Unlock the secrets of a $13 trillion industry in this must-listen episode! In this quarterly update, Chris Seveney takes a deep dive into the dynamic world of mortgage note investing. Discover the vast opportunities within the mortgage industry, with a special focus on non-performing loans. Chris shares insights on 7e Investments’ portfolio strategy, market trends, and the economic factors shaping the investment landscape. Learn how the fund navigates potential market softening and why equity-rich assets are crucial in today’s environment. This episode offers valuable perspectives for both seasoned and novice investors in the mortgage note space.

—

Watch the episode here

 

Listen to the podcast here

 

7e Investments Quarter 2 Update: Analyzing Market Dynamics And Investment Strategies

Welcome, everybody. I wanted to talk to all of you about our quarterly update from 2024, the 2nd quarter. I wanted to talk about what we’re seeing in the marketplace, overall performance, and where we see things headed within the next quarter as well as in 2025. For those who do invest with us, I am proud to say that we’ve been able to issue a distribution for 23 consecutive months.

This July 2024, we are hitting the 2-year anniversary of our regulation A+ offerings in CWS investments where we have grown to over 670 investors with a significant number of those investors reinvesting within the fund. For all of you who have invested, I want to say thank you. Our fund continues to raise money. As we’re raising the money, we have not had any challenges to date in deploying funds into assets.

This July, we are hitting the two-year anniversary of our regulation A plus offering CWS investments where we have grown to over 670 investors. Share on X

The Size Of The Market In Mortgage Note Space

For those who received the report, what’s interesting is a question we get asked all the time is, “What’s the size of the market? In the mortgage note space, how much do you see?” I remind people that the mortgage space is a $13 trillion industry for 1 to 4 families. That doesn’t even include seller finance stuff and so forth. You think about $13 trillion. In any period of time, there are hundreds of billions of dollars in non-performing loans.

To give people a retrospect, in the second quarter of 2023, we saw over $5 billion in loans come across our desk. Of that $5 billion, approximately almost 20% of that were non-performing loans. Under $900 million in non-performing loans came across our desk. When you think about that, if someone would require 10% of that, that’s $90 million. We are closer to less than 1%. Typically, per quarter is what we are looking to acquire.

Interestingly enough, second liens are making a strong comeback. There was over $100 million in second liens. There are also other types of loans out there that make up the scratch and dent, qualifying, and non-qualifying. Bridge loans which are like fix and flip loans, were out there as well as non-performing, which is higher dollar value. Each one of these had a specific piece of the pie. Non-performing, when we looked at all the categories, was one of the top next to the non-conforming type of loans that we see come across.

When you think about it again, $800 million of non-performing loans in the last quarter did come across our desk. With that, how did that shape our portfolio? What does our portfolio look like? We have 66 assets in the portfolio, which is slightly down from the prior quarter. The reason is when we started a few years ago, for those who have followed us on our show and tuned in, the churn is typically about 18 to 24 months. When we were getting started and had a few million dollars, the loan balances may have been lower and diversified that portfolio.

Those loans have been working them out. We turned around and started to liquidate them. Early on, our average loan balance was $80,000 to $150,000 whereas now, our average loan balance is over $300,000. The property that is secured by our portfolio has an average asset value of almost $1 million. It’s $66 million in asset valuations.

Something we continue to be very strict on is making sure the assets in our portfolio have that equity in them because I see prices softening. I don’t want to have a $300,000 loan on a $350,000 property. That’s not going to end well in my mind. Having a $300,000 loan backed by a $500,000, $600,000, $700,000, or higher property gives us a lot more comfort in regards to if we see any type of softening come across the market, it allows us to be able to go work that loan and make sure that we have that cushion to protect our investors’ investment. It’s the preservation of capital.

One of the things that you probably hear me harp on a lot is we want to make sure we’re always on that preservation of capital. Why? It’s because if you look at many of the other investment strategies out there that take on leverage, which we don’t have any within our portfolio, interest rates have gone up and they’ve run into some serious issues not only on the returns they were trying to target but even that preservation of capital. I’ve seen investors, people I know personally, not only get wiped out of their investment but got the double whammy where they had to go back and pay additional taxes because they took accelerated depreciation early on in the fund and they have to pay that back.

Real Estate Market Softening

We’ll talk a little bit more about the portfolio and where we are spread out. We’re in 24 states across the United States. East of the Mississippi and South of New York is where the primary majority of our assets are. As we start to shift towards the West, we’ve got some assets in Oklahoma, Nebraska, Arizona, Nevada, and California. Anything from Wisconsin, Illinois, and above that median, we don’t have assets. You don’t see much in Idaho, Montana, Washington, Oregon, and the Dakotas. It’s an area that A) We typically also stay out of primarily because there’s not a lot of activity. To build a team within that area, an attorney and REO people if you have to take it back is a little more challenging.

 

Sticking to the 25 or 30 states that we typically will play in we feel gives us diversity in regards to several factors. One is I believe the real estate market, if there is any type of softening, is going to start in specific markets. We’re starting to see that in certain areas of Florida. I’ve seen somebody who bought a property to fix up and thought it would be worth $600,000 but it’s only worth $400,000. They’re underwater and are getting foreclosed on. You’ll see some of that in certain markets.

We want to make sure we’re diverse and not all in Clearwater, Florida. That’s the first thing that popped into my head, whether that’s a good market or not. We don’t want to be everything in Austin, Texas. That’s another location that is it okay to have assets there? Yes, but we don’t want the majority of our portfolio to be spread throughout one specific region. I wish I could predict the future. I wish we could shake my little magic eight ball or whatever the case may be. I have a little fidget spinner here that says, “No, Tomorrow, Sit on it, Yes, today, Pass the buck, Maybe,” and all that fun stuff.

 

One thing I love to do is analyze data and see the ebbs and flows of where the data is headed from things. The New York Fed with the Consumer Credit Panel and Equifax produced a pretty significant report that I’ve done a prior episode on. What it talked about is looking at the transition into delinquencies by loan type. It goes back to 2003.

The economy after the dot-com bust, for those who were not around or too young, the economy was doing really well. Delinquencies started to drop a little bit except for student loan debt because college started getting really expensive. Thankfully, I graduated before then. My cost of 4 years is about the cost of 1 year. Things started to drop.

People think it was 2008 or ‘09, but 2006 is when delinquency rates really started to pick up. We’re talking credit card, auto, mortgage, and home equity. All of them follow the same pattern between 2006 and 2011. They peaked around 2010. Most people know the end of 2008 and the beginning of 2009 is when it started hitting the fan. It didn’t happen overnight. That continued for a significant period of time.

2010 and ‘11 were still great times when people could get into assets at a very low price because everything was dropping significantly. To give an idea, mortgage delinquencies were typically on average between 3% and 5%. It peaked over 12%. Credit card peaked at 14%, which credit card is typically about half that. Everything doubled from their norm.

Thankfully, things settled down. Things pretty much stabilized back from 2013 to 2020. Credit card debt floated right around 6%. Auto loan was about 7%. Mortgages were floating around about 4%. Student loan was about 10%. Everything was floating across the ocean with some little bits of waves up and down until COVID came.

Student loan, let’s take that off the table because nobody was defaulting because they didn’t have to pay. Everything started to drop during COVID through 2022. Why? I believe it’s because the government printed about $7 trillion and you didn’t have anywhere to go out to eat. You couldn’t go on vacation. It was hard to spend money. What happens when consumers have several years of pent-up demand? There is fear of missing out. People want to keep up with the Joneses. Everyone starts going out and buying stuff. Everyone is buying real estate, cars, NFTs, and Bitcoin. Everybody is buying whatever they think is the next hottest thing. That will last for a period of time but eventually, it’s going to pop.

This report shows that credit card debt or defaults transitioning is up around 9% and it is in the span of two quarters when it doubled. It went from 4% up to 9%. The only time it was steeper was in 2008. Auto loans went from about 5% to 8%. The increase in auto loan delinquencies is faster than it was in 2008. Mortgages have gone from about under 2% to up over 3%. It’s not as steep as 2008. One of the things that is helping mortgages is people filing for bankruptcy. When you file for bankruptcy, technically, your loan is current, so that information is not in there.

I share this, and I apologize for getting so technical, because A) This trend isn’t unexpected for us with rising interest rates, inflation, housing market dynamics, property values fluctuating, and unemployment, which is starting to pick up. Honestly, I do question what the true unemployment rate is. The increase in defaults was at all-time lows. There is only one place they can go, get back to normal, and stabilize. They got to go up.

Delinquencies Will Continue To Rise

What do I think? I think in the short-term, which is the next 1 to 2 years, delinquencies will continue to rise as borrowers adjust to higher interest rate environments, economic conditions, and poor spending habits. This trend could be mitigated by government intervention if the economy worsens significantly, but I’m not sure how the government will intervene. I don’t think they probably will. Typically, when they do, it’s usually too late.

Delinquency rates are rising across various loan types. This trend is likely to continue as borrowers adjust to higher interest rates, changing economic conditions, and poor spending habits. Share on X

The other reason why we’re going to start seeing this, and I don’t know if people saw this report, is Bankrate came out and did a cost for a typical single-family and hidden costs over the course of a year. It was mind-blowing because it’s $18,000. Think about that. It’s $18,000 of hidden costs. What does that include within that cost? One is insurance on a property and taxes. Those can range significantly.

I am in Fairfax County, Virginia. Virginia is pretty good for property taxes. I used to live in Massachusetts, so I’m comparing. We still went up around 10% in property tax. For our homeowner’s insurance, 200% was the initial estimate we got. We then started picking up the phone and calling other people, but it still went up by about 25%. When you think about that, that’s a significant cost where people struggle, or when people get a mortgage, they don’t leave $300 to $400 extra a month to taxes, insurance, and some of these things that can pop up.

I want to remember. This $18,000 is on top of the mortgage, which is the most expensive all-time ever. Things that you need to understand is it’s getting a lot more expensive. Insurance is probably one of the major factors because it’s something where you can’t cut annual premiums. You can’t do much about that, so it makes it that much more challenging.

Other things that are included in this is energy bills. The cost of energy is everything with inflation. It has gotten out of control. That’s something that also got added to this factor. That depends on the state. Some people may have a $100-a-month energy bill. I know places like the Northeast that if you’re using oil in the cold, that can get extremely expensive.

This $18,000 is an average. For places like Alabama, it’s $12,000 versus places like California, which is $28,000. They also compared this from 2020 to 2024. Most states are up by 20% to 30%. Everything has gotten more expensive. I don’t see wage growth at 20% to 25% to account for everything that people are paying. When people say, “Inflation’s 2.5%,” I honestly call them BS on that because I know my costs go up more than 2.5% per year even though I know it was 9%. That 9% year was probably double that. I’m not an economist. I only can look at what we spend and look at how much more things look to cost.

Outlook For The Fund

I share all of this outlook because it’s also good to go back to where we started with what we see and where we see the fund going. We see the fund moving in that direction and we’re going to see more opportunities out there. More opportunity for us compared to a lot of the other real estate sectors is interesting because in the multifamily space, which I know a lot of investors like to invest in those types of assets, are not seeing a significant opportunity or there is a significant risk associated with a lot of that opportunity.

For other types like self-storage or short-term rentals, it’s the same thing. They are experiencing so much cost that it’s challenging to bear. Whereas as a note investor, we don’t own that real estate. The cost of the insurance and the cost of the taxes impact how we bid on assets, but we’re not burdened by those costs when we’re buying a non-performing loan. We only get burdened by them if we have to take it back. We have a $300,000 loan balance on an asset worth more than twice that amount. It’s rare that we would take it back because it would sell at auction.

I hope that also gave some insight into our thinking, our logic, and how we’re strategizing and game-planning for the future. For people out there, these are great questions to ask people, “How are you strategizing? For other opportunities, what do you do? How do you strategize? If this, then that.” These are great things to ask. I hope you enjoyed this market update or this quarterly update for 7E Investments. If you have any questions, please feel free to reach out at Invest@7EInvestments.com. We’re happy to answer any questions you have. Thank you all. Take care.

 

Important Links

• The New York Fed Report Analysis: Is The Housing Market Headed For A Downturn?
• Invest@7EInvestments.com