When the floods happened, when the hurricane rolled through Texas, there were somewhere between 45,000 and 75,000 household affected by it. That number is increasing. That’s the hurricane effect. What does that mean? It means there’s an opportunity for us as note investors, if you like Texas notes, to reach out to the banks, reach out to the servicers, reach out to the mortgage companies and mortgage bankers to see if they’ve got anything on their books they want to get rid of. Scott talks about the opportunities you have as note investors during the aftermath of the recent hurricanes.
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The Hurricane Effect
Have you ever had one of those a-ha moments while you’re working through something? I had a real a-ha moment take place on some things. I want to share some a-ha nuggets that I came across because it’s great talking points. If we look back at one of our first episodes last year, we had Jason Bible on from Houston from Right Path Real Estate and Houston House Buyers. We were talking about what had happened with the floods and the hurricane coming through the Gulf Coast up through Houston. I’ve talked to him multiple times about this. When do we expect to see delinquencies start to skyrocket in Houston? Where do we see the opportunity for him as a fix and flipper, but also as an opportunity for note investors? That was always been from the main idea that it’s going to be at least six months after the foreclosures or before or after the hurricane goes up before the banks are going to do anything. They’re going to come in and start evicting people, foreclosing on people that are flooded and lost their homes.
There’s also going to be a point where the banks are not going to be kind, “Insurance is going to take a while. How are we going to get paid?” They’ll pay it off, which a lot of people are. There are also a lot people who didn’t have flood insurance. They’re paying out of pocket. That leads to a lot of delinquencies going on. I thought I’d share some of the great things that I found that surprised me and shocked me to thinking, “There are opportunities here.” Our focus has always been to buy direct from banks. My belief is we get one bank, it’s only the multiple deals versus if you send out 5,000 postcards, you’re dealing with 5,000 potential for one deal. You get 1% to 4% response rate in direct marketing. That’s not effective marketing, especially in today’s technology. If I’m going to bust my butt to reach out to banks, reach out to sources, I want multiple sources coming, multiple deals coming in over the year. Let’s talk about the Texas market.
The Texas Market
There are 449 FDIC-insured banks in Texas alone. There are 238 Texas-chartered banks that make up 2,422 branches. Banking has always been a big business in Texas. Out of those 238, 128 of them have at least five branches or more that makeup over 2,000 of the branches. That’s not an exact number of the banks who are opening and banks who are closing. That’s one focus of where we find note deals direct from the banks. You can buy direct from banks. You’re not going to be dealing with the big five or ten. You’re not going to waste time with the Chases, the Citibanks but there are still plenty of opportunities out there.
Hurricane Effect: You can buy direct from banks. You’re not going to be dealing with the Big Five or Big Ten.
We see a lot of mortgage bankers coming in to Texas to lend because of the favorable lending laws. A lot of companies and mortgage companies that were around years ago that folded. Those guys have popped back up and started doing portfolio lending out of their own, holding those loans, packaging and selling them off. There are still a lot of lending opportunities. In Texas, there are 406 licensed mortgage bankers in Texas. They are people that have been around the business usually two or more years that are doing $5 million or more, they either own a warehouse line or they’re a big company, their own mortgage bank. They’re not doing savings accounts, CVs, they’re producing mortgages.
There are 1,142 mortgage companies lending in Texas. There are 168 servicers that are licensed to do business in Texas from all across the country. That’s not all the servicers, but that’s a good chunk of them that are doing business here in Texas. There are some people that are Texas only, and the rest are big, nationwide servicers. Those mortgage companies they may look at other states. The same thing with the servicers, they may be located in other areas. The same thing with mortgage bankers, they may be in other states but are licensed to be a mortgage banker here in Texas.
I was able to go to the NMLS Mortgage Industry Report for 2017 and it came out in first quarter 2018. There were exactly 234,652 new home loans originated for Texas. That’s $51.5 billion in origination with about $220,000 average loan balance on those loans. We had over 10,211 home improvement loans at $1.1 billion, which is $105,000 average. That’s a smaller loan. A lot of those are seconds or people doing a home equity line of credits. We also had a chunk of refinances. People refinancing their house, get a lower rate and pull some equity out of their homes. It was total of 88,324 refinances or $16.6 billion at an $188,000 average mortgage balance on the refinance. Altogether over 333,000 loans, $69.2 billion in loans written with an average balance of $208,000 is what the mortgage balance is. That’s a pretty good sizable chunk in Texas.
The Default Rate
Here in Austin, Houston and Dallas, $208,000 is below average based on the market value of the properties. Average is your first-time home buyer. There are some big loans when with the minimum and maximum, and all those will average out. It gives you an idea of what’s going on. A total of 333,187 loans written. Those are new loans that originated or refinances, people going in. That’s not the full amount of loans being done here in Texas. What’s the national default rate? That has dropped down. It dropped down from 4.5% to 3.9% across the board, across the nation. It’s not coming down as steep as it was, it’s plateauing off a little bit. We’re going to see it hover at 3.5% or bounce back up depending on what’s going on. What are the default rates in Texas? What’s the hurricane effect cost? If you think about this, there are two states, even Puerto Rico had been affected.
I pulled some numbers from CoreLogic on this. In Florida, there are still over 6% of loans in 30-day delinquents. That number has skyrocketed to 9.9% of homes in Florida are 30 plus days delinquent. If you look at serious delinquency, which is 90 days or greater, that number has gone from 2.7% up to 3.9%. It has gone up to 25% year-over-year. In Texas, 30-day delinquency rates were at 4.8%. Those have bumped up roughly 25%. They went up from 5.6% to 6.7%, 30 days. Serious delinquency across the state of Texas, those were at 2.5% up from 1.9%. Houston is leading up the way in Texas. That’s up more than double with serious delinquency. It’s up to 4.6% of all loans are at least 90 days or greater delinquency. Not a big surprise with everything taking place in Houston, but that’s still a lot. Delinquency rates that’s higher than the national average, especially the seriously delinquent. In addition, 4.6% of all mortgages in Texas are at least 90 days or greater in default. We see 6.7% of all mortgages are at 30 days or greater. It’s going to get bigger as we go into the next quarter.
Foreclosure Speed
In Texas, we lead the nation in foreclosure speed. We’re building fast highways, fast executions and fast foreclosures. You can foreclose in 21 plus days here. I have not seen a peak in foreclosures. What’s that means? The banks are trying to work with the homeowners a little bit or they’re looking to move these things off their books so they won’t be a bad guy. If we take our delinquency rates and we apply that to the origination of stuff, we won’t look at the whole total households yet. If you take a 6.7% delinquency, which is all of Texas for 30 days or greater, multiply that to 333,187 new loans that were originated last year.
That means roughly about 22,300 of those loans are not paying. That’s 22,000 potential non-performers. That’s a pretty good size. If you figure it up in 90 days at 2.5%, that’s a sizable chunk there too. That’s still 10,000 loans that are in 90 days or greater. If you take a whole state of Texas, 7.4 million Texas households and that’s a ballpark number. Some will have mortgages, some won’t. If we take an average of households, 6.7% of 7.4 million Texas households, that means there’s under 500,000 loans in default in Texas alone. That’s a lot of opportunity there for you guys as note investors, distressed debt investors to be reaching out to banks.
Hurricane Effect: Texas leads the nation in foreclosure speed.
I jumped on the county clerk and did a quick deed of trust search. How many deeds of trust were filed? There were 101,439 deeds of trust recorded in Harris County last year. If you figure 6.7% times 101,000, it comes out to roughly 6,800 new loans in default if they were all with lenders. I didn’t have time to go through all 101,000 records, but that’s still 6,800 in Houston alone. If you look at the total households in Houston, there are 834,000 households in Harris County alone. Taking that same percentage of 6.7%, that’s still 56,000 households in default.
Increased Rates
When the floods happened, when the hurricane rolled through here, they figured there’d be somewhere between 45,000 and 75,000 household affected by it. Which is right, the numbers not too bad about that. That number is increasing. It means there’s an opportunity for us as note investors if you like Texas notes. Reaching out to the banks that are lending in Texas. Reaching out to the servicers, reaching out to the mortgage companies, the mortgage bankers, see if they’ve got anything on their books they want to get rid of. There’s an opportunity here because of increased rates. They don’t want to hold that stuff on their books. They would like to get it off their books. For every month it’s in default, that value of that note is reduced by 5%, 10% a month. If it’s a month late, it’s no longer 100% of written value. It’s worth about $0.90, $0.95 of $1, two months, it’s $0.80, $0.85, three months, it’s $0.70, $0.75.
We have a question, “Are delinquencies ideal for modifying with a borrower after buying the defaulted note from the bank?” When you refinance, you try to work out a modification of some sort. That’s exactly what the whole idea is. In a lot of counties in Texas, you can go and do a search for modified loans. Sometimes they’ll show that. I did a search for that in Harris County Clerk. There were 8,400 mods filed in Harris County. People are already modifying in Harris County for all it was filed. I didn’t look at the specific dates on those things. I didn’t get a chance to run those numbers. This could be a modification of a variety of different things, residential, commercial. There’s still opportunity if it’s something’s modified. They might want to get it off their books.
Finding Note Investors In Houston
There are some opportunities here in some different areas. That’s just to Harris County. That’s not talking down in Nueces County, Refugio County down in South Texas where Rockport-Fulton as they say the Texas Riviera is. There’s some opportunity down there. There’s still stuff in default down there. People are rehabbing or they don’t have the money. There are still a lot of tarps on the houses. People ask, “How do you find note investors? What’s a simple way to find note investors in Houston?” If you go down to the county records or the county clerks and you do a search for deed of trust, there’s 101,000 deed of trust recorded. You can do the same thing for assignments. I ran that number and there were 35,744 assignments filed, just in Harris County. Loans were created or sold. Mortgage has been around and they were sold to a different company. On these assignments, it lists the grantee and the grantor. Every grantor is a seller, every grantee is a buyer and often a seller as well.
The one thing about Harris County, it won’t let you pull up. You’ve got to be a subscriber to a different website to pull up the actual county records to see what the document exactly says. I ran a search in less than five minutes and it pulled all of this grantee, grantors. Some of that I can copy and paste it directly in Excel. It doesn’t give addresses, but it does give me the names of the grantees and the grantors. Both people are buyers and sellers. If you want stuff in Houston and you spend all the time reaching out to banks through making phone calls, doing mail blasts, email lists.
There are some servicers of things in the website that you’ll be able to find. The big a-ha moment is I had to take a step back. I was thinking, “Don’t waste your time in Texas. It’s too expensive for the most part, too fast foreclosures.” That’s still going to be the case for a big majority of lenders, especially if they’re focused in the Dallas markets, Austin or things haven’t been hurt that well. If you find a lender who’s got a chunk of the portfolio in Houston that’s been affected in any form or fashion, they may be willing to move from that paper off at a price that makes sense.
Loan Modification
We have a question, “Has the consumer come to expect a loan modification when they get behind a bank loan? It seems consumer laws can tell banks to make a loan mod attempting to cost them little.” They can do a modification a variety of ways. Banking laws want the banks to work with the borrowers. If it’s already done in default, they’re not getting paid. That value’s dropped out, even if they weren’t able to do stuff. They might try to do a loan mod of some sort, but they’re the originator of that loan, they don’t have a lot of room to write off that stuff. They don’t have a lot of room to reduce principal.
They can be flexible, drop interest rates and do a variety of things. It still doesn’t mean that they’re going to do that. It’s not like you and me being able to talk to them and come up with an answer in a day, an hour or ten minutes sometimes. This is where you’re going to start seeing banks selling off chunks of their portfolio in specific areas. A great example is Joe Bayarena, Jamie Kubiak and Adam Adams taking down that portfolio of loans in San Antonio. That would be 30 loans. A big chunk of this was performing loans. The portfolio was roughly 55% of unpaid balance and there was a lot of equity behind that.
Banks aren’t always willing to do a loan mod at the board. You’ve got to be in default to do that. A lot of people, “I’ll make payments for a while,” then they can’t afford it. Nobody said banks are the smartest people when it comes to giving loan mods. They sometimes don’t get it. Sometimes they’d rather sell the stuff off and that’s where we as note investors come in handy to be able to take those assets down. To be able to buy in bulk, buy and be creative if we got a good enough price point to make sense. If the loans were home equity loans or they pull that line of credit for repair loans, they’re probably not going to foreclose. If the borrower did a loan or cash-out refi, pull equity out for toys or rehab. That’s in a second lien position as long as they didn’t do it, it’s one loan.
In Texas, we have a thing here called the Texas cash-out, where you only do one cash out refinance. Based on the State laws, State will only let you pull the 80% of your equity out in the loan. If your house is worth $100,000 and you owe $60,000, you’ll only be able to get a loan for $80,000. You can’t go the full $100,000. The only way you do $80,000 is you’re going to pull 20% if that was the situation. If you’ve got 20% equity, you’re not going to cash out. You’re basically doing a straight rate term refi on that stuff here in Texas. Texas has got some weird banking laws when it comes to financing.
It was in ‘95 was the first time that they would allow you to pull equity out of your house if you wanted to. Compared to other states, you won’t be allowed to do that. Some states allow you to pull 100% of your equity out. If I was anybody, this is what I would be doing, I’d be ramping it up. More emails out to the asset managers. I would be ramping up asset manager phone calls or emails out, spending time on LinkedIn. I would jump on Distressed Pro, pay to have that to start checking out the delinquency rates that backtrack, especially for Texas banks and identifying those areas. Those are some of the bigger areas that I would highly recommend.
Hurricane Effect: Based on the state laws, not just the bank state law, state will only let you pull the 80% of your equity out in the loan.
Assets From Banks
We have a question, “If we get some of these assets from banks, we want to get them off their books. We want the property in repairs, which might be why some of these borrowers are delinquent. I am thinking about what happened in Florida. Properties were available but had damage. Black mold was prevailed.” They’re going to probably need some work. It’ll be good. Some only a little bit but others will be a lot. In Houston, especially Harris County, people were going and cutting four feet across the sheet rock and pulling stuff out. I would not be surprised if you walk in these houses, you’ve got to replace at least sheet rock.
I’ve seen people that are going and building their house up. They jack it up or they build a foundation on the whole first floor because they don’t want to do it. They only want to rebuild. They turn the first floor into a garage and then it becomes a one-story house on top of the garage. It’s going to need work. That’s where we as note investors or real estate investors have the opportunity. You’re still going to have to review the properties and go from there. A bank is going to be willing to get rid of that because banks are not in the habit of wanting to do repairs. They do not want to do fix and flips. They want the debt. The way that they leverage every dollar they get in, ten, fifteen times in a year, they’re happy to do that. They can make up that stuff relatively pretty quickly.
Increasing Delinquency Rates
A couple of things you want to track is delinquency rates increasing. There are some different reports for different things you can use to do that. Distressed Pro is one of those great things. You can jump on the FDIC government websites and look at the quarter reports. Banks are starting to put money away in the reserves. Often, they have to have so much money in the reserve to be able to sell off at a substantial discount. Texas and Florida are leading the nation in delinquencies. I can understand Florida, but the rest of Texas wouldn’t be that way, but it is, with Houston leading the way. This is one of the biggest markets in the country. It’s going to have an economic impact on things.
The Hurricane Effect
I would think that a lot of the foreclosure laws or things that we have going on here would eliminate a lot of that stuff. We’ll see at the next report that comes out. That’s what I wanted to share with you, some numbers. The hurricane effect. I ran these numbers for Harris County, which is Houston. Fix and flip in Dallas, Austin and a lot of the places are out of control. It’s crazy. People are overpaying. Some opportunity there if you can come in and buy some debt decently enough. Turn around, get some Cash for Keys, deed in lieu to borrowers, and turn around carry financing to fix and flipper, or turn around and wholesale those deals off to fix and flippers relatively quickly.
I would be willing to bet though that those two numbers with Florida and Texas continue to grow differently. Florida with a longer foreclosure process, it’s going to probably keep going up because foreclosures are going to take a while because it’s a longer foreclosure timeframe than it is here in Texas. I wouldn’t be surprised if banks here start the foreclosure process relatively quickly once they started going. I was shocked when I was pulling those numbers. I was like, “There are some opportunities here in The Lone Star State. Hopefully, it was helpful for you. Have a great day and we’ll see you all at the top.
Important Links
- Jason Bible – previous episode
- NMLS Mortgage Industry Report for 2017
- CoreLogic
- Distressed Pro