Banks Trading Billions Of Dollars In New Discounted Distressed Mortgage Notes

Sep 10, 2020

The big banks have been trading new multi-billion dollar pools of distressed mortgage notes at discounts for huge profits. What’s happening now, and what does it mean for other real estate and mortgage debt investors?

Windfall Profits

Major banks are enjoying another huge windfall in profits. Did they just get the lucky lottery ticket? Is this just a smart response to a disruptive year? Or is it the result of another epic market manipulation?

Most importantly, what does it mean for other investors, and you?

According to Bloomberg, banks like US Bancorp and Wells Fargo are trading pools of mortgage debt as big as almost $20B. All at discounts. As well as potentially having those principal and interest payments guaranteed by the government, even if the loan is 90 days or more in default.

A former Ginnie Mae President now at the Milken Institute says the play is “almost pure profit.” Each of these transactions can put billions into their bottom line.

The Wells Fargo Issue

Where are all these defaulting and non-performing loans coming from?

COVID-19 and its shutdowns, restrictions and other side effects may have certainly put some borrowers in tough financial situations. Foreclosure moratoriums  have held back a flood of foreclosures and evictions so far, but both renters and mortgage borrowers have been struggling. Other data sets show 30% or more of them are having trouble making payments. 

Then there is another issue. One which by now no one should be surprised Wells Fargo may be in the middle of. The bank notorious for a string of fraud and bad practices and settlements going back more than a decade, was recently in the news for forcing mortgage borrowers into forbearance programs. It has reportedly thrown many of its home loan borrowers into forbearance programs without their permission, won’t take their payments, and won’t remove them from the program. This is an ongoing investigation.

Many wondered what all the fuss was about. Why did borrowers care so much? Why would the bank do this? Is it just another technical glitch or something else? It turns out that defaulting loans and loans in forbearance might have some benefit to big organizations. They may qualify for financial help or be able to trade loans at discounts and make additional profits.

The Outcome

While mass market manipulation that controls national home prices and forces people to lose their homes and nest eggs is definitely not a good thing. It seems a little unfair to then make huge profits on causing that, and then selling them back the properties for more and with new loan fees when the market magically bounces back. 

However, all conspiracy theories aside, the bottom line is that there appear to be billions and tens of billions of dollars of distressed mortgage loans coming down the pipe for investors. 

This is great for real estate investors and mortgage note investors who have been looking for more inventory at the right prices. Of course to get them is going to require having the right connections to tap into these pools.

There is a great opportunity to share in the profits. More importantly, there is an opportunity to step in and help hurting borrowers, home owners and families who may be being taken advantage of by other lenders and servicers. You can have a valuable impact on their lives, and be well compensated for serving them. 

As far as the outlook for note investors, if the economy goes down, there will be more assets to buy, leasing opportunities, and buyers investing in notes versus stocks. If the economy goes up they’ll enjoy growing equity, performance, and chances to resell notes for profits.

Investment Opportunities

Find out more about investing in secured debt and real estate, go to NNG Capital Fund

Image by Csaba Nagy from Pixabay