As true with most New Years celebrations, 2020 came in with me falling asleep way before midnight and waking up January 1 watching news clips of die hard enthusiast smiling at the camera and slurring speech with drunken delight saying something that sort of sounded like “Happy New Year” but came across more like, “Have a New Beer!” In my usual dismissive condensation, I looked at the television, shouted “you’re an idiot” and rolled my eyes as I took another bite of my Captain Crunch cereal. At the time, I just couldn’t imagine what was in store for myself or America as we were all about to be faced with a global emergency, the Covid 19 Pandemic, better known as the Corona Virus.
Fast forward a few months and it feels like I’m living in some sort of Wonderland. The even more amazing part is, I’ve been here before. It’s looking and feeling like the Great Recession of 2007 all over again but, this time, something is different, some greater darkness appears on the horizon and every day, it’s coming into greater focus. It’s looking more and more like, REO.
As you can imagine, being the owner of REOPro, I get a lot of questions from members and others about my opinions on what the future holds for the foreclosure niche real estate industry and how can one be prepared for it. So, let’s spend some time and talk about my expectations and see if we can build some consensus.
First off, let’s all stipulate that for a housing crisis to happen, we must have multiple banking failures. The American banking industry is so massive that no one issue can bring it to its knees. This is important to understand because, when we talk about the REO industry, we are essentially talking about bank failure in mortgage lending from both a systematic and voluntarist paradigm. More to my point, we must look at everything from day to day operation failures to complex and hard to see cultural problems that combined created a housing crisis or a REO wave. Further, think of a foreclosure crisis as a death by a thousand cuts. No one cut caused the system to crash and as such, I’m not going to know or even be able to cover every single slash but, in my opinion, here are some pretty deep issues that we need to resolve, if we have the courage to do so. None the less, if these issues aren’t addressed, I do foresee a foreclosure crisis by early fall and I also see a 10-15 year cycle that we may want to start referring to as the REO tide.
As a young adult, I was told by family and friends to always have at least 6 months of savings to rely on in case of an emergency. Of course, I dismissed the advice because to adhere to it, meant I was going to have to sacrifice my lifestyle and I just wasn’t going to do that. As I got older and wiser, the wisdom of such advice started to ring true and by the Great Recession of 2008, I was thankful and appreciative that I had savings to fall back on. Unfortunately, many of America’s companies either haven’t heard of such sound wisdom or like my younger self, have chosen to simply ignore it. None the less, during this pandemic, most business is closed as America is ordered to stay at home and social distance from one another to flatten the curve. As a result, many businesses are facing a real possibility of not ever being able to open back up as bankruptcy looms. Of course, hearing that huge companies like airlines or hotel chains and restaurant conglomerates can’t financially recover from a 30-60 day shut down seems off and poorly managed but, none the less, here we are. Granted, it’s not just the huge, too big to fail companies that are facing financial devastation but, the driver of the American economy, the small business owner isn’t in any better shape. Regardless of your feelings on the matter, when companies shut down and cash registers stop ringing, job loss should be expected.
In the past 3 weeks, our nation has lost a little over 16 million jobs. This is historically unprecedented. At no time in our nation’s history have we ever seen such unemployment at this scale. To give you some perspective, at the height of the Great Recession, the unemployment number was 10% in October of 2009. That equated to about 15 million jobless. It took us about a year to get to that point. Right now, here we are at a little over 16 million jobless in three weeks. Couple this with the fact that nearly 70% of Americans have less than $1,000.00 stashed away in 2019 according to GoBankRates.com. Nearly 53% of Americans surveyed said they didn’t have enough money to pay their bills like; Mortgage, Rent, Car, Insurance or Utilities, if they were unemployed for a month or more. If I haven’t sent cold chills up your spine yet, stop and think about this. That’s potentially 16 million people who are going to tell their mortgage lender, their landlord, their car note holder, they can’t pay in May. Folks, that is going to hit our financial system like nothing, and I mean like nothing we have ever witnessed before in America.
Of course, the federal government is stepping in, doing what it can, lowering rates, providing stimulus packages, extending tax deadlines but, at the end of the day, this is like putting a 3-inch band aid on a 1-foot wound. The only thing that will turn this around is getting people back to work. How long that may take well, that doesn’t seem to be so clear. This uncertainty is what fuels speculation about the future of REO and what we should plan for in 3-6 months. Is their going to be a wave of foreclosures? Do we need to start getting ready now? Truth is, too many wild cards in the scenario to accurately and meaningfully predict one way or another, however, let’s go with what we know.
First off, towards the end of the Great Recession, say around 2011, banks and lenders figured out that selling property in REO just wasn’t good enough. This was partly because we were coming into Presidential election cycle where Barack Obama was pushing a home preservation platform. To appear cooperative and accommodating, these financial institutions, started using alternative disposition channels which included everything from auction sites to property management. By doing it this way, they were able to quickly move these NPA’s (Non-Performing Assets) off their books without appearing as if they were kicking people out their homes. These alternative channels became so prevalent that the rumored 2nd wave or REO tsunami never really materialized. If you were anyone in the business back then, you would attend industry insider parties or go to round table discussion and hear everyone talking about and even preparing for the REO tsunami…..which was more like a children’s wadding pool. For the most part, the front line REO agent just didn’t see that these lenders were more concerned about complying with politicians for political favor and in return, getting those nice bailout packages vs. getting these properties sold and looking even worse to the general public. Just between us, I strongly and emphatically suspect, that will be very true this go around since we have a Presidential election just a few months out. My larger point here is, if you are coming up with predictions and not considering the political ambitions of the political elite during a Presidential election year where so much is at stake, your prediction is worthless. Everything from alternative distribution channels to home preservation mandates to direct financial stimulus is going to ensure a REO tsunami doesn’t gain momentum.
I’m 100% confident REO will come back. Just the sheer amount of job loss so far has driven that coffin nail deep and I just don’t see any way to prevent it however, it will not be a tsunami, it will not be a 2nd REO golden age. I don’t think you will see REO power agents closing 350 deals a year like we did during the Great Recession. Maybe more like 75-150. Now, don’t get me wrong, that’s still a sizeable number of foreclosures and for any wide eyed bushy tailed agent who wants to make a name for themselves in this niche, that’s 75-150 worth pursuing. I’m just a little more pessimistic in my REO predictions because, I can’t forget the incredible impact alternative disposition channels had on REO and more importantly, the impact an election cycle had on the industry as a whole. At the end of the day, no politician, or any other, wants voters going to the ballot box with a fresh eviction from a government mandated quarantine on their minds. I just don’t see how that scenario turns out well for any incumbent.
With all that being said, let me just also say, I do believe the one truth in all this is that change is constant and inevitable. We don’t know exactly how many people have Covid-19, so far we haven’t accurately predicted deaths, we don’t know what putting this country back to work will look like, we don’t know what sort of economic impact 16 (+) million people not paying that mortgage on May 1st looks like….we just don’t. We don’t yet understand the impact of bank reserves being depleted or long-term consumer hoarding really does to our economy. I can’t foresee any potential natural disaster or if some rogue country decides to get ignorant during this time and decide to let a few missiles fly. I’m not sure what happens if suddenly, our power grid is hacked or if the banking system gets held hostage by a hostile foreign country. I’m going to end this blog as I began it. Yes, this feels like Wonderland and yes, I’ve been here before. The situation may have changed but, the scenery is the same. Like any good agent, I’m preparing for an influx of REO and yes, I think it begins now, with increased BPO orders. I think REOs will begin with the major banks in 3-5 months and the smaller banks in 4-9 months. Reading the tea leaves, I think REO hit’s its stride in 7-15 months…..but, it will not be like 2008, in many more ways than one.