Aggressive Retirement Investing in Real Estate Lending

InsuranceNewsNet.com quoted me in Investors ‘Flocking In’ to Real Estate Lending. It reads, in part,

The stock market is off to a roaring start in 2018, but there’s no shortage of investment gurus who warn that continued equities growth is far from guaranteed.

The dreaded market correction could be coming sooner, rather than later, some say.

That gives some money managers pause about what asset tools to steer in and out of a client’s retirement portfolio. But there’s an emerging school of thought that one specific alternative investment could be good protection against a stock market correction.

“We’re seeing financial experts weigh in with their 2018 investing recommendations, citing everything from mutual funds to value stocks,” said Bobby Montagne, chief executive officer at Walnut Street Finance, a private lender.

But one prime retirement savings vehicle often gets overlooked — real estate lending, Montagne said.

Real estate lending means investing in a private loan fund managed by a private lender. Walnut Street is one such lender in the $56 billion home-flipping market.

“Your money helps finance individuals who purchase distressed properties, renovate them, and then quickly resell at a profit,” Montagne explained. “Investments are first-lien position and secured by real assets.”

With real estate lending, investors can put small percentages of their 401(k)s or IRAs in a larger pool of funds, which lenders then match with budding entrepreneurs working on home flipping projects, he said.

“It allows investors to diversify their portfolios without having to collect rent or renovate homes, as they would in hands-on real estate investing,” Montagne added.

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An Aggressive Investment

Some investment experts deem any investment associated with real estate flipping as a higher-risk play.

“Investing a percentage of a retirees funds in real estate flipping would be considered an aggressive investment,” said Sid Miramontes, founder and CEO of Irvine, Calif.-based Miramontes Capital, which has more than $250 million in assets under management.

Even though the investor would not directly manage the real estate project, he or she has to understand the risks involved in funding the project, material costs, project completion time, the current interest rate environment, where the properties are located geographically and the state of the economy, he said.

“I have had pre-retirees invest in these projects with significant returns, as well as clients that did not have experience and results were very poor,” he added. “The investor needs to realize the risks involved.”

A 1 percent to 5 percent allocation is appropriate, only if the investor met the aggressive investment criteria and understood the real estate market, Miramontes said.

Investment advisors and their clients should also be careful about grouping all real estate lending into one basket.

“You could invest in a mortgage REIT, which would be a more traditional vehicle to get exposure to real estate lending,” said David Reiss, professor of law at Brooklyn Law School in Brooklyn, N.Y. “If you’re doing something less traditional, research the fund’s track record, volatility, management, performance and expenses.

“You should be very careful about buying into a fund that does not check out on those fronts.”

Challenges for Modern Housing Markets

Professor Barnes

Professor Boyack

 

 

 

 

 

 

 

 

 

I will be speaking in a free American Bar Association webinar tomorrow, Challenges for Modern Housing Markets:

Our current housing system is not sustainable in terms of the market, residential tenure, cost stability, and neighborhood inequality. Our panelists will discuss some key areas in which housing must be stabilized in order to strengthen our economy and society. Our panelists will address ways to lessen the volatility of housing prices and home mortgage lending, the importance of and ways to improve stability of residency, ways to improve the sustainability of affordable housing, and recent lawsuits that have reframed the problem of distressed and inequitable communities.

The other speakers are

The program will be moderated by Professor Wilson R. Freyermuth, University of Missouri School of Law.

My remarks will be drawn in part from my work on the Federal Housing Administration.

The webinar is free and open to all.  It will take place Tuesday, December 12, 2017 at 12:30 p.m. Eastern/11:30 a.m. Central/9:30 a.m. Pacific.

Register for the webinar at http://ambar.org/ProfessorsCorner.

The webinar is sponsored by the ABA Real Property, Trust and Estate Law Section Legal Education and Uniform Laws Group. It is part of a series of webinars that features a panel of law professors who address topics of interest to practitioners of real estate and trusts/estates.

 

Minority Homeownership During the Great Recession

photo by Daniel X. O'Neil

Print by Andy Kane

Carlos Garriga et al. have posted The Homeownership Experience of Minorities During the Great Recession to SSRN. The paper concludes,

The Great Recession wiped out much of the homeownership gains attained during the housing boom. However, the homeownership experience was very different across racial and ethnic groups. Black and Hispanic borrowers experienced substantial repayment difficulties that ultimately led to a greater share of homes in foreclosure.

Given that home equity often represents a substantial share of household wealth, these foreclosure events severely damaged the balance sheets of minority families. The dynamics of delinquency and foreclosure functioned differently across the income distribution within racial and ethnic groups.

For the majority, higher income was associated with lower delinquency rates and fewer foreclosures as a group. However, for Hispanic families this relationship was surprisingly reversed. Hispanics with the highest incomes fared worse than those with the lowest incomes. This counterintuitive finding suggests how college-educated Hispanic families may have had worse wealth outcomes than their non-college-educated peers: Hispanic families with high income (potentially the result of high educational attainment) had a greater share of home equity lost in foreclosure than lower-income Hispanic families.

Logit regressions suggest that underwriting standards and loan structure explain a significant amount of the greater likelihood of foreclosure among Black and Hispanic borrowers. However, underwriting standards explained more of the gap for Black borrowers, while loan structure was a stronger factor among Hispanic borrowers. Regional concentration and variation in housing markets explained more of the Hispanic-White foreclosure gap than any other group. This is understandable given that Hispanic borrowers in our sample were heavily concentrated in housing markets that experienced some of the largest volatility. Despite accounting for these important factors, sizable gaps remain in foreclosures among Blacks and Hispanics relative to Whites. Incorporating measures of labor market outcomes into the analysis may offer further insights.

In sum, the homeownership experience during the Great Recession proved to be inimical for many families, but far more so for Black and Hispanic families. For these families, financially destructive foreclosure events delayed and potentially derailed the dream of homeownership. (164-65)

I am not sure what this all means for housing finance policy other than the obvious: consumer protection in the mortgage market is a good thing as it ensures that underwriting standards evaluate ability-to-repay and loan structures exclude abusive terms like teaser rates (thanks to the ATR and QM rules and the Consumer Financial Protection Bureau). There are probably other policies that we should consider to reduce the depths of our busts, but they do not seem likely to gain traction in the current political environment.

Mortgage Rates & Refis

TheStreet.com quoted me in Mortgage Rates Expected to Rise and Push Down Refinancing Levels. It reads, in part,

Mortgage rates will continue their upward climb in 2017 as the economy demonstrates additional growth and inflation, but this will of course dampen the enthusiasm for homeowners who have sought to refinance their mortgages up until early this year.

The levels of refinancing will definitely “take a hit relative to 2016,” said Greg McBride, chief financial analyst for Bankrate, a New York-based financial content company.”

A survey conducted by RateWatch found that 56.57% of the 400 financial institutions polled said it is unlikely mortgage rates will fall and unlikely there will be an increase in refinancing in 2017. RateWatch, a Fort Atkinson, Wis.-based premier banking data and analytics service owned by TheStreet, Inc., surveyed the majority of banks, credit unions, and other financial institutions in the U.S. between December 16 and December 29, 2016 on how the Donald Trump presidency will affect the banking industry. The survey found that 35.71% said an increase in refinancing levels is very unlikely, while 6.29% said such an increase is somewhat likely, 1.14% said one would be likely and 0.29% said it would be very likely.

Mortgage rates, which are tied to the 10-year Treasury note, are predicted to fluctuate between 4% to 4.5% in 2017 “with a brief trip below 4% in the event of a market sell-off or economic stumble,” McBride said.

The 4% threshold is critical for homeowners, because when mortgage rates fall below this benchmark level, more consumers are in a position to refinance “profitably,” which is why 2016 experienced a “surge in activity,” McBride said.

When rates rise about the 4% level, the number of homeowners who opt to refinance declines dramatically and “refinancing levels will be notably lower in 2017,” he said.

The mortgages in the 3% range gave many homeowners the opportunity to refinance last year, some for the second time, as many consumers also chose to refinance their mortgages during the 2013 to 2015 period.

As the economy expands and workers are experiencing pay increases, the number of home sales should also rise in 2017.

“People who are working and receiving a pay increase will buy a house whether mortgage rates are 4% or 4.5%,” McBride said. “They may buy a different house, but they will still buy a house.”

Refinancing activity is likely to continue ramping up in January rather than later in the year as the “recent dip in rates allows procrastinators to act before rates continue their movement up,” said Jonathan Smoke, chief economist for Realtor.com, a Santa Clara, Calif.-based real estate company. “As interest rates resume their ascent and get closer to 4.5% on the 30-year mortgage, the number of households who can benefit from refinancing will diminish. That’s why we expect lenders to shift their focus to the purchase market this year.”

Economic growth resulted in interest rates rising before the election and in its aftermath. The rates rose because of the expectation from the financial markets of expanding fiscal policies leading to additional growth and inflationary pressures, Smoke said.

Mortgage rates will continue to rise in 2017 as a result of more people being employed, and this economic backdrop will favor the buyer’s market instead of the refinancing market. Current data from the Mortgage Bankers Association already demonstrates that refinancing activity has declined compared to 2016 due to higher interest rates, Smoke said.

“Rates have eased a bit since the start of the year as evidence of a substantial shift in inflation remains limited and the financial markets oversold bonds in December,” he added.

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Borrowers should be concerned with increased interest rate volatility in 2017, said David Reiss, a professor at the Brooklyn Law School. The Trump administration has been sending out mixed signals, which may lead bond investors and lenders to change their outlook more frequently than in the past.

“Borrowers should focus on locking in attractive interest rates quickly and working closely with their lender to ensure that the loan closes before the interest rate lock expires,” he said. “While there is no clear consensus on why rates went lower after the new year, Trump has not set forth a clear plan as to how he will achieve those goals and Congress has not signaled that it is fully on board with them. This leaves investors less confident that Trump will make good on those positions, particularly in the short-term.”

Wednesday’s Academic Roundup

Wednesday’s Academic Roundup