Tag Archives: mortgage buyer

Mortgage Buyer – Three Big Reasons Why the Boom Will Not Last

Another day, another barrage of news headlines about the wonderful housing market.  Home values soared nearly 20% in some markets during 2012 compared to the prior year, inventory is low, foreclosures are down, and flippers are crawling all over each other to outbid competitors on nearly any kind of house.  For real estate investors, any mortgage  buyer, or people wanting a new home to live in, the future does indeed look bright.  Even I believe it more than likely that the next 12-24 months will sparkle for real estate, and my own mortgage buyer business has hit a higher gear as of late.  That said, housing is quickly becoming a bubble, which by definition must pop … again.

How do we keep this “recovery” going or can we?  All of my analyses plus my gut feeling tell me that we’re headed for another crash in real estate, and probably in stocks too.  There are lots of reasons for this, but I’ll sum them up in three main categories.
Falling House
1. Over-Extension of Credit
In an article called “Credit Supernova”, PIMCO’s Bill Gross notes that, in the 1980’s, it took $4 of new credit to generate $1 of GDP (gross domestic product).  Since 2006, it has taken $20 of new credit to generate that same dollar.  In other words, it takes increasing amounts of credit to actually produce anything.  Gross refers to this as Ponzi Finance, as the ongoing credit financing begins to consume itself.  If you or I pay off one credit card with another credit card and then get a personal loan to cover that card, we can pretend for a period of time that we have smooth sailing.  But at some point, interest payments get too big to manage and the resulting defaulted debt causes all sorts of collateral damage.

The biggest debtor of all is the U.S. government, and it has no way of ever paying off all of its obligations.  Instead, the bureaucrats (plus some states and cities) extend and pretend so that the ship doesn’t go down on their watch.  Most of the media has an aversion to digging deeply into issues, so they publish the happy talk from the so-called experts in government and on Wall Street.  Speaking of which …

2. Heavy-Handed Involvement of Government and Wall Street
As pointed out in Zero Hedge (The Echo Boom in Housing – Recovery Stocks, 2/4/13), actions by the Federal Reserve and the U.S. government have prevented housing from having an organic recovery.  The low interest rates pushed by the Fed are intended to encourage Americans to invest in riskier assets and allow the government to pay off debts for a longer period of time.  ZH notes that “high levels of speculative activity could be nurturing a false confidence.”  I would agree except that I’d replace the words “could be” with “are.”

The Federal Housing Administration (FHA) has insured more than 30 million homes, but has way too many risky loans and a high default rate.  It had a $16.3 billion shortfall in November.  Meanwhile, it continues to insure loans that have as little as a 3.5% down payment.  Along with Fannie and Freddie, these government entities are together involved with nearly every mortgage in the country.  Government manipulated economies and markets have a very poor track record over the course of history.

Meanwhile, hedge funds and private equity firms are buying companies and assets along every part of the housing supply chain.  Per CNN Money, Paulson and Co. bought up enough land in Arizona, California, and Nevada to build 25,000 homes.  Blackstone Group spent $2.7 billion last year to buy 17,000 homes post-foreclosure.  At some point, companies like these, which are only into real estate for a quick buck, will see signs of a downturn and try to rapidly sell their real estate holdings.  This will cause the housing bubble to collapse that much more quickly, as there are too many sellers and not enough buyers.

3. Poor Household Wealth
There are not enough buyers because unemployment remains high and household wealth continues to decline.  In states as diverse as Alaska, Alabama, California, and Arizona, food stamp usage has nearly doubled over the past five years.  Over 10% of the California population is on food stamps, numbering about 4 million people.  The Fiscal Times reported that nearly half of U.S. households (132.1 million people) could not financially handle a weather emergency or finance long-term needs like health care and college tuition.  They state “these people wouldn’t last three months if their income was suddenly depleted.  More than 30 percent don’t even have a savings account, and another 8 percent don’t bank at all.”  This is not just people near the poverty line either, as much of the middle class has joined the working poor and is dependent on some form of government assistance.

In summary, the economy and housing market are built on sand and are missing the basic foundation upon which to build.  As government becomes more heavily involved in everyday life and the average citizen becomes poorer and more dependent on handouts, true production and demand will wilt.  The U.S must jump off this train of being debt enamored if it is to get back on the right track.

Planning in the New Year – Is It The Right Time To Sell A Mortgage Note?

It wasn’t long ago that we celebrated the coming of new year –  we watched the ball fall, made some resolutions and some noise, and toasted to 2013.

Starting fresh is what the new year is all about. While we do reflect on the past, for example how we capped off 2012 with a tumultuous presidential election and concerns about the fiscal cliff, the new year is really more about planning for the future. As we look ahead and consider changes to come, it’s a good time to review finances and consider the best use for our investments.

The decision whether to sell all or part of a mortgage note (also often called a real estate note, deed of trust or promissory note) usually boils down to two main categories.

First: Simplifying Life

While holding a mortgage note can be a good investment and receiving monthly payments beneficial, managing the responsibilities and risks inherent to holding a mortgage note can feel burdensome at times. If you find any of the below to be stressors, it may be a good time to consider selling your mortgage note:

  1. Managing payments, insurance, and taxes for your mortgage note.
  2. Planning your estate for heirs.
  3. Settling finances in the event of a divorce.
  4. Assuming the risk of non-payment of a mortgage note or bankruptcy of the payer.
  5. Unexpected changes due to the divorce or death of the payer.
  6. Worrying about default and foreclosure.
  7. Concerns with the real estate property becoming devalued.

 Second: Cash Requirement

There is no question that life changes, planned or not, often come with expenses. Selling a mortgage note is a fairly simple way to raise a lump sum of cash quickly, and can be significant depending on the value of your mortgage note. Types of life events that may warrant selling a mortgage note are not limited to, but include the list below:

  1. Covering medical expenses
  2. Paying for college tuition.
  3. Planning a wedding and/or starting a family.
  4. Buying new real estate.
  5. Making a career change and/or investing in a new business.
  6. Transitioning into other investments or reinvesting at a higher interest rate.
  7. Purchasing a vehicle and other high cost items.
  8. Funding travel plans.
  9. Managing retirement expenses.

If you are in the process of deciding if selling a mortgage note makes sense for you, you may want to contact a  reputable mortgage note buyer for further advice and information.

 

The Wages of Unemployment

The article below appeared in the Wall Street Journal last week and was written by Richard Vedder.  While it does not directly impact mortgage buyers or owning real estate notes, it is an interesting commentary about the effect of government handouts.  Reprinted with permission.

From the mid-17th century to the late 20th century, the American economy grew roughly 3.5% a year. That growth rate has since declined significantly. When the final figures are in for 2012, the annual rate of real output growth for the first dozen years of this century is likely to be about 1.81%.

What accounts for the slowdown? An important part of the answer is simple: Americans aren’t working as much today.  And this trend reflects more than the recession and sluggish economy of the past few years.

The national income accounts suggest that about 70% of U.S. output is attributable to the labor of human beings. Yet there has been a decline in the proportion of working-age Americans who are employed.

In recent decades there was a steady rise in the employment-to-population ratio: For every 100 working-age Americans, there were eight more workers in 2000 than in 1960. The increase entirely reflects higher female participation in the labor force. Yet in the years since 2000, more than two-thirds of that increase in working-age population employed was erased.

The decline matters more than you may suppose. If today the country had the same proportion of persons of working age employed as it did in 2000, the U.S. would have almost 14 million more people contributing to the economy. Even assuming that these additional workers would be 25% less productive on average than the existing labor force, U.S. gross domestic product would still be more than 5% higher ($800 billion, or about $2,600 more per person) than it actually is. The annual growth rate of GDP would be 2.2%, not 1.81%. The retreat from working, in short, has had a real impact.

Why are Americans working less? While there are a number of factors, the phenomenon is due mainly to a variety of public policies that have reduced the incentives to be employed. These policies include:

• Food stamps. Above all else, people work to eat. If the government provides food, then the imperative to work is severely reduced. Since the food-stamp program’s beginning in the 1960s, it has grown considerably, but especially so in the 21st century: There are over 30 million more Americans receiving food stamps today than in 2000.

The sharp rise in food-stamp beneficiaries predated the financial crisis of 2008: From 2000 to 2007, the number of beneficiaries rose from 17.1 million to 26.3 million, according to the Department of Agriculture. That number has leaped to 47.5 million in October 2012. The average benefit per person jumped in 2009 from $102 to $125 per month.

To be sure, we would expect the number of people on food stamps to increase with rising unemployment, poverty and falling incomes in late 2008 extending into 2009 and perhaps even into 2010 (even though the recession was officially over in late 2009). But more is going on here.

Compare 2010 with October 2012, the last month for which food-stamp data have been reported. The unemployment rate fell to 7.8% from 9.6%, and real GDP was rising steadily if not vigorously. Food-stamp usage should have peaked and probably even begun to decline. Yet the number of recipients rose by 7,223,000. In a period of falling unemployment and rising output, the number of food-stamp recipients grew nearly 10,000 a day. Congress should find out why.

• Social Security disability payments. The health of Americans has improved, and the decline in the number of relatively dangerous industrial production and mining jobs should have led to a smaller proportion of Americans unable to work because of disability. Yet the opposite is the case.

Barely three million Americans received work-related disability checks from Social Security in 1990, a number that had changed only modestly in the preceding decade or two. Since then, the number of people drawing disability checks has soared, passing five million by 2000, 6.5 million by 2005, and rising to nearly 8.6 million today. In a series of papers, David Autor of MIT has shown that the disability program is ineffective, inefficient, and growing at an unsustainable rate. And news media have reported cases of rampant fraud.

• Pell grants. Paying people to go to college instead of to work is traditionally justified on the grounds that higher education builds “human capital” that is vital for the country’s economic future. But a study Christopher Denhart, Jonathan Robe and I did for the Center for College Affordability and Productivity (that will be released soon) shows that nearly half of four-year college graduates today work in jobs that the Labor Department has determined do not require a college degree. For example, over one million “retail sales persons” and 115,000 “janitors and cleaners” are college graduates.

In 2000, fewer than 3.9 million young men and women received Pell Grant awards to attend college. The number rose one-third, to 5.2 million by 2005, and increased a million more by 2008. In the next three years, however, the number grew over 50%, to an estimated 9.7 million. That is nearly six million more than a decade earlier. The result is fewer people in the work force. Meanwhile the mismatch grows between the number of college graduates and the jobs that require a college education.

• Extended unemployment benefits. Since the 1930s, the unemployment-insurance system has been designed to lend a short-term, temporary helping hand to folks losing their jobs, allowing them some breathing room to look for new positions. Yet the traditional 26-week benefit has been continuously extended over the past four years—many persons out of work a year or more are still receiving benefits.

True enough, the economy isn’t growing very much. But if you pay people to stay at home, many will do so rather than seek employment or accept jobs where the pay doesn’t meet their expectations.

These government programs are not the only players in this game. For example, a more worker-oriented immigration policy in recent decades would have measurably raised the rate of economic growth and increased the employment-to-population ratio. Taxes are part of the story too: Today’s higher marginal tax rates on work-related income could well lead to further reductions in work effort by those taxed, as well as to slower economic growth.

Most Americans recognize the need to reduce government spending to rein in the national debt. But there is another reason to cut government spending for specific programs: If more people have less incentive to stay out of the work force, they might seek jobs and help spur economic growth.

Selling a Real Estate Note 101: Best tips for selling and buying a mortgage note

Welcome back to our series “Selling a Real Estate Note 101”. If you have been following along, hopefully you have gained a basic understanding of what is a mortgage note, the process of selling your mortgage note, how the value of your note is determined, what to look for in mortgage note buyers, and some knowledge of your note sale options. If you would like more information on any of the above topics, please call us directly so we can help answer your questions.

Now that we’ve covered the basics, we wanted to summarize the most important tips for selling a mortgage note (also called a real estate note or promissory note), and helpful tips on how to create a mortgage note for a future sale.

Best tips for selling a mortgage note:

  1. Familiarize yourself with the process of selling a mortgage note, how the worth of your note is determined, and what to look for in a mortgage note buyer- BEFORE you start requesting quotes. Having your paperwork and questions on hand when speaking with potential note buyers will facilitate the process of negotiating the sale of your note.
  2. Explore your options; every mortgage note is different. For example, selling only some of your payments (known as a partial) may be more advantageous for you and may offer a higher rate of return. A trusted and reputable note buyer can help you determine your best options.
  3. Verify that there are no upfront fees to the seller (with few exceptions), as these are already figured into the purchase price.
  4. Make sure the mortgage note investor checks the credit of the payor/buyer upfront to avoid any sudden drop in purchase price quotes due to unforeseen credit issues.
  5. Review your written purchase agreement with a Real Estate Attorney, if possible.

Seascape Capital Best Tips for Selling and Buyer a Mortgage Note

Tips on creating a mortgage note for owner financing (also called seller financing):

If you currently hold a note that you may consider selling in the future, one option is to sell your real estate note to a buyer using owner financing. Some of the common reasons people choose owner financing include: attracting more potential buyers for your property, offering more flexible terms (often the case when working with buyers who are not able to obtain financing through a bank), or managing a sale between family members or as part of a divorce agreement. These tips can help you create value and structure your mortgage note for an optimal sale through owner financing.

  1. The larger the down payment, the better. For residential, a down payment of 10% is ideal, 20-30% for commercial notes.
  2. The more equity in the property, the better. This is achieved, in part, with the down payment mentioned above, as well as principal payments received. This adds value to the mortgage note.
  3. Consider the credit of the buyer and always obtain a current credit report. Ideally, the credit score should be 600 or above (the higher, the better). Their credit rating can influence the value of the note and can play an important role in determining a down payment to protect your property.
  4. Make sure that the sales price is aligned with current market values and that interest rates are comparable to bank rates.
  5. As with most real estate, the condition of the property is another important consideration when creating value for your note. A note will be worth more when the property is in good condition, located in a desirable area (with access to power and water if it is a land contract), and is currently owner-occupied and well maintained.

Whether you want to sell your mortgage now or in the future, we hope you find these tips helpful. If you have any insight that you would like to offer our readers based on your experiences with selling notes, or would like us to address any particular topics of interest, please share them in the comments below. As always, thanks for reading and please feel free to pass this information on to others!

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Selling a Real Estate Note 101: Can I only sell part of my mortgage note?

Can I Only Sell Part of My Note?Selling a mortgage note (also called a real estate note or promissory note) can be confusing, especially if you are a first-time note holder and have never worked with a note buyer before.  This “Selling a Real Estate Note 101” series is designed to be a resource for those people.

In a previous post, we covered the common reasons why people sell their mortgage notes and how that process works. What we haven’t addressed yet, however, is the option to sell just part of your mortgage note (also called a partial). Here are some of the common questions about partials.

Why only sell part of the note?

  1. In tough economic times, the note seller may not be able to find a buyer for the full value of the note (or the seller would have to take a bigger discount). For more information on how the value of a note is figured, please read What is my mortgage note worth?.
  2. Sometimes the seller only needs a small sum of cash for a particular purpose (college tuition, unexpected medical bills, to reinvest, or pay down debt, for example).
  3. Selling a partial note provides the seller with immediate cash flow now while getting the note back in the future (once the partial sale’s terms have been fulfilled) to collect remaining scheduled payments.
  4. The seller also gets the flexibility to sell another part of the note at a later time, if they wish.
  5. A partial note sale will often yield the seller more money for their note in the long run.
  6. Another advantage to the partial note seller may be the delay in some of the capital gains taxes.
  7. It is easier to find a mortgage note buyer since buying a partial note is considered a less risky investment.

How does a Partial work?

  1. In a full note sale, the buyer purchases the entire amount of the note, meaning all of the remaining payments. In a partial, the buyer agrees to buy part of the note, usually in the form of a specified number of payments (e.g. 60 monthly payments), or a specified amount of the balloon payment. There are even partial sales (called a split partial) where the note seller and note buyer split the monthly payments. For more information on the different options for partial note sales, please contact us.
  2. Typically, note investors require a minimum note balance of $50,000 before they will consider investing in a partial note.
  3. The process of selling a partial mortgage note is very similar to selling a full note. Please refer to our post on Should I Sell My Mortgage Note? for more information on the process and paperwork required to get started.

The bottom line is that a partial can be a win-win when it reduces the amount of discount the
seller takes and makes for a more secure investment for the buyer. To talk about your options
with a partial sale or just have your questions answered, please give us a call.

Next week, we will be covering more important tips for selling a mortgage note. Please
comment below to let us know if you have found this information helpful or if you have been able
to share it with someone who has. We invite any and all feedback!