What This Trillion Dollar Bank Move Means For Real Estate Investors

Banks have recently shifted a trillion dollars in bad loans to non-bank entities and servicers. What does it mean for U.S. real estate investors?

The Trillion Dollar Shift in Distressed Properties

Bloomberg recently picked up the story of a Virginia homeowner who just listed her home to the bank. After years of attempting to modify or cure her loan, she lost. She tells Bloomberg she was repeatedly told paperwork was lost, couldn’t get answers to unexplained charges, and then after her loan was transferred to a new agency was told she had run out of time.

If you think this sounds like more bank games, you aren’t alone. Analysts and industry observers also commented that these scenarios have been escalating, as banks have ducked regulators by transferring over $1 trillion in loans to non-bank entities, which are not subject to the same rules. Regulators fear this is just the beginning of a trend in avoiding the letter of the law, and will require further regulation to reign in.

More Trillion Dollar Banking Stories in the News

  • New rules have left it unclear whether another $1.1 trillion in loans really count towards new collateral requirements, and whether they can be securitized and sold
  • New swap rules posed by the OCC would require banks to have almost $1 trillion in collateral to back swaps between each other
  • Another $15B of CMBS is expected to be sold in September 2014 alone

Hedge Funds Swallowing Up Billions More in Non-Performing Mortgage Loans

A new U.S. HUD report in August 2014 shows that just a few major hedge funds have been responsible for snapping up over half of $16 billion in auctioned off FHA loans recently. Thousands of nonperforming HUD loans are to be sold off this way, but smaller players and nonprofits have continually lost out.

Plenty of Inventory and New Opportunities

Business is moving away from banks. That could be very good or very bad. More regulation will come if we don’t regulate ourselves, and lead with positive peer pressure. Secondly it shines a light on just how much money and opportunity is out there. Trillions of dollars worth.

Beyond the media hype and headlines, any way you cut it, there is a ton of foreclosures looming, which means plenty of deals to be had. Distressed Pro estimates there is still $230B in nonperforming loans and REOs on U.S. bank books. New defaults are happening every day, and foreclosure activity is up over 100% in some areas, according to RealtyTrac.

None of this threatens the new rebound, it just means there is a lot more business to do than most can fathom. Still, most real estate investors do need to look for alternative means of funding. Accordingly, there is endless capital and even plenty of rental properties trickling down from big hedge funds through various channels. There may be some deals in there, but the heads of these firms have come out in the media to say they are more interested in unloading properties at retail, where they can snag the most profit.

Other options for sourcing properties for investors may include local auctions, other real estate wholesalers, and for the aggressive and patient – banks with property in shadow inventory.

There is a huge and desperate need for second chances today. It’s not that many can’t afford to get into rentals, but they don’t stack up to the strict underwriting systems for tenant approvals. It may be easier for many to qualify for a mortgage loan to buy, rather than rent in 2014. Landlords that can look beyond credit score and apply some common sense to tenant screening may make more money, and be doing families a great service. The loyalty will pay off.

Bloomberg has also noted that all of the buying by big hedge funds has starved nonprofits. Nonprofits are some of the best entities for handling distressed properties, and bringing neighborhoods back. Unfortunately, many lack the mortgage and real estate experts on staff, and the capital to tackle large portfolios and compete with for-profit equity funds. A hybrid solution, or more investors dedicating more resources to nonprofits, could make a sizable difference in local communities and the national housing market.