Thoughts from the desk of Bob Repass…
Some of you may know that “back in the day” I attended North Carolina State University. Of course one of the highlights of my time there was watching our Wolfpack basket team under the direction of Head Coach Jim Valvano lead us to an unexpected National Championship in 1983.
Coach V took a team that had to win the ACC Conference Tournament just to qualify for the NCAA Tournament on a spectacular journey that helped coin the phrases “Cardiac Pack”, “Survive and Advance” and “March Madness!” At the time, we had no idea that almost 10 years to the day we would lose Jim Valvano to the dreaded disease, cancer.
Jim Valvano, nicknamed Jimmy V, is now better known for his fight against cancer, the creation of the V Foundation to raise money for cancer research, and for his epic motivational speech just weeks before his death at the Espy Awards that brought us the phrase; “Don’t Give Up, Don’t Ever Give Up!”
Well I’m not positive but I would not be surprised if on January 2nd in the Valero Alamo Bowl TCU’s Football Coach Gary Patterson dialed up some of Jim Valvano’s motivational magic. Our family was at the game, both my daughter Kristin and daughter-in-law Emma are alumni, and honestly when our Horned Frogs trailed 31-0 at halftime, it did not look good. But with that “don’t give up” spirit, the Frogs scored 31 straight to force the game to overtime where we prevailed 47-41 in triple overtime!
Football is just a game but this game reminded me that just as Jimmy V demonstrated, perseverance and commitment through tough times is a key to living a joyful life as well as having a successful business career.
The Trading Corner
The Big Short – Is History Repeating Itself?
by Bob Repass
If you are like me, at some point during the housing crisis in 2007-2009 you may have felt like laughing to keep from crying. Well that’s the approach the director of the movie “The Big Short” has taken in his film version of the book of the same name by Michael Lewis (see the Recommended Reading column in this issue).
The levity of the film is used to explain the complex dealings and structure of mortgage-backed securities, credit default swaps and collateral debt obligations to make sense or at least some sense to the movie-goer. Illustrations such as wagering on blackjack and how the housing market is similar to the game of “jenga” are informative and very entertaining. Witty lines such as a banker who states he’s offering fire insurance on houses that are already on fire sum up the situation at hand.
We are now over six years past this meltdown and while at time the economy and housing market seem more stable, “The Big Short” serves as a reminder of how we need to be watchful about letting history repeat itself.
One of the pivotal players in the movie is Michael Burry, a clairvoyant of sorts, who saw the financial crisis coming before anyone else and bet heavily on it. In recent interviews he was asked to weigh-in on the current economic conditions:
On the government’s role in the aftermath of the crisis:
The biggest hope I had was that we would enter a new era of personal responsibility. Instead, we doubled down on blaming others, and this is long-term tragic. Too, the crisis, incredibly, made the biggest banks bigger. And it made the Federal Reserve, an unelected body, even more powerful and therefore more relevant. The major reform legislation, Dodd-Frank, was named after two guys bought and sold by special interests, and one of them should be shouldering a good amount of blame for the crisis. Banks were forced, by the government, to save some of the worst lenders in the housing bubble, then the government turned around and pilloried the banks for the crimes of the companies they were forced to acquire.
On whether or not another financial crisis is looming:
Well, we are right back at it: trying to stimulate growth through easy money. It hasn’t worked, but it’s the only tool the Fed’s got. Meanwhile, the Fed’s policies widen the wealth gap, which feeds political extremism, forcing gridlock in Washington. It seems the world is headed toward negative real interest rates on a global scale. This is toxic. Interest rates are used to price risk, and so in the current environment, the risk-pricing mechanism is broken. That is not healthy for an economy. We are building up terrific stresses in the system, and any fault lines there will certainly harm the outlook.
Recent news of Fannie Mae and Freddie Mac ramping up sales of a new mortgage security to “lay-off” the cost of defaults in private investor in an effort to transfer risk is an indication that we could be getting ourselves right back into a familiar area…
2016 Market Forecast & The Evolution of Real Estate Note Investors
by Eddie Speed
People often refer to the “crash” of 2008 as a real estate crash. In reality, it was a real estate financing crash. The government put pressure on lenders to loosen their lending guidelines. The lenders seized the opportunity and became willing partners in the loose lending practices.
The ripple effect of defaulting loans hit Fannie Mae, Freddie Mac and FHA quickly resulting in a knee jerk reaction by the government to this crisis. New laws and regulations were implemented and those had a deep effect on the entire real estate financing industry.
The market repercussions to these changes are playing out today and in turn have created new opportunities.
These new restrictions forced banks and other lenders to reexamine their approach to the fallout of the financial crisis. The time consuming and expensive costs of foreclosure combined with the crippling new cash reserve requirements made it intolerable to continue with a “ business as usual” attitude. A new approach had to be adopted.
The new approach was to simply bundle and sell non-performing mortgaged backed notes. This approach was quicker, easier, more efficient and less expensive. This disposition strategy has worked so well that the “genie is out of the bottle” and banks will not go back to liquidating large numbers of REO’s.
The concept of selling non-performing loan pools quickly spread to Fannie Mae, Freddie Mac and FHA throughout 2015. This trend has resulted in what will be a record breaking year for the sale of non-performing loans.
According to industry numbers, there were $147 Billion of 90-day delinquent loans on single-family homes in December 2014. $61 Billion of which were on the books of FDIC insured banks while $86 Billion were on Fannie and Freddie’s books.
To date an aggressive sale pattern saw approximately $11 billion in the non-performing notes sold in 2015. The fact that these sales have dramatically increased reinforces that the process has found its footing.
As big as this year’s sales are, we have a long way to go. The people who understand the current conditions and future implications will do extremely well, those that don’t will just be “in the game”.
We at NoteSchool are extremely excited about 2016 as we anticipate this increasing supply of non-performing loans making their way down stream to the smaller capital investors.
In The Spotlight…
We are going to start the New Year off with something a little different in the “In The Spotlight” column this month. I reached out to some of my colleagues here at NoteSchool, Colonial Funding Group and Colonial Capital Management and asked them each to share their best advice heading into 2016 for anyone in the note business. I’m not sure you will find any better advice all in one place than the following!
Sourcing and resources will be the key to ultimate success affecting your bottom-line in 2016:
- Capital to fund the Note opportunities,
- Correctly priced assets that aren’t the drudges in the bottom of the barrel (“Tails”)
- The right vendors who specialize in what types Notes you’re buying
– Eddie Speed
Get connected and stay connected. Being connected not only means networking although that is a very important piece but also includes staying on top of what is going on in the industry, what is affecting the various markets, etc. There are so many ways to stay plugged-in today that it is imperative to use all the tools at your disposal. – Bob Repass
Star Wars is back again to start off the New Year. I remember in “The Empire Strikes Back,” Yoda gave advice to Luke Skywalker. The Jedi master told Luke: “You must unlearn what you have learned.” Moving forward in 2016 may involve something you may need to unlearn. Goal setting is a priority this time of year, however, many of us look back at the end of each year and haven’t meet our goals. We learned to set goals, put our plan in writing but we may need to unlearn keeping the plan to ourselves. Find an accountability partner to help you stay focused on working your plan and accomplishing your goals. Paralysis of Analysis, procrastination and perfectionism are learned behaviors. Resolve to unlearn them. Don’t procrastinate, allow fear or perfectionism to stop your progress! – Martha Speed
With 2016 being an election year, there has been extremely little talk about what Americans can and should be doing for their own financial futures. Discounted and distressed Notes will continue to be a delightful gem in 2016 for the portfolios of individuals who choose to embrace their boundless opportunities. Given the task we all have as individuals to provide for and protect our family’s financial future, Notes are certainly a way to provide the predictable cash flow while affording protection through the collateral, two important elements for anybody’s financial future. – Ryan Parson
Best tip I could give them is to diversify their business- Always think how your business can grow and diversify into new areas. In the note business there are many avenues to diversify, performing notes, NPL’s, Partials, 50/50 models and so forth. – Charles Mangan
Best tip is to deploy their IRA funds… Money sitting in their IRA (like I did) defeats the purpose of having a self-directed IRA. Also be sure to stay engaged in the weekly mentoring calls, even if you have to go back and listen. The marketing changes and so do processes. The only way to stay in the know is to stay engaged. – Susan DeLaGarza
I’d say creating systems to streamline certain processes in your business will be essential for those looking to scale their business in 2016. After you complete a task think “How can I make this more cookie-cutter?” Eventually you’ll be able to hand some of these tasks off and begin working ON your business instead of IN your business. – Czarina Harris
I’m heading into 2016 I’m sure most of you have seen on January 4th the market closed at its lowest point since 2008. If you have been considering taking your money out of the market and investing in the note business I would say now is a better time than ever to pursue what we feel can be the biggest game changer in today’s marketplace. – Duane Gibbs
Get and stay engaged in the business. Our top students attend every webinar they can, re-attend 3 day classes participate in special events. They constantly network, ask questions and share. – Kevin Shortle
When making an offer through our Trade Desk, it is imperative that you already have your capital for funding lined up-whether it will be working through your IRA Custodian, joint venturing with a partner, brokering a note to an investor, or purchasing the note on your own. – Angie Repass
Make sure to utilize the webinar calls at NoteSchool. Anytime you have questions about a deal you are looking at either from us or out in the market always bring it to the call to get clarification. Don’t forget to work on your investors. We already have so many deals that are coming in 2016 and having the money ready to fund as opposed to finding it will be instrumental to your financial success. – Matt Edwards
Run your note business as a business versus a hobby. Take advantage of all of the business deductions that IRS allows that will keep more money in your pocket. Keep good records and make your life a tax deductible event. – Joe Varnadore
I’d say, to constantly be improving your craft (the art of the deal). Just knowing where assets are is only part of the equation. – Ben Haught
To be successful in 2016 you need to prioritize your business plan into manageable goals that can be implemented quickly. Priority # One is to load your deal pipeline in the next 30 days as that will impact the next 60- 90 days of your 2016 business plan – Kevin Moore
Capital Markets Update
The Flight to Quality: Are You Booked On it…
by Ryan Parson
In a typical college level finance course, a professor would lecture about “flight to quality,” explaining the concept involved investors seeking safer assets rather than more risky ones and thus willing to forgo yield as a result. The professor would also explain that the safest of all investments were USA-backed assets such as a Treasury bonds or T-bills.
You don’t have to look very far today to see that Treasuries are paying a pretty paltry return. When you take inflation into consideration, you’re essentially losing money. Flight to quality is in actuality a “flight to loss.” Of course, there are reasons investors are willing to accept this drastic trade-off, primarily fear of loss (of principal).
With all the recent talk of the Fed tinkering with interest rates, coupled with concerns about whether or not a recession is coming, where does one turn for Flight to Quality in the world of alternative investments? More specifically, where do high net worth investors seek out quality in the face of all this uncertainty?
From the perspective of high net worth investors, Flight to Quality looks a little different than it does to other classes of investors.
They start by saying ‘no’ to investments in the traditional market and ‘yes’ to assets with a predictable return backed by something tangible, typically real estate related.
Why is having a real estate related asset considered to be flight to quality in the world of alternative investments? It boils down to the fact that as market value changes, as interest rates go up and down, the physical pieces of real estate you own still have value regardless of fluctuating markets. The value of that investment is significantly influenced by the fact that investors can control what happens with their assets. For example, if demand to own housing in a particular market is greater than rents, the investor may choose to sell their property with seller financing, versus renting, in order to achieve a higher return.
As overall economic unrest continues, the desire to have an asset you can control becomes significantly more important. Real estate provides Flight to Quality as investors do the best they can to bulletproof their portfolios from the barrage of uncertainties and otherwise uncomfortable conditions.
If you have a 401k plan through your employer, you may or may not be keeping an eye on results on a regular basis, but if you even remotely pay attention to it, you certainly know that there is a lot of volatility today. Consequently you see your portfolio value go up and down. The frustrating part is that you have zero control over these fluctuations. Not surprisingly, part of the drive behind Flight to Quality is a thirst for more control.
What’s your strategy for achieving Quality – and Control – in your portfolio?
Quote of the Month
“Never forget that intelligence rules the world and ignorance carries the burden. Therefore, remove yourself as far as possible from ignorance and seek as far as possible to be intelligent.” – Marcus Garvey
Connect With Us
Are you on Twitter? If so, be sure to follow us on Twitter @NoteSchool and @ColCapMgmt, if not, why not?