How have notes fared during the downturn?

Question

Performance during a downturn has been a question mark in my mind for performing notes. 9-10% yield without volatility (like the markets) sounds nice but if even a fraction of the note portfolio goes non-performing then it darkens the whole picture, even makes buying stocks/bonds look like the better option again.

Is this a fair assessment? Has note performance been a concern recently? If I'm not thinking about risk during downturns the right way I would love feedback on what i'm missing. I do not want to get into the non-performing note business, I want a hands off option that still does better than an index fund.

Chris Seveney · Answer

@Sean D

I am doing a white paper on this and actually last year during covid my payments went up as I had more borrowers pay off

I saw very little percentage of notes request a covid forbearance (less than 5%) which without covid is around the average.

Bob E. · Answer

Ask yourself "Why would someone borrow money from me for 9-10% when banks are lending at 3-4%?".  The answer- because the banks won't lend to them.

This is basically sub prime lending.  If you are buying or creating notes with a 9-10% interest rate you are going to have some defaults over time.

That said you can make decent money at this.  Foreclosure is pretty easy.  My SD IRA had a not that stopped performing last fall when the borrower dies and his daughter decided to move in and live for free.  I sent an email to my servicer and they started FC.  I should get the property back in another 3 months or so.  This one will be easy for me because I have rentals in that market and a property manager that can get it rent ready / sale ready.  My estimate is that over the course of 6 months  I will spend less than two hours working this.

There are a few other risks with Notes, with the Fed handing out Trillions of dollars in "Free" money I expect there the be inflation.  In 1979 the inflation rate was 13.3% and in 1980 it was 12.5% and in 1981 it was 8.9%  Details.  In three years prices went up 34.7%  During those years the Fed Funds rate was 12%, 18%, and 12%, that will affect the value of your notes.

David Putz · Answer

@Sean D,  @Taylor L. Is correct.   We just spoke about this on our  FB Live that we were all expecting a large drop in our performing  notes and across the board less than a 2%, on average.

Chris Seveney · Answer

@Scott Matthew C.

No. Actually none of them in NOVA. Most of my notes are in the Midwest and southeast

We have approx 300 in our portfolio and have not had major issues with those which were performing. Yes some were impacted with covid but also had more borrowers refinance into lower rate loans since values have increased so are margins are actually up.

Taylor L. · Answer

All of the note guys I've talked with have done just fine. @Chris Seveney has an awesome note investing group on Facebook too, seems there's been plenty of activity.

Scott Matthew C. · Answer

@Chris Seveney

Thanks for the reply.

Scott Matthew C. · Answer

@Chris Seveney

Most of your notes in and around NOVA?

How have notes fared during the downturn?

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