Last Saturday, in the blog post we published, we discussed the CARES Act and relief that is available from the SBA. A lot has happened in a week. President Trump officially signed the CARES Act and it is now in effect, with emergency grants already being disbursed to small businesses by the SBA. There are talks of additional bills to jumpstart the economy. Both federal and state governments continue to provide updates including that social distancing guidelines have been extended until April 30.
During a downturn in the economy, there are always opportunities present for savvy investors, especially in the real estate market. That is because real estate is one of the most stable industries of them all. Let’s take a look at the potential impact of the stimulus package on the mortgage industry.
The coronavirus has created record unemployment that greatly exceeds figures we saw during both the Great Recession and the Great Depression. In times of high unemployment, in the rental market, a percentage of renters are unable to make rent payments. The same is seen in the housing market where a percentage of owners are unable to make their mortgage payments. When owners are unable to make their mortgage payments for an extended period of time, this leads to foreclosures.
As part of the CARES Act, owners affected by the pandemic can postpone mortgage payments for up to a year. Through these measures, the federal government hopes to significantly reduce the number of foreclosed homes during this downturn in the economy. It is important to look at more than just homeowners and mortgage servicers as this is just a slice of the pie. Even though homeowners can delay payments, mortgage servicers are still bound to pay investors principal and interest on mortgages. Payments must also be made to mortgage insurers, property insurers, and local tax authorities. Now, we’re starting to see the whole pie.
Since Mortgage companies do not have enough cash to cover missed payments for up to a year, the Fed has stepped in to provide relief. In a statement made last week, Fed Chair Jerome Powell stated: “When it comes to this lending, we’re not gonna run out of ammunition. That doesn’t happen.” Powell’s words have rung true as the Fed bought $40 billion in mortgage-backed securities last week, to supplement billions of purchases made in weeks prior, with aims of providing relief to the industry. As a result, U.S mortgage rates dropped to a record-low 3.47% last week.
Despite measures taken by President Trump, Congress, the Fed, and other governmental bodies, foreclosures will inevitably increase overall compared to what we have seen in years past. Volatility in the stock market will be mirrored by volatility in hard money lending. We do expect that there will be a large market for private lending in the near future. This presents an opportunity for investors to make deals in real estate at more attractive terms and rates than hard money offers.
So how does all of this impact you?
If your tenants cannot pay rent…
With April now here, you are at a crucial point as a landlord. Your tenants have already paid April rent, or if that check still hasn’t arrived, you need to take a proactive approach in reaching out to them. Talk to your tenants about their ability to pay rent this month and beyond. Now that social distancing and shelter-in-place orders have been extended, this issue will only become more prevalent in the next few weeks.
Negotiate with your tenants to find out how much of their rent they can pay. Perhaps that’s half, perhaps that’s less. Whatever that amount is, getting a payment commitment and collecting that check is important, while offering to prorate the balance across future months. For example, if rent is $700 and your tenant is able to pay $400 now, offer to prorate the $300 balance across June and July, and offer to waive late fees and penalties as a vote of good faith (In some areas, this is also mandated through emergency legislation, so check your local resources to determine this.) Keep in mind that their situation will not improve for May, so there’s no point in punting repayment to May. Take a proactive approach and try to parcel out any outstanding balances starting in June or even July, depending on how impacted your area is.
Many states are imposing a moratorium on evictions and foreclosures, so even if you wanted to evict for nonpayment, you wouldn’t be able to. You would also be hard-pressed to find a new tenant to move into the property while this situation is going on, so your best option is to be flexible and work with the tenants you already have in place. Plus, it’s the right thing to do—we are all currently being impacted by this!
If you cannot pay the mortgage on your rentals…
If you have a mortgage loan backed by Freddie or Fannie, you should be able to defer payment for up to 12 months. If your loan is through a different bank, most are still offering a repayment deferral program ranging from 90–120 days. In most cases, interest would still accrue during deferment and the deferred principal would be added to the term of the loan, so that it would be extended. If you are in this situation, don’t just stop sending payments assuming your lender will automatically defer. Doing so can hurt your credit and standing with your lender. Be proactive and contact your lender ahead of your default date, and request payment deferral. The most important thing here is to communicate openly, create a plan for repayment, and stick to that plan to the best of your ability. Even if you are in a position to repay your loan, we recommend you take advantage of deferment plans, especially if cash flow is a concern. Having cash on hand in the months ahead will be extremely valuable, so hoard as much cash as you can right now.
If you are looking for funding…
If you have a deal in flight and have been working with a hard money lender (HML) or bank to secure funding for your deal, you may find yourself waiting as banks and HMLs adjust to this new reality. We believe that right now and most certainly in the weeks and months to come, private lending from individuals fleeing the volatile stock market will be quite attractive. Make sure to cultivate relationships with your private lenders and, if you are new to this, establish a strategy to attract private lenders to your deals. MyHouseDeals members have access to private lenders, and we also created a system that teaches you how to work with private money.
Keep in mind that once foreclosures start hitting the market, you will want to be well-positioned to capture those deals. We are about to enter an exciting time for investors with perhaps the biggest opportunity we’ve seen in our lifetime! Deals will go fast. Do your work now to be prepared to make those deals happen (We’ll be covering this in much more detail in a future blog post, so stay tuned!)