move out of you know LA or San Francisco into you know this nice little beach community that’s you know not you know affluent but it’s also because you’ve got significantly you know there for people who are doing mortgages a lot of them are ultra wealthy they’re not using mortgages anyway but you know it’s pretty attractive rates too right now right. So you’ve got that balance. What are you seeing if anything I mean usually you’re not dealing with the higher-end homes but you are in Pre-REO so what are you seeing on that side?

Jorge: Everything you just described is accurate and I’d say it’s high-end and low-end the low mortgage interest rates are making it very attractive for families of all sizes plus the fact that more people are working from home and stay and spending more time at home the REOs which lent many of them are concentrated in low to moderate neighborhoods these are selling very fast today at prices that were significantly more same 10-20 better than they were Covid and that’s extraordinary but and something we would never have anticipated when Covid first hit that it was going to be a helpful for the housing market but I think those if you look forward to the future it’s tough to say how long this can last I mean at some point all these millions of families that are on some kind of payment arrangement or forbearance that runs out their economic situation hasn’t improved and they end up getting foreclosed upon that will increase the inventory significantly probably at all income levels but again concentrated on the lower income levels and the and will that you know that should probably increase supply should should push prices down but the low mortgage interest rates this economy is so weak that the low interest rates will have I mean there’s nothing they can’t raise them for the next probably several years you know two to three years at a minimum and that will make it so attractive to to buy so that that will keep the the housing market propped up.

Buck: But then there is definitely a geographic element of that too because you know I just look at what’s happening for example you’ve been to my house in in the northern suburbs of Chicago again really nice neighborhood really affluent place and then the price is there I mean I’m looking my house there I’m trying to sell and it’s it’s now listed for a full 20 percent less than I bought it for in 2012. and so what’s what’s driving the differences in terms of and it might just be because of all the mess that you know Chicago is in and I know you know that from your from your own person so what what do you make of that I mean what are you seeing across the board across the country in different markets because I know you guys are kind of all over.

Jorge: Yeah we do see that I mean what’s interesting and you mentioned this earlier is that in the cities you know there’s definitely people that think and probably rightly so they were they moved into cities to be close to work now they can suddenly work from home in many cases then why not move to a neighborhood that they really want to live in that’s maybe a smaller community a resort community in some of those areas hey we can live and work here if we’re doing work from home so I think there’s definitely going to be a continued exodus from the big cities and that will I mean that’s not new that’s a lot of people expect like that and you know that will reduce the you know probably have a reduction in time of values in in cities and you know New York chicago you know these downtowns and increased values as you go to the suburbs I mean I live in Barrington you know which has been a really very another affluent suburb of Chicago but it has this for the last several years with all the job losses has been a very weak market and but in the last six eight weeks we’ve seen properties that were on the market for a year or two they’re all selling getting you know under contract signed sold signs and that’s a big change. I think it’s going to be a great time to sell your property if ever there was a time to sell it this is the market.

Buck: You would think but yeah no I’m really struggling with this thing unfortunately but and I may end up just keeping it for that reason because I think it’s kind of there’s something going on in the cChicago suburbs in particular. But what what do you anticipate so you you know you talked about sort of how we’re we might be sort of at 2012 levels and sort of going back back in time from there what is it that you know from the that you’re seeing that makes you think we’re going to continue down this path and at some point does it just you know does the full kimono come off and and all of a sudden you see the sort of the pinnacle of the drop in the single family market?

Jorge: Yeah it’s we’re still we had a long run up of you know since you know the last since the 2008 and the the great recession there was a long run up that that included increases or appreciation home values for for almost a decade or more than a decade almost and that I think right now we’re on kind of the fumes of that. I mean there’s different circumstances that are extending it but at some point there has to be a big you know there will be a massive spike in foreclosures I mean it’s inevitable and that increased supply should drive down prices even with the low interest rates.

Buck: Do you see that okay say for example a Covid vaccination becomes available in December becomes widely disseminated by March April May all of a sudden you know business as usual do you see that that could put the brakes on this or do you feel like you know that train is already left?

Jorge:  I think it’s the latter I think that that’s I don’t think you know the vaccine will be a cure-all for the challenges we have in the country. I mean we were due for a for a downturn and Covid happened to be the trigger it could have been any other reason but Covid happened to be the trigger and I think you know we’re still seeing some some activity but if you look back at 2008 when things started going awry in 2009 the government put in place some kind of credit I think it was about a 7500 credit to incent buyers to buy a home and that helped kind of prop the market up for a little while longer maybe a year and then it was already weak and weakening but I think it probably slowed the the contraction here. We’re due. I mean if you go back in history we’re due for a downturn and this the company’s I mean the the economy is definitely on the decline the the housing market is still staying strong and actually in some cases like we pointed out is is improving but that the economic fundamentals behind it are not there so there needs to needs to be a correction.

Buck: Here’s the problem and I’m playing devil’s advocate here because I hear you and in many ways I kept for I was sort of beating this drum of tsunami you know of defaults and all that but what’s going on with the fed and the interest in interest rates and then you know fiscal policy it just seems to me like as long as the fed keeps printing money asset prices stay keep staying high as they are you know it it’s hard to imagine if exactly if something positive comes out of the vaccine that there isn’t some artificial continued you know elevation of those asset prices I mean look at the stock market right I mean and you know all these all these markets are ultimately correlated we’re doing things differently than we did in 2008 so I just wonder how if there is a possibility where there really is a truly you know sort of soft landing because of the extraordinary means that the federal reserve and fiscal policy have taken. But you don’t see that I guess I mean I think you’re probably I mean you’re you’re kind of where I i was before, but now I’m just looking at it saying I mean listen and you know we had one little dip in the markets at all-time highs you know that and so so I just I’m not really seeing you know exactly what happens you know across the board if everything is correlated but I don’t know your thoughts on that?

Jorge: Yeah well I will say it’s the good news I think for any investor out there is that the market is unpredictable and people can make convincing arguments on all sides and that creates opportunity I mean. The problem was a year ago we had so much data that informed us that you know hey this is what happens with distressed mortgages or real estate when when the markets become predictable that’s when you know returns contract now the market is unpredictable I would think you could have some of the brightest minds in the country put them all in a room saying what’s going to happen the next year in this country to the economy you’ll get multiple different answers you go back a year or two and you’d probably get some pretty you come to some kind of consensus by and large you wouldn’t get that today and I think that unpredictability creates some creates opportunity I mean unfortunately the the opportunity is going to be the result of I think since to the extent opportunity comes it’s due to some significant economic challenges rippling through the country and the globe for that matter.

Buck: What we do know though is right now as you mentioned your business AHP servicing is seeing an increase on opportunity and inventory. Talk a little bit about what hp servicing does remind us kind of like the way this whole notes process works and what non-performing notes are and all that stuff.

Jorge: Sure so AHP buys mortgages when people can’t pay and so typically a bankers hedge fund will own a loan and then when they stop paying they’ll be willing to sell that at a discount and the further behind they get generally the greater the discount and so we buy those loans we crowdfund the money at AHP servicing and we use that money for two things one is to buy those mortgages at discounts and then work them out ideally and then the other is to what we’ve used it for is to build a national mortgage servicer and just to give a little detail on that we’ve been buying mortgages for a decade in that decade we went through nine different servicers we were never satisfied with one of them so in 2017 or with one of them with any of them and so in 2017 we decided to start our own servicer and thinking that would take us maybe a year to build it out here we are three years later we are licensed in every state of the union except for New York and New York is imminent they announced their new licensees every Friday we’re eagerly anticipating an announcement today they published on their website so hopefully we’ll be there we’ve completed everything they’ve asked us for. But either way right now we’re a national mortgage servicer and so we service our mortgages plus we have about 40 additional clients which we service for and we’re continually adding new clients the fact with the distress and the new pools of loans being sold into the market new pools of defaulted mortgages being sold in the market there’s definitely we’re seeing more and more servicers are more more of a demand for a servicer who can meet the needs of those of those investors who hold on performing mortgages so we’re definitely seeing an up to you can uptake a business.

Buck: And then there’s a fund tell us about the fund.

Jorge: Yeah so the fund is the crowd we crowdfund this money to buy both the loans and fund the servicer and that has it pays that we pay the first 10 percent to investors and it’s typically distributed monthly and that’s the fund that we operate now it’s started in november of 2018 it closes november 5th of 2020 so that’ll be the last time that it’s available. We are working on another fund to go after that the next fund right now we’re anticipating that it will distribute seven percent as opposed to the 10 percent and that’s I you know partially a response to the extremely low interest rate environment that we are in today you know which compared to 2018 it’s continued to drop so we think seven percent will be well received.

Buck: Oh wow okay and so the 10 opportunity is about to end how long do you think or you know how much you got left in that one?

Jorge: There’s ample capacity we have November 5th is the date but there’s room for more investors. Remember we started this fund in november of 2018. In May of 2019 we stopped accepting new investments and that went on until I believe november of 2019. for several months we would have taken money the reason is we would raise a lot of money and we just as we mentioned before there just weren’t the opportunities to deploy it now fast forward to 2020 post covid we’re seeing lots of opportunities so now we are we do have capacity so we are welcoming new investments in.

Buck: And I’m just going to back up for a second and remind people kind of the business model of a non-performing note. Essentially you’ve got somebody who’s not you know you’re not not paying their mortgage and the the bank you know may end up these could be you know bank held notes or they could be from seller financing whatever and then somebody ends up you know whoever owns that ends up selling that debt to an investor like you or me or Jorge’s fund and then at that point you know you presumably bought these things at a big discount and so you have a few different options at that point you could technically just foreclose on somebody take the property and sell it, the other thing is you could pay him some money and tell him to scram and see if that works, or you could try to negotiate some kind of a new mortgage that somebody can afford and wipe out you know most of their old debt and try to keep it performing now the third option is what Jorge’s company really tries to do and so there’s a social element of doing good behind behind the fund is that about a pretty good summary?

Jorge: That’s a great summary Buck. I was gonna say we might have you write a commercial or two.

Buck: And so effectively that’s important because I know there’s especially these days there’s a strong push I know by a number of investors to have some sort of social meaning behind their you know their investments well this one does. In addition to that I do want to point out that you know this is not an easy business to do as an individual. I have tried doing it myself and I can tell you that I lost a lot of interest pretty quickly just doing it myself because it just seemed tough and I think what makes this business kind of a lot more stable is the fact that first of all Jorge’s company this is all they do he’s very very good at this stuff and they deal in large numbers so in general my personal feeling on note investing is if you’re going to do it I would highly recommend doing it through a big fund rather than doing it yourself and just from speaking from personal experience. Jorge do you think that’s fair? Talk about the advantage of doing this through large numbers because I think that’s critically important.

Jorge: Yeah I think you’re right. We don’t make money on every loan that we buy. There’s oftentimes situations where we you know you rely on an agent driving by saying hey I think that property’s worth a hundred thousand dollars and then you get it back and foreclosed now you go inside and it’s you know termite invested or something like that so we’ve you know if you buy a hundred loans there’s probably a portion of them it could be ten percent of them where you’re you’re not going to do well. So the problem I think for individual investors is if you happen to buy you know one or two or three and they all happen to be in that you know challenging bunch where you could lose money and that increases the likelihood that you’ll have some investors who didn’t do well maybe they’ll win on one lose on the other and they said hey this didn’t work. So the larger the pools are the larger amount of loans you buy generally the better that you you’ll do in aggregate and I think that’s what’s approved out of AHP.

Buck: The other part of this fund that I think is really unique and something that I think is important to to know is that unlike most funds unlike most placements well I should point out this is also open to you know anybody you don’t have to be accredited and investments can be as little as 100 bucks so it really is open to anybody. But there’s also an element of liquidity to this which is really unusual for a fund. Do you want to talk a little bit about that Jorge because I think that also helps people to make some decisions.

Jorge: Sure so I’ll reiterate the first two points one is yeah minimum investment is only 100 and we are open to accredited and non-accredited investors like you said almost anyone can invest and we do offer best efforts liquidity which basically means that although the investment is for a term of five years you can invest we request your money back at any time and we’ll undertake our best efforts to return the money to you. Now there is a caveat to that though we pay as I’ve stated before we’ve paid first 10 percent to investors but if you redeem in the first year that goes from ten to eight and the second year goes from ten to nine after two years you get to keep the full ten percent and the next caveat is typically we will once the redemption’s requested we returned that money within 30 days, we were able to do that for years up until Covid. Covid hit we had a huge number of redemption requests, an unprecedented number and we’re still working through those requests. So I guess you want to make you want to hear that yes we do process redemptions and we continue to process redemptions but once an investor and it’s typically done within 30 days except in extreme circumstances like Covid things can get delayed and they are but we’re distributing we have distributed considerable amounts of money since Covid has began.

Buck: So just just as a reminder the deadline for the 10% fund is november 15th meaning that if you want to get in there and get a 10% return that’s what you need to do. How do you invest Jorge? 

Jorge: Sure you go to ahpservicing.com there’s a button near the top invest now you can click and you walk through a very expedited process where in a handful of minutes you can complete the investment process sign the investment agreement even request an ach to fund your account all within a few minutes all online.

Buck: Jorge Newbery everyone always a pleasure Jorge, thanks for joining us. We’ll be right back.