There was a time when investors in nonjudicial foreclosure states benefited from faster foreclosure timelines and an influx of affordable properties, but rising mortgage rates and stiff competition at auction have pushed these investors in a new direction.
This new path is leading them to nonperforming loans, says John Vella, chief operations officer at real estate tech provider Equator.
Specifically, this group wants to skip all the competition surrounding the courthouse steps and grab distressed loans early on.
The plan is to work out the loan – either getting it to perform eventually or staying with it through foreclosure – so investors can then rent out the property or hold it out for sale.
"We are seeing investors buying nonperforming loans to get ahead," Vella told HousingWire. "The days of going to the trustee sales – and seeing if you are going to get a great deal – are gone."
He notes that now "everyone wants to jump in," so competition is higher and the margins and prices are not as strong as they once were when betting on traditional foreclosures in nonjudicial foreclosure states.
Buying nonperforming loans gets investors ahead of the competition, it also fits in with today’s focus on special servicing.
As Vella points out, "nonperforming loans are going to buy at discount."
So if an investor buys on the cheap and connects with a top-notch servicer, they can work out the loan or eventually turn a profit on the property after it goes through foreclosure.
"By getting more upstream, if they are working with a special servicer, they can make money on the workout by selling at the foreclosure sale or putting a tenant in the property," Vella states.
The issue is specific to nonjudicial foreclosure states since properties in those areas are moving consistently through the default cycle.
Judicial foreclosure states are a different story altogether.
Still plagued by long foreclosure timelines, investors scoping out judicial foreclosure states are using a different strategy.
"The elongated foreclosures are allowing servicers to have more time to work with the borrowers," said Vella when discussing judicial foreclosure states.
As a result, those markets are witnessing more short sales and loan mods.
And investors in those regions are more likely to turn to short-sale auctions.
Vella is not alone in discussing the growing appeal of nonperforming loans.
Bank of America Merrill Lynch (BAC) recently issued a report, saying some investors find nonperforming and reperforming loan securitizations as attractive alternatives to private-label residential mortgage-backed securities.
Appetites for these bonds apparently grew when investors started to see rising home values.