Bad Loans Equal Good Investments for Investors

With home prices rising, big real estate investors have discovered another source of cheap property: bad mortgages. American Homes 4 Rent, the second-largest single-family landlord after Blackstone Group, are stepping up acquisitions of nonperforming loans, or NPLs, to expand their holdings of homes to operate as rental properties.  Hedge funds, private-equity firms, and real estate investment trusts, which have raised more than $20 billion to purchase rental homes, are buying mortgages as banks face new regulations that make it more expensive to hold soured loans. The Department of Housing and Urban Development is also auctioning loans to stem losses at the financially troubled Federal Housing Administration.  The shift to buying loans comes after the pace of foreclosures slowed and house prices jumped in Atlanta, Phoenix and other hard-hit markets where investors have made the most purchases. Average home prices in Phoenix have risen 44 percent since hitting bottom in September 2011.  Atlanta prices are up 37 percent since March 2012. Paying more for homes makes it harder for landlords to make money from rentals.

NPL acquisition strategies will continue to give access to properties for healthy markets nationwide.  Such companies bought 13,000 delinquent loans last year.  The large-scale loan purchases raise concern among housing advocates that residents may be displaced or transformed into renters of their former houses.  Modifying these loans to keep the homeowner in there, but it runs counter to  business models.  Companies shouldn’t be in the business of buying distressed loans for the purpose of foreclosing on people. Companies plan to give delinquent residents a chance to stay put as owners or renters.

The intent is to approach some of these folks where it just doesn’t look like they’re going to get caught up on their loans. The company can offer them the opportunities to stay in their homes and keep their kids in the same school.  Companies have paid $220 million for 1,736 nonperforming loans since 2012. That’s about $127,000 per distressed loan, compared with $140,000 per rental home.  It is estimated that 30 percent to 50 percent of the NPLs will end up as rentals for these companies. In other cases the borrowers will resume paying the loans after a modification, or the company will sell the homes because the location or quality doesn’t match its investment criteria.

Loans on homes subject to foreclosure filings in December were an average 920 days delinquent, up from 255 days late in January 2012, according to data.   Homes acquired through NPLs have often gone years without maintenance as the owners struggled to pay their debts, adding to renovation costs for investors who take them over.  These big companies are always going to take the outcome that’s most economically beneficial.