Coastline Capital Fund Management

Coronavirus Pandemic Predictions Revisited (6 Months Later)

by Andy Mirza

I published the original blog post with these predictions 6 months ago on March 24, 2020. I wrote a follow up blog post a month later in April. How have the predictions held up after 6 months and where are we headed now? Let’s see….

These were the original predictions. (I’ve adjusted the timelines so that they’re current):

  1. Fear and Hysteria Subside (5 months ago)
  2. Peak New Cases Reached (4-5 months ago)
  3. What I’m Seeing Now
  4. Predictions (3-5 months ago)
  5. Predictions (3 months ago to 5 months in the future)

 

Fear and Hysteria Subside (5 months ago)

For some of the population, this prediction was correct. For most of the population, it wasn’t. There are still a good number of people who are afraid and very concerned about the coronavirus.

These fears affect our leaders and the decisions they make in an effort to deal with the pandemic. Some of those decisions are still hampering our economy and interfere with foreclosures in some of the states we buy notes in. Thankfully, it’s only a few and most states have returned or are returning to normal.

Reaching Peak New Cases (4-5 months ago)

Each state hit their peaks at different times. This prediction was true for New York, New Jersey, and much of the east coast.

In California, the lockdowns slowed the spread of the virus and we didn’t hit our peak of new cases until August (just one month ago.) However, our COVID hospitalizations peaked in mid-July. That’s when things felt like they were the worst.

What I’m seeing Now

Foreclosure and Eviction Moratoriums

The U.S. government has extended the ban on foreclosures and evictions for federally backed loans, affecting approximately 8.1 million homeowners, through the end of 2020. (See the full story.)

For loans that are not federally backed, only state laws and orders affect what can and cannot be done regarding foreclosures and evictions. Some states still have severe restrictions in place but most states are returning to some level of operations.

Six months into this pandemic, how are my original 8 predictions holding up?

Predictions (3-5 months ago):

  1. Most foreclosures that pre-date the pandemic will resume.

This one came true, although I wish I could say “all” instead of most. We’ve had foreclosures and evictions resume for our notes in Texas, Nevada, Tennessee, Wisconsin, and Virginia.

 

Illinois and New Jersey stand out as states that have canceled Sheriff’s Sales through the end of the year.

STATUS: Correct prediction

  1. Evictions that pre-date the pandemic will continue.

Evictions have been coming back although somewhat behind foreclosures. More states are allowing foreclosures again but not evictions.

One such state is California. We understand that foreclosures have resumed but the courts are still not scheduling any eviction hearings.

We were able to foreclose on one of our California notes in the summer of 2019 on a borrower who hadn’t made a mortgage payment in over 10 years. She’s been fighting eviction since then and “got saved by the bell.” Nothing we can do until the courts allow eviction hearings again.

STATUS: Correct prediction.

  1. Courts will resume normal operations

Again, this is a state by state issue but all our indications are that most courts have resumed operations, although some are more limited in capacity than others.

Cook County, Illinois, has a general ban on entering foreclosure orders. Hopefully, that will end soon.

STATUS: Correct prediction.

  1. Loan traders will start to trade again (and investors will invest) as markets stabilize

This one has definitely come to pass although we’re not exactly where we were at the beginning of the year.

We raised capital a couple of months ago and completed trades with three different sellers. Things operated the same as they had in the past. There was no indication that our sellers were distressed or willing to sell at fire sale prices and trading occurred normally for us.

In March, a large note fund had agreed to buy a couple of our loans. When the lockdowns started, they backed out of our trade as well as all of their other trades. I’ll know that things are back to normal when we can put that trade back on the table.

STATUS: Correct prediction (although we’re not all the way back yet)

  1. Selling a vacant property will present a bigger than normal advantage over selling an occupant occupied property

I believe that it’s been easier to sell vacant properties this year. We’ve certainly seen some of our REOs go into contract very quickly. However, again this depends on the state and what their lockdown status is.

In a state like New Jersey, we’ve experienced a slower market. Tennessee, a much hotter market.

Ultimately, it doesn’t appear that a vacant house matters that much when the country as a whole is in a seller’s market. The pandemic has hurt housing inventory tremendously. This story from the Wall Street Journal stated that “at the end of July, there were 1.3 million single-family existing homes for sale, the lowest count for any July in data going back to 1982.”

Potential sellers that are concerned have refrained listing their homes for sale resulting in tighter inventory. Demand is high enough that vacant homes don’t matter so much.

STATUS: Maybe correct but doesn’t really matter.

Predictions (3 months ago to 5 months in the future)

  1. Forebearance Agreements will become common

This one has already come true in a big way. Federally backed mortgages approved all forbearance requests in an attempt to help homeowners and prevent massive defaults.

Noteholders with loans that are not federally backed are also offering forbearances. One of our trading partners adopted a policy of automatically offering forbearances to all borrowers of newly acquired non performing notes.

(We don’t like making blind offers to borrowers and proceed on a case by case basis; I’ve seen too many instances of banks and hedgefunds making sweet loan modification and forbearance offers to borrowers that were clearing gaming the system and had no good faith intentions of making good on their obligations.)

I believe that once the forbearances expire, lenders will begin to offer loan modifications to the borrowers that are still in trouble and can’t pay the full forbearance amount. Lenders did this before in response to the 2008 financial crisis. They took all the arrearages and added them to the back of the loans as “deferred principal.” This deferred principal did not accrue interest but was only due when the loan needed to be paid in full.

 

Politicians and the big banks want to prevent the huge numbers of foreclosures from the past. Forbearance followed by a loan modification is an easy way to do that.

STATUS: Correct Prediction (at 1 month)

  1. Performing and Re-performing loan portfolios will show signs of strain

We still haven’t seen signs yet that other note investors, funds, or private equity groups are in trouble yet because of increasing defaults. The longer we see negative economic data for individual Americans, the more likely we’ll see distress with investors holding that kind of paper.

I read an article that talked about how mortgage funds sold their holdings to minimize risk in April and May. At that time, I remember liquidity crunches, failures to fund, and loan buyers ceasing activity but those problems seem to be past. Maybe this prediction already came and went back in April?

STATUS: Undetermined but nothing so far.

  1. More defaults will equal more opportunities for investing in real estate notes.

I absolutely know that more defaults equal more opportunity for us and other well positioned note investors.

However, I initially didn’t think we’d see as many defaults now as we did in the Financial Crisis of 2008 because the loans originated since then have been of a far superior quality and for the other reasons I laid out in my first prediction blog post.

I’m not sure what the timing will be like for these increasing defaults. Instead of the 3-11 months I initially predicted, it might be in the 2-3 year category. Instead of a wave of foreclosures, we’ll most likely see a slow, rising surge. There are plenty of established note investors out there with experience and connections from the last time who will absorb any rise in inventory of NPNs.

I think there’s plenty of capacity to handle the upcoming foreclosures.

Final Thoughts

Governments and big banks are doing what they can to prevent foreclosures and defaults, except with more experience which makes their efforts far quicker and agile. This time was different: loans were higher quality loans made to borrowers that could afford them. Our current economic troubles were mostly from lockdowns due to the pandemic instead of a misallocation of resources, which is what you see in typical recessions.

Now that things are settling down, the threat of COVID is receding, and our economy starts to recover, we’ll see the fall out in terms of foreclosures and evictions. Hopefully, for everyone’s sake, the final numbers will be a lot less scary than people first imagined.

Andy Mirza is the Chief Operating Officer for Coastline Capital Fund Management, LLC, a company that creates and manages funds that buy, sell, and liquidate residential non-performing notes (defaulted mortgages).

Coastline Capital Fund Management LLC

27702 Crown Valley Pkwy D4 #268
Ladera Ranch, CA 92694

P: (949) 371-6749

andy@coastlinecapgrp.com

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