EP71: Inflations Effects on Your Mortgage Note Business

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In this episode, we talk about how inflation can effect your mortgage note business. When reading a recent newsletter by Marco Bario, the question of inflation and the effects it has on your note business became more apparent. 

In this video Rick breaks down his take on the article as well as adding in how he thinks you can counter inflation in your note business. 

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Transcript

ep71-inflations-effects-on-your-mortgage-note-business 
 

Rick Allen: [00:00:00] Coming to you from sunny Orlando, Florida. Welcome to the paper stack podcast, where we cover current topics in the note industry, give you tactics for your note business and talk with industry leaders to make you a better note investor. And now your hosts, Brett Berkey and Rick Allen.  

Brett Burky: Hello, and welcome to another episode of the paper sack podcast. 

Brett Burky: I am Brett Berkey. And this is Rick Allen.  

Rick Allen: Sponsored by Coke. Sponsored by Coke.  

Brett Burky: Actually, this is one sponsored by DME still. What are you talking about? I know.  

Rick Allen: DME. We're gonna be there. It's coming up. Wow, we got, what, two weeks? Yeah. The 10th and 11th?  

Brett Burky: Oh, wow. Yeah. Yeah, that's gonna be cool. If you haven't yet got your ticket, You better hurry. 

Rick Allen: You better hurry. You better hurry and get your ticket. And you better book the room. Yeah. It's at the Hilton St.  

Brett Burky: Pete. It's gonna be nice. It's gonna be nice. The weather's kind of shaping up to look good. I mean at least now around here I like to be outside during the day when I get home, [00:01:00] but so today's topic is something that's on the top of a lot of people's mind and it's something that makes a lot of sense in terms of How inflation actually affects your note business and when you're collecting, payments as it affects your yields. 

Brett Burky: What as a note investor, what do you have to, why is it important? What are the strategies for it? How do you mitigate anything? Can you work around it to go against it? Because I'm talking to my brother who's a financial advisor for Fidelity. I'm like I have a, an account where I just put money to just stay there to where I'm wanting to do a big purchase. 

Brett Burky: I'm like, look, man there's a lot of money I should be earning interest on this. And I was like, but I don't, what can I put it in to at least make something that's super safe? And so he put me to something and it was like at 6%, I'm like I'm still losing. He's bro, he's I'm sorry. He's this is the highest it's been in 40 years. 

Brett Burky: He's you're not going to find something that's going to, if you want something safe, that's going to. Beat current inflation. So I'm like that sucks, so so like I'm just like [00:02:00] looking at him So how does that affect everyone's note business? How does it affect everyone's note business  

Rick Allen: Rick? 
 

Rick Allen: That's a good question. It's a topic I'll start with something that was written by Marco Barrio. He has a newsletter porch swing funding It was it's really, a really good publication. Just it's free. Get on there. Listen to it He puts out some good content. And so just a little shout out there to Marco but what he talks about is You know, just a 7% inflation right now and he's and the nature of owning owner finance notes And how if it's if there's 7% inflation then year over year you're starting to lose buying power which is big. 

Rick Allen: So we'll just use the round numbers that he talks about It's look if you have a note that's paying 1, 000 a month, and that's what you're collecting. We'll just use it, say that you're collecting 1, 000 a month, and then your payment is eroded because of 7% inflation. In five years, if that were to continue your 1, 000 would really only be able to buy [00:03:00] 695. 

Rick Allen: That's crazy. Just think about that. It's a huge... It's huge, right? If you're, if you know what 100 could buy you at the grocery store one year can buy you 93 the next year. And so that you translate that into the note space. If it's 1, 000 payment after five years, you can buy 695. 

Rick Allen: If it were to continue in 10 years, be 483. 

Rick Allen: 15 years, 336, and in 20 years, 234. Obviously, we're not looking down the barrel, I don't even have a crystal ball to tell you we're not looking down the barrel of 20 years of 7% inflation. That just doesn't happen. No. But it's one of those things where it's a real, it's a real issue. 

Rick Allen: So if you have a 30 year note, the buying power on that note, by the time it matures, is just, it's getting wiped out. So he suggests doing a couple things. One is if you're buying or you're originating a loan, [00:04:00] target that 10 to 15 year note, right? Because you can hedge yourself against the... That's smart. 

Rick Allen: Hedge yourself against the 30 year note, the long payoff, get your money in quicker. And if it's a 10 year note, then you'll never see the 20th year of inflation.  

Brett Burky: Yeah, let me ask you a question with all the notes you've bought, do you ever... Are you ever playing the 30 year note game?  

Rick Allen: No, I don't play the 30 year note game. 

Rick Allen: I might originate them for 30, but I can turn around and sell them.  

Brett Burky: That's why, yes, that's the one thing I was curious about. Some people do refis. People, I'm trying to do a refi right now to get a first, like a, the heat lock thing. And so it's  

Rick Allen: they do refis. So you can look at it a couple different ways, you can do, there's maybe a larger opportunity for a partial if it's over a 30 year less of the principles being paid down, you can sell off more of the interest. There's different ways to skin the cat. You can slice, slice pie different ways. 

Rick Allen: Not one way is right. Not when one way is [00:05:00] wrong. Typically shorter term notes sell. Right a little easier, but there's a different things out there. I think there's another side of the equation to look at when it comes to the owner financed world and What's going on with notes or what's going on with inflation and that's looking How does that affect your borrowers right because I mean We're seeing just, I'm going to look at, this is a Forbes article right here. 

Rick Allen: It was like seven and a half percent inflation, which is huge. If you strip out the, they said the volatile food and energy prices it brings a 12 month down to 6%, but hey, I think the food and the energy is all part of it, right?  

Brett Burky: Those are two important without that. 

Rick Allen: It's two huge, it's two huge pieces of the puzzle. Just some of the numbers that kind of stuck out to me that we'll look at is let's see here. Energy prices are up 27%. 27%. That's [00:06:00] huge. They're 40%, the gasoline prices are 40% higher. 

Brett Burky: Yeah, it says something to be able to work from home, it's a kind of a gift, sometimes to be able to not have to do I know you do a ton of driving. I do a ton of driving.  

Rick Allen: So use cars. They're up 41% the price of food is up 7% the price of shelter costs is up 4. 4% over the same period. 

Rick Allen: So what does that all mean? What it means is if you have like your There's a bunch of inflation and people can argue why. Personally, I think if you put in trillions and trillions of dollars into the economy, it costs more money to buy the same thing because there's more money available. 

Rick Allen: It People  

Brett Burky: are, bullish on crypto. Yeah. And hard assets because of that exact reason, you  

Rick Allen: borrowers?  

Brett Burky: It means it's going to be harder for them to hopefully make the payments. They're going to be a little bit tighter because people are getting  

Rick Allen: the pinch, right? [00:07:00] So if you originated something and you push them to their limit on where they're at and now there's 7% inflation and the cost of a car is 41% higher. 

Rick Allen: And the cost of energy to heat and cool your place is 27% higher. And the cost of food is 7% and gas is 27%. Or 40% higher than it was last year, all of a sudden, that's a lot of inflation, and it's coming in from a bunch of different spots. It's not just coming in at the gas pump. It's not just coming in for food. 

Rick Allen: It's coming in for everything. And what that does is That raises that, that puts the pinch on people. And so you're going to run into some, you're going to run into an issue to where not only were people not making their payments necessarily during COVID because of moratoriums, but now to get back on their feet. 

Rick Allen: Now there's the pinch there. And as the note holder you're looking at the what do I do? Do I [00:08:00] lower their payment into a reasonable spot? Because once you lower somebody's payment into a Sort of something they can afford and maybe the economy corrects itself. Now you're your notes undervalued, right? 

Rick Allen: And what I think you're gonna see is a lot of people are looking at it and saying I'm just gonna take the house back. Why would they say that?  

Brett Burky: Because real estate's up. Real  

Rick Allen: estate values are way up. Yeah, and so now you've got a situation where you have people who potentially own notes who are not necessarily As motivated to work with individuals because they can get the real estate back and they can make a large return on their money by taking back the real estate. 

Brett Burky: Why wouldn't the borrower, if the borrower is actually making payments, just refi and get the cash out?  

Rick Allen: So they do what's called quantitative restricting, which makes it more difficult to get financing. But let's even look at a more basic level is why? Why was that borrower owner financed in the first place? 

Rick Allen: What's the [00:09:00] reason they usually have? They're not bankable. They couldn't go get a loan elsewhere or else they would have. Right now. I've had times when there was a guy who, he had a 40, 000 owner financed loan. And he just wrote a check and paid it off. He was a he owned a concrete block business laying concrete blocks for houses. 

Rick Allen: Yeah. And so for him, he was like, I just didn't feel like going to the bank. I knew I was going to fix it up and eventually just pay it off. So it was just easier to go ahead and do the owner financed loan at 8%. He's I really wasn't concerned about it. And he just wrote a check for it. Nice. That's not the norm though. 

Rick Allen: The norm is the people that are, that you have in your property or that you've owner financed a loan to, they couldn't get financing from a bank either because they're not bankable or the bank doesn't want to lend on that house, some banks won't lend on lower price band assets. It's just, it's not profitable for them. 

Rick Allen: They're just not going to do it, regardless of what the media tells you that they're, it's just, there's not financing for those lower price band assets. That's interesting. So you run [00:10:00] into situations where you could have this, this cataclysmic storm of inflation causing people not to be able to make payments, real estate going up. 

Rick Allen: So borrowers, so lenders not wanting to work with the borrowers. Wow. And now you're going to have people being foreclosed on. From what we hear, there's a huge amount of NPL coming already.  

Brett Burky: Yeah, that was something, there's some  

Rick Allen: conferences. We were at the NBA yesterday, the Mortgage Bankers Association conference for servicing NPL. 

Brett Burky: Yeah, it was a default default servicing, here in Orlando, sunny Orlando. You want to hear it from the source. The servicing companies are the people who are collecting payments or not collecting the payments. So they have some inside track on this stuff. And so  

Rick Allen: people we talked to basically said, look, come the fall of this year, I think it was a hundred and ninety eight billion hundred and sixty eight hundred and sixty eight billion billion just coming right now. 

Brett Burky: It's still the [00:11:00] more times are ending and it needs to work its way through the system. There's got to be that whole offloading and all that. And that, I was like why is it taking so long? It just takes a long time. So last year there was  

Rick Allen: just for some context, there was about seven hundred and seventy eight billion dollars traded over the whole year. 

Rick Allen: And that was a majority of performing loans, right? I expect this year and really the next 12 months that we could see trading top 1 trillion. Get up to a trillion dollars in trades coming through in the secondary market. That's huge opportunity. The people I know right now, I see people changing gears right now, moving their funds, getting ready for this fall. 

Rick Allen: There's going to be a lot of NPLs  

Brett Burky: available. Yeah, we've already seen it. We've got some people giving us assets and saying, Load them all! And it's you're going to be overloaded and you're going to, It's going to be not a good experience for our users. There's  

Rick Allen: 1, 200, 1, 200 NPLs in all of them. 

Rick Allen: We could sell them all right  

Brett Burky: now. They're [00:12:00] pretty hot, it's also, it's going to take some finesse to get through it because, we have a lot of users and we already hit over 10, 000. So yeah, hitting over 10, 000 users. So when someone uploads stuff like that, I'm on their team cause I helped set it up for them. 

Brett Burky: And the inbox looks like a mess. It's just it's over, it's overwhelmed. And for one person trying to handle that. It's going to be, it's probably going to be a lot better than what happened like in, say, 2008, where there were piles of stacks of papers and stuff trying to work through stuff because at least we have a system for people and that's why we're, developing the enterprise is to meet this need that's coming, but it's going to still be interesting. 

Brett Burky: Maybe messy, but interesting. So that's, that's the whole inflation thing is definitely something that has been on my line, especially cause I'm looking for a car. I was a, yeah. I wouldn't say I was uninformed, I, at the time, when COVID was going on, I had a car, I was making a car payment. I was like, Rick loves it, because now I get to ride with him everywhere. 

Rick Allen: It's like having a [00:13:00] fourth child. Yeah, he even cleaned my car one day. I  

Brett Burky: did. I drove his car back from the airport. Because he went hunting. And I was like, I'm going to do Rick a favor. And so I just detailed the crap out of it. It was a good job. Yeah, it was pretty clean. But I, got rid of the car during COVID. 

Brett Burky: I was like, the guy's you don't want to buy another one? I was like, I don't go anywhere. What do I need another car for? I was like, I don't need the insurance. He's it's just, and so I was like, yeah, I'll get one when I, things get back going again. So I went to Google. 

Brett Burky: I was like, oh my gosh. And the prices, I'm now at the point where I'm like. It's only gonna get worse. I'm I have to bite the bullet. I'm gonna have to pay 40% over I don't want to I was trying to be, cheap and find a good deal and I'm like, you know this is a seller's market. I'm gonna have to just take it So what which sucks but how many other people are going through those same situations? 

Brett Burky: And then yeah as things get going and keep going. How bad can it get? So that's the that's a scary  

Rick Allen: part for me. It can get bad. And so you look at that there's [00:14:00] Overall 7% inflation, like the wages are not keeping up. Wages are not keeping up, no. So you just, it's curious when you start. 

Rick Allen: If you start thinking about who does this really affect when there's the inflation, it's just, it's widening the  

Brett Burky: gap. Yeah, which is very  

Rick Allen: sad. It does, it widens the gap, because at the end of the day, there's some times when you just don't even look at the price that you're paying for gas. You notice it, but you're like, whatever. 

Rick Allen: The difference of costing 15 or 20 more to some people is, it doesn't matter. It doesn't matter.  

Brett Burky: The person that's only got, the 10 to put in their gas tank.  

Rick Allen: Yeah, that's huge. But it's look, I've got 10 and now my 10 is getting me, two gallons. Yeah, it's not getting you much. 

Rick Allen: I don't know. There's a lot. There's a lot to digest there, but it is. It's one of those things where, inflation is a real thing. So it's going to affect your note business. The [00:15:00] question is, what can you do? To work around it. What can you do to capitalize on it? Because at the end of the day, as sad as it is, whenever there's, when there's blood in the streets, there's huge opportunity. 

Rick Allen: That's when the money's made, right? You go look at anybody who is making the real like huge capital gains on, over the past, we'll say decade. Look at like invitation homes, people who were getting their money at 2% or 1% or whatever and buying these rentals and just sat on them. 

Brett Burky: The obvious one is the fourth arm of the government pretty much is BlackRock. They're buying up everything and they're going to turn everything into rentals, not allowing people to have home ownership. I think it's terrible what they're doing, but yeah, that's my personal opinion. 

Brett Burky: I think, they're going to keep people as renters forever. It's That's bad. But they came in at the time when everything was distressed. So cheap. And they just bought everything up. So what can you do? What can you do with  

Rick Allen: that? You gotta look at it and find out where's your opp Where are the opportunities [00:16:00] gonna lie? 

Rick Allen: There's gonna be huge opportunities, right? In the non performing space. I think that'll be a huge opportunity for people to deploy capital into buying non performing loans. And either taking them, turning them into REOs. 

Rick Allen: And I think what you're probably going to see is people keeping those REOs. More and more people are going to keep those REOs, figure out how to recapitalize them. Recapitalize their account and try to hold those REOs.  

Brett Burky: If you're holding the REO, you're not making any money while you're holding the  

Rick Allen: REO. 
 

Rick Allen: No, but if you turn them into rentals or you turn them into things like that, and start focusing on your cashflow, I think you could potentially see people making that play. and trying to run a similar play as to what the Black Rocks were doing and stuff like that. Recapitalization is going to be a huge factor. 

Rick Allen: If you've got a large portfolio of performing loans, selling partials to recapitalize to start acquiring some of the non performing loans is going to be a big play that people are going to want to do. That's,  

Brett Burky: yeah, that's actually [00:17:00] very interesting because it is, they might not, their other capital could be deployed at this moment and they might not have it. 

Brett Burky: If  
 

Rick Allen: you don't have capital and you've got a large portfolio of performing loans, figuring out how am I going to get more capital to take advantage of the non performing loans? By selling partials. By selling  

Brett Burky: partials. The good thing is we have a list of people who over the years we've been doing this have asked, Hey, do you guys have partials? 

Brett Burky: Because we were going to. Do partials and then we didn't so it's still a nice size list of people that are interested in partials. So if you as a note seller are listening to this and Want to recapitalize, just reach out to me. The way it's done on the site is a little bit different. We've done it and they get to the part where you have to use the fee method. 

Brett Burky: So they get to the fee method and then we let you guys go on your own merry way and do the, because that's the part that... Has to go offline because it's just so particular and whatever, but we have that list. And so if you are looking for that, we can help out. Yeah.  

Rick Allen: So huge opportunity, huge opportunities  

Brett Burky: there. 
 

Brett Burky: We'll see what happens. It's, currently February 2022, it [00:18:00] was just a Tuesday of February 22nd. Oh, two. Yeah. That was weird. That was freaky.  

Rick Allen: 2 0 22.  

Brett Burky: Yeah. Yeah. That's never gonna happen again. And it was a Tuesday. It was a Tuesday. It was a Tuesday. It  

Rick Allen: was just weird. So yeah, my kids were, they jumped in the car and they were just ready to tell me this when they got home from school. 

Rick Allen: That's how I heard it. And I I had noticed it when I was doing the date. I'm like, huh, it's a lot of twos, right? But then they got in the car and they told me. So that was really  

Brett Burky: good. So that was cool. So that's what we're at about that port. We're in that next Thursday, right afterwards, so the 24th. 

Brett Burky: So we'll see what happens. We'd actually like to hear what you guys think. We're not. Experts  

Rick Allen: on inflation. Yeah, leave a comment below. Definitely. Let's open up a lot some conversations and dialogue I'm interested to hear your thoughts on the inflation. What is it gonna do to your no business? 

Rick Allen: What is what are the opportunities? Coming down there. Do you think we're full of crap and don't know what we're talking about? That could  

Brett Burky: be. Let's hope so. Because if it, I'd like it to stay either here or go backwards, that'd be nice. I wouldn't want it to stay here. But I, no more is what I want. 

Brett Burky: Don't go higher. You know [00:19:00] what I mean? Yeah.  

Rick Allen: That's something that's there. I don't know, we'll see. If you're not subscribed, please subscribe. Click that button.  

Brett Burky: Yeah, we had a contest, which we were going to get to first. And user base or YouTube subscriber subscribers have a money  

Rick Allen: to subscribers and close, but we had we did do a new integration with note school that, they're onboarding some of their students to our platform to buy and sell loans. 

Rick Allen: So it's going to be a good thing. So that thing pushed up the user base, user registration to cross the 10, 000 mark. It was close. It was really, I, we're in a, I thought it was a pretty good 9, 9,  

Brett Burky: 9, 984 or five. I don't know. I was really pushing for it. I almost wanted to hit the button on advertise to push for subscriptions, but  

Rick Allen: I can't buy it. 

Rick Allen: Which doesn't make sense because we buy  

Brett Burky: users. I know. It was just one of those weird things, but that's it. But yeah, we'll talk to you in the next one, so see you around the internets.