Examining three states with the highest foreclosure rates will help you assess risk and strengthen your lending portfolio.
Tracking residential foreclosure data is vital for understanding both the health of the housing market and its impact on the broader U.S. economy. This is somewhat common knowledge to those in private lending. We're all too familiar with the cascading effect of an increase in foreclosures: potentially lowers property values in surrounding areas, reduces consumer spending power, and impacts the stability of financial institutions.
But, how can we break aggregated national statistics down into data that matters
for the individual parties involved?
It's great to know what the industry is doing across the country, but what
activity is occurring in your backyard?
In this article, we take a deeper dive into foreclosure data to uncover valuable insights and offer suggestions on how you can apply this information at a granular level to assess risk and strengthen your lending portfolio.
TRACKING NEGATIVE REMARK BORROWERS
According to ATTOM's Year-End 2023 U.S. Foreclosure Market Report report, 2023 foreclosures were up 10% from 2022. This data is useful for describing the current state of the overall market, but is the same true for the private lending space? As a lender, can you protect against borrowers who are more likely to experience foreclosure? Or perhaps as a buyer, is this something you can monitor to find good value?
Forecasa spoke with several private lenders and learned that most do not file anything with the credit bureaus when deals go to foreclosure. Because of this, typical borrower background checks will not return any foreclosures/negative remarks from previous lenders. Additionally, as it relates to foreclosures, it's difficult to judge a lender because so many loans are traded on the secondary market When loans get traded, the note buyer is the entity that files the negative remark, not lenders. The originating entity may or may not ever become aware of the non-performing loan. This is cause for concern for lenders because they may continue to fund deals to borrowers without knowing the risks.
To create more transparency and mitigate risk proactively, Forecasa has started tracking these borrowers so originators can identify risk both in their current portfolio and with future prospects. Forecasa has identified more than 1,500 companies within the private lending space as "negative remark borrowers." These entities include both companies and individuals who have a publicly recorded negative remark transaction. Every state has its own process and document types to record negative remarks, of which we include any of the following:
>) Lis pendens (A public filing of a pending lawsuit or claim attached to a property; since it is the first step of a foreclosure, it is
a leading indicator of foreclosures to come.)
>) Foreclosure
>) Judgment
>) Notice of trustee sale
>) Notice of default
>) Affidavit
To avoid "noisy" negative remark filings across a broad range of public records, Forecasa is only focused on negative remarks filed by private lenders or private loan buyers. As Forecasa identified these borrowers, our team noticed several instances where unique lenders or loan buyers had filed multiple negative remarks against the same borrower. In fact, 46% of borrowers with negative remarks have received at least two negative remarks in the last two years. Identifying and monitoring these negative remark borrowers is crucial to avoiding them.
STATES WITH HIGHEST INCIDENCE OF NEGATIVE REMARK FILINGS
So where do we see this happening? In its "Q1 2024 U.S. Foreclosure Market Report," ATTOM highlighted the following three states as having three of the four highest foreclosure rates in first quarter 2024: New Jersey, Florida, and Illinois.
Table 1 provides a breakdown of each state filtered exclusively to private lending. Generally speaking, private lending and non-private lending move in the same direction, but often at different magnitudes. Across these three states, you can see the private lending markets experienced the same direction, but a larger magnitude change than their state's overall market change.
The private lending numbers shown represent lis pendens transactions where the plaintiff was a private lender or private loan buyer. As classified by Forecasa, a private lender is a mortgage originator offering short-term fix-to-flip/ bridge loans, 30-year DSCR loans (30-year rental loans), ground- up construe ion, and/or multifamily loans to residential investors. Although conventional lenders may offer these products, Forecasa reviews the underlying transactions to ensure the lenders being tagged as private lenders are truly private lenders. After identifying the private lenders Forecasa can aggregate and analyze the data to create visibility into the private lending market.
Tables 2, 3 and 4 show a breakdown of private lending for each of the three states with the highest foreclosure rates.
USING NE6ATIVE REMARKS FOR RISK MANAGEMENT
So now what? The ability to track and monitor negative remark transactions is not merely a regulatory or procedural requirement It's a critical ,component of risk management and underwriting processes in the private lending space. When interviewed in an episode of the Lender Lounge podcast, Ryan Craft, CEO of Saluda Grade, said,"... the greatest risk in fix-and-flip lending i not the loan that you do it's the loan that you do not know about." Using these negative remark indicators allows lenders to proactively monitor their blind spots and identify risks before they manifest into financial losses.
Here are some key points for how lenders can effectively use these indicators on their own:
Integration into underwriting processes.. Lenders should incorporate negative remark checks into their standard underwriting procedures. By doing so) enders can gain a comprehensive view of a borrower's history that might not be visible through traditional credit reports.
Regional analysis. Given the variation in foreclosure activities across different states, as evidenced by the data from New Jersey, Florida, and Illinois, lenders should adjust their underwriting strategies based on regional risk profiles. This means not only looking at national trends but also drilling down into state-specific or even MSA-level data to tailor their risk assessment and mitigation strategies accordingly.
Continuous monitoring. The underwriting process should not be seen as a one-off activity at the point of loan origination.
Continuous monitoring of borrowers' financial behaviors and any new negative remark filings is essential. This ongoing vigilance helps lenders quickly respond to changes in the risk status of loans in their portfolio.
By adopting these practices, lenders can safeguard their assets and contribute to the overall health of the private lending market Understanding and reacting to the implications of negative remark transactions ensures that enders remain resilient in the face of potential downturns in the market,. thus maintaining their financial stability and supporting sustainable growth.
By Michael Fogliano and Sean Morgan
Private Lender, The Official Magazine of AAPL
Summer 2024, p. 16-22
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