Chris Seveney continues his 2024 year-in-review discussion as he dives even deeper into the world of mortgage note investing. Tune in as our host presents strategies you can employ to navigate the challenging real estate market, achieve significant growth, and maintain a strong portfolio of performing and non-performing mortgage notes. Chris explores key market trends of this year you should take note of, including the rise of non-performing loans and the impact of fluctuating home prices. Gain a better understanding of their conservative investment approach, focused on capital preservation and long-term success in the mortgage note market.

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Watch the episode here

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Mortgage Notes Year In Review – 2024 Year-End Review (Part 2)

7E Year In Review

I am going to do a 2024 7e year in review and this is for everybody reading, including our investors, people considering investing, or people wanting to understand what has gone on in the mortgage note space over the past year and what we’re seeing. I recorded an episode in regards to what I got right and what I got wrong in 2024 based off a recording I did. I also recorded a video of what I anticipate in 2025. Let’s dive right in and start it at very high level of 7e.

I’m happy to say at this stage, we had a significant goal of trying to double our investor count over to past year. We came very close to that. We now have over 700 investors within the fund. Our reinvestment rate is very strong and what I mean by that is people who start off with investment and have continued to invest within our regulation A offering or a regulation D. Again, that regulation A has a $5,000 minimum. All that information can be found on our website under Offering Circular or the SEC website under EDGAR.

As a company overall, we grew by 50% as well and we haven’t finished a year, so a very strong year again that we’ve had. I have to give credit to our team. We have been a team that has been very consistent in regards to who’ve been members of our team. We’ve had very little turnover within our company, which is honestly very unusual for a startup. When you have trust in your team and you build a bond and strength, it continues to build just like a sports team. The longer you’re together, the better off you typically perform. That’s how I like to look at things overall at 7e. That’s a little bit of a high level.

Let me dive more into assets, what we’re seeing in the note space, what we’re seeing overall in things in 2024 for a lot of real estate funds. It was very challenging, especially those who are not on the debt side. As a company that has no debt in place, we did not have to have any challenges with interest rates or loans being called that we owed. Our capital stack has remained consistent where no debt and now investors pref is essentially outside of the expenses right there first in that capital stack.

Adjusting And Reorganizing Portfolio

It has allowed us to continue to grow and continue to, in this term, take advantage of hinting to buy a mix of performing a non-performing loan. As our portfolio has continued to grow consistently over the past year, we’ve also continued to adjust and reorganize our portfolio as non-performing loans became performing. Now, we would sell those off. When we started the fund, we grew over 150 assets to start and many of those had some lower bounces to them because we wanted that broad diversity.

As we’ve grown, our asset valuation or price of unpaid balance on loans has continued to tick up, which has allowed us to replace 3 or 4 non-performing loans with one. We fluctuate now between 50 and 75 loans, which is consistent with where we anticipated on being. In 2025, we’ll probably be between, I’d say, 60 and 100 loans. It’s where I’m anticipating at this point in time, but it allows us to plan ahead, go forward, and understand our diversification that we want to have within the fund.

The other thing I’ll mention on that asset management side of things is, over the past year, I should say, I’ll use the term, the bid ask spread. What I mean by this is what a seller wants first, what a buyer always wants to pay. At certain times, it was way off and some sellers I know where they put out a billion dollars a month. We’re only having 20% of their loans trade hands because that spread was too much. As time has gone on, insurance increases, taxes increase and holding these loans has increased while asset values are not skyrocketing like they are the last few years.

That is had sellers change or two, and let me explain at a high level why. You’re sitting on a loan that’s worth $100,000 and the property continues to increase and interest continues to accrue. You’re basically saying, “I’m still covered with equity. Let this thing be by default.” Interest continued to accrue. Now, what’s happening is, let’s take that $100,000 asset. Now, the property value isn’t increasing. Every dollar you spend now, you’re at a point where you might not get that back.

You’re spending it to get it back with interest, okay. If you’re spending it and it’s not coming back, it’s turning your bottom line. Sellers might be more interested now in liquidating some of those assets. Also, I think a lot of sellers, especially institutional ones, have certain requirements on how much non-performing loans they can have on their books. We started to see a lot of sellers look to diversify their portfolios to get some of that off their books over the past year.

Again, something we’ve been able to 7e, and be very cognizant of. Again, I don’t like to use the term take advantage of, but I’ll say, very peculiar in the assets we want to buy. We still can cherry pick the assets that we want. For example, we just closed on a nice loan in Texas. We’ve got another one we’re closing in Oklahoma, both non-performing. We got it with very good discounts. We’re working on a nice performing loan to balanced portfolio in New Mexico.

We can still cherry-pick the assets we want. Share on X

We’re continuing to see opportunities but also able to select and cherry pick the opportunities we want, which is been something that from the outset have always wanted to do and will continue to do. As part of that and continue to work on the portfolio and the assets, as you continue to go, there’s always lessons learned. Over this past year, what are some of the lessons that we have learned? After in time to manage assets and thankfully, when we model our assets, we are very conservative.

This has been another challenge in the note space and why we’re also seeing a declining competitor out there in our size range is because they underestimated the effort in the time meaning the staff that’s required to manage some of these assets as well as the time it’s taking. For those who have listened to me in the past, I have never said there’s going to be this big foreclosure wave coming down the pipeline. I did think that we would see an uptick and bankruptcies. We clearly have seen an uptick in bankruptcies.

We’ve seen it in our portfolio. Why? It’s because people have equity. They have no place to go and bankruptcy is probably their best option. Now, for us, we model things based off worst-case scenarios, which when people have equity, bankruptcies sometimes is a worst case. I see people who think, “I’m just going to foreclose on this asset and get it done within six months.” We might model it eighteen months because of bankruptcies and everything that’s involved. That’s going to give you a very different price point and being conservative.

Staying Focused On Core Strategy

For us, we fortunately did not learn the hard way from this. It’s what we anticipated and what we continue to model and be, going back to cherry picking, very specific on those types of assets. We’ve also been able to focus again. I apologize if a lot of this is repeat stuff because it’s something that I am passionate about and something that is how we look at managing a business, which is, again, focus on that cherry picking but not chasing the shiny object.

When people ask, “We consider getting back into multifamily,” which is my background for many years. “We consider other asset classes.” Our answers always been no. We are a note fund. We are note company. We’re going to buy performing and non-performing loans. Our loan strategies is always adjusting, which you have to. I like to always use the analogy of a football game and the rules may change slightly by the referees or your opponents.

It might change whether it’s a borrower or the companies that you make in game adjustments. That is crucial in managing any type of fund and any type of asset portfolio. What we’re not going to do is go from a 1980s Nebraska wishbone offense to the running gun offense. Most people probably don’t know what that is but if you’re an old guy like me and you’re a college football fan. You would know what that is. It’s important to understand we stay in our lane. We stay what we’re focused on.

We’re not going from notes to multifamily to self-storage to bitcoin to commercial office to pick your short-term rental or pick your flavor of the day. It’s not something we’re going to do. We’re not interested in chasing that shiny object. As a company, and we’ve reiterated this in the past as well, people always ask us the interest rate environment, how is that impacting the company overall? As we mentioned in the past, we’re interested in rare agnostics. Interest rates and the loans we buy are typically fixed and we are buying based off of a yield.

Interest rates float between 4% and 7%. The impact that does have on us is primarily based off of borrower’s ability to refinance. When rates go down, we see more refinancing on our loans. Great for us. If they don’t, then it doesn’t have a major impact because it goes back to how we model our loans. We model as if we’re holding them to perpetuity meaning to maturity, which I don’t know how many actual borrowers truly do hold the loan for 30 years. If it’s 3%, they’re probably going to be as long as possible but I don’t think we have one loan in our portfolio that’s less than 3% unless it was a mod from that standpoint.

Those are some of the areas that we’ve seen. As we move forward into 2025, I talked about what we’ve been through in 2024. I’m going to record a much longer episode of my predictions on things but just talk more specifically about 7e then diving too deep into the markets. As we mentioned in the past, we are seeing billions of dollars of loans per month. We see more loans that we could acquire and we do have funds. People will ask, “If somebody cut you a check for $10 million tomorrow or $50 million, how would that impact you?

It’s conversation we’d have what people in regards to pulling that capital but we always go back to, we are such a small speck of sand in a $13 trillion industry for where we’re at. Where we are, we are, as a company, roughly raise round $35 million to date when we look at overall that number. If we’re buying a few million dollars a month and we’re seeing over a billion dollars a month. It’s less than 1% of the assets.

Over the last several months, we’re also seeing a much broader diversification of assets. We are seeing loans fall to investor loans, which have some opportunity but have to be very selective on those. We are seeing some reverse mortgage loans. Those are loans that you would have to foreclose on. It’s something we look at, but it’s not a primary function or focus of our business but we had the foreclosed and we’ve had to go through that process. It’s something more familiar with but it goes back to the concept of being very conservative.

 

When we’re ultra conservative a lot of times on those things, we might not be competitive. That’s okay. It’s not as if we are having issues, pouring this capital to get into loans. On the performing side of things, we continue to add some performing loans into the portfolio for that cashflow. Those have been very good for us. Sometimes, those are short-term loans. It allows us greater flexibility and rebalances the portfolio. That’s always important that we have that non-performing, performing ratio and mix that we continue to like a tennis match or pickleball. Whatever your cup of tea is. The back and forth of truly balancing that portfolio, managed risk and returns.

Rise Of Non-Performing Loans

The residential non-performing loans was down. It’s starting to pick up a little bit. We still see those loans. We’re still buying those. Those are what we typically base everything off of but they’ve been a little more challenging. Which again, as I mentioned, we’ve seen the decline in competitors because they haven’t seen a lot of those. Also, a lot of people who were doing those again, we’re getting burnt because of some of the timing.

As we continue on now and in 2025, we’re starting again to see that uptick and more of those loans coming on the market. I believe that is based off of increased unemployment and decreased in savings. People have credit cards at 28% I think is what I saw some of the rates now on credit cards, which to me is completely insane. People are struggling. A vast majority, which again, I’ve reiterated before, there’s rumblings out. I can’t confirm whether this is true. I’m just telling you what I’ve heard that 50% to 70% of Americans live paycheck the paycheck.

 

Home Prices And Risk Management

If that’s the case, temporary job loss, a significant increase, taxes, insurance or credit cards. That’s going to hurt and we’re seeing that in Texas, and Florida, and we’re seeing it in other areas. That’s where we’re seeing some increases in some of these default in loans. I’ll also lastly talk about as our portfolio home prices because home prices are a significant risk and how do we manage that risk profile? It can be challenging. I have been a proponent of I think home prices are high. They have topped out for the time being. They will soften. I’m not saying you’re going to crash, but you’re going to see some softening.

If they do soften, what’s your loans value? This is something, again as a company, we strive to focus on maintaining a loan to value that is in line with the risk profile. You’ve been on any of our webinars. You always hear us say we like singles, doubles and occasional triple. We’re not a home run hitter. We’re not a strikeout hitter. That’s not what we’re going for. We’re not going for all the guts and all the glory within our portfolio.

Conclusion And Call To Action

We look for loans that have that equity protection. If there’s softening, we look to protect our investors and preservation of capital. That’s something I look for. How can I manage preservation of capital? I hope you enjoyed this in regards to 2024, highlighting some places we’ve been, a little bit of what we’re seeing, and talk a little bit more about our company in general. As always, if you have any questions, reach out. Go to our website 7EInvestments.com. Email us at Invest@7einvestments.com and we are happy to answer any of all your questions. Thank you. Take care. Happy holidays and hope you have a Happy New Year.

We look for loans with equity protection. If there is softening, we protect our investors and preserve our capital. Share on X

 

Important Links

• EDGAR
• 7e Investments
• Invest@7einvestments.com