There is a new lender playbook that is radically different than any other recession or depression in the past – a new financial data that is completely opposite of what has ever existed in the past. In fact, there are attitudes being expressed by lenders and by borrowers that have never existed before at the same time. On today’s show, Merrill Chandler takes a closer look at these paradoxes that exist right now in the financial world, especially involving lenders, as well as the importance of the lender-borrower partnership.
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If You Have A Good Lender, They’re Doing This…
I believe this is going to be an amazing episode. We’re talking about the paradoxes that exist in the country. The opposites are existing at the same time when they never have before. What do I mean by paradox? There are many strange things going on at the same time and they are opposite in nature. If they ever have occurred in our society before, at the same time, one usually precludes or excludes the other. We’re going to go through numerous versions of this because I want us to see that we’re living in strange times. There’s a new lender playbook out here that is radically different than any other recession, depression in the past. There are new financial data that are completely opposite of what’s ever existed in the past. In fact, attitudes being expressed by lenders and by borrowers that has never existed before.
That’s what we’re going to take a look at. Paradox by definition is where two seeming opposite variables exist at the same time, in the same space. Hot and cold. Can you be hot and cold simultaneously? If that were a condition to be hot and cold, that’s a paradox. Let’s take a look at how in the financial world. I’ve attended numerous and I have the details from a couple of online seminars that I’ve attended, where lenders are not throwing the baby out with the bathwater. I was in 2008, I had eight properties and there was a feeding frenzy to move to foreclosure the second you are 90 days late on a particular property. I had eight of them and we did our best to renter income and augmenting income.
The Foreclosure Crisis
I’ve shared with you before, in 2008, when the markets crashed, I had every penny invested foolishly in the market. When it crashed, I lost everything. I lost it all and I lost the income because we would harvest off the sale from different securities and equities that we had invested in. We were making our payments as highly leveraged and making my payments. The second week any one of our properties hit 90 days, a notice of default was mailed to us. Some of them were literally like the old town criers back in the day. There it was taped to our front door, a notice of default.
Many times I’ve told you in the past, Brad, my partner in this endeavor, we’ve been doing things together for a few years. This is because of the securitization of mortgages. There were lenders who were trying to foreclose a mortgage that they didn’t own the promissory note. We had 32 lawsuits against unlawful foreclosure. I did like I do now. It’s like I offered my tribe here. To all my readers, I’m all about connecting the dots. I’m all about looking behind the scenes, between the blinds and seeing where the truth of the matter is. In this case, we were doing these foreclosure events and there were tens of hundreds of thousands of people. The second they hit 90 days late, foreclosure proceedings began across the nation.
Here’s what happened. When you went through the foreclosure process and your property went to auction, it was awesome for real estate investors to go to the auction, buy a property, some undervalued and some not, then be able to fix, flip, and prepare it. Even the real estate investors were holding on to properties for a long time. Many times, they went back to the bank, meaning at the auction, nobody wanted to buy it. Generally speaking, the values had dropped so much. The sale price at auction was the amount of the first mortgage. In the foreclosure proceedings, let’s say a house was worth $300,000. There was a note on it, let’s say Citibank had a note on it for $180,000, and it went to foreclosure, went to auction. Citi said, “I want $180,000 because I want all of my money from this note if somebody is going to buy it. Otherwise, I’m going to keep it in my inventory.” It’s an important word for this conversation.
Some got sold off. Some real estate investors had a heyday, but the vast majority of properties went into bank inventory. Some of you have seen The Big Short. If you haven’t, I highly recommend it. It is an excellent general review of the foreclosure crisis. Here’s the problem. One of the scenes in this, which I beheld with my own eyes in the Salt Lake County area, there were entire new divisions that had been built. Borrowers had come in, engaged a loan, the credit specs were not necessarily super fastidious. If you could fog a mirror, you got a mortgage. There were entire subdivisions that were sold to borrowers who may not have qualified otherwise if they didn’t plug them here. Here’s what happened, after all these properties get foreclosed on, there are entire subdivisions that were completely empty. It showed some of these subdivisions in the movie, The Big Short.The salvation of our economy is the lender-borrower partnership where we are partners in this game, not adversaries. Click To Tweet
They were tumbleweeds rolling across the street, completely vacant. It took 5 to 7 years to reintegrate those properties into the markets again. For people to come out of recession, get reemployed, and be able to be in a position to purchase a home. There were new standards for purchasing a home. Fannie and Freddie went the full doc. You have to prove up now. Back in the day, it was almost similar to automatic underwriting, but there were no underwriters. It was like, “Let’s fill this out,” because they were selling these mortgages on the back end. Literal neighborhoods empty. Every time there are neighborhoods empty, there’s somebody not in a home, they would start becoming dilapidated. They would start eroding. The lawns would grow out of control.
The other thing is that part of our negotiations with these banks when we were doing foreclosure defense. The banks were saying, “We want them out of the house,” to say, “Why don’t we set up the rent.” Our argument was so that they could maintain the property because the property is only going to decrease in value. The land may stay the same value or grow over time. The value of the actual building, the house, the apartments for multifamily are going to become dilapidated, and it did. It was a scourge. There were many articles and things that were presented in the media of saying, “What a waste.”
Connecting The Dots
People are renting in apartments when there are entire subdivisions of homes that were available. The banks thought it better to grab these properties, hold them, and sell them later. That is all different now. The lenders, especially mortgage lenders, have a brand-new playbook from everything that I have been studying. Part of my genius, I’m only good at a few things but I’m brilliant at them, and that is connecting dots. Taking what appear to be random things from different industries, different markets, bringing them together, synthesizing what is the truth about a situation. That’s how we got to fundability optimization. I didn’t go to FICO school.
The whole point of this is in this dot connecting, I’ve been going to disparate seminars and training so that I can keep boning up on what’s going on out there in different industries. Yet I’m noticing some powerful things where I’m connecting these dots. One of them is that I attended a seminar for Mortgage Loan Servicing. What was interesting was that these mortgage servicers, remember there’s the originating entity, then there are the people who after they’ve been sold on the market, then there are professional servicers and mortgage servicers. They presented in this. There are three phases of deferments that servicers should be trained and prepared to execute three deferment processes.
One was a six-month forbearance agreement, which means you don’t make a mortgage payment and it’s a needs test. There is a needs test associated with it, but a six-month forbearance agreement. They do another. They explore options. They reinstate extend forbearance, do a repayment plan, deferral, loan mod, short sale, deed in lieu foreclosure, and foreclosure. They’ve got all these options, but the ones that extend through this entire time is what they’re offering. The sample timeline, there’s a 90-day foreclosure prohibition. No foreclosures are going to happen. They’ve pulled foreclosures off the table. There’s a six-month forbearance from the request offered by the lender.
How many of you were notified by your lender? If you need to take advantage of this, here are the rules of engagement, but many borrowers who wouldn’t have thought of it earlier. It was offered by the lender. The lender then from the forbearance request, there is a six-month period. They then reevaluate and explore the options. Some of these options are very short-lived especially the foreclosure deed, short sale. The ones that extend further in time, the preferential is the deferral or the loan modification. An additional six-month forbearance agreement is offered by the lender. This is unheard of. Forbearance back in 2008, you had this conversation with your lender and they would say no, but you brought it to the table. Now they’re offering these forbearance agreements and they’re doing them back-to-back. Finally, what the presenter presented was that after the second one, there is an opportunity for what was called a permanent forbearance.
Permanent forbearance is where there is a needs analysis for a borrower. It’s a minimum of quarterly basis, possibly even monthly, where until you are able to reengage and you’re looking for a job, you’re in a highly-employable industry, let’s pretend you’re a restaurant manager and restaurants are closed down by COVID, that may qualify. It’s completely out of your control and you have a job at the restaurant when it goes back. That’s what I mean by a needs test. It isn’t like, “I got laid off from a warehouse and I’m not going to go back to work because I have all of these benefits that are coming in. I get $600 a week extra, so I don’t need to go back to work.” There’s a needs evaluation.
What’s fascinating is that these lenders in this conference were talking about being able to provide forbearance until the recession/COVID isolation stuff retriggered growth in the economy. It’s unheard of. Now, the question is, “Why?” First of all, 5 to 7 years of fields of empty homes and the dilapidation, a degradation of the value of the property because those homes were empty, the lenders have learned from conferences that I’ve been attending. That was no man’s land. No lender wants to repeat that inventory of dilapidated properties. Even if they sold it at low prices to a real estate investor, that’s where we’re coming from. We want those properties. We want to be able to rehab the. We’re talking about fields of subdivisions, not just a fix and flip here and there.
They do not want empty homes for two reasons. One, the degradation of the value of the property and having somebody in there has the opportunity to keep up the place. The arguments we made back in 2009 and 2010 during the foreclosure. The suits that we were filing, they want to keep somebody in the home, who has a vested interest in the home, not a renter, but the owner of the property. Number two is they want to maintain positive and clear relationships with their customers. That’s also unheard of. Part of the paradox is, Brad in his research, part of our pivot is to completely look at all the big industries, credit card industries, the mortgage industries, the auto industries, and business lending industries. Every one of those is designed for us to continue our exploration and our research in what’s happening in all the ones that impact you and me.
The Lender-Borrower Partnership
It’s a panel of bankers. How do they pivot in this environment? Now, we’ve all had the impression that bankers don’t want to pivot. It’s like, “Give me my money. I’ll foreclose, I’ll repo, I’ll take my ship back and you go to hell. That is not the environment anywhere among lenders, both credit card, auto, mortgage as we’ve seen. They’re looking at what was the original cost of acquiring a customer. Their job as lenders is to minimize risk. Do you know what their new solutions are? To minimize risk, they’re waiving fees like late fees. Let’s say you owe $200 payment on your credit card but you’re struggling to make that payment. Right around the 15th, they charge you another $57 as a late fee. All these numbers are made up. Normally, what they would want to be able to write this off if it went to lose. Lenders are taking on a completely new framework. I’ve been preaching for years the salvation of our economy is a lender-borrower partnership where we are partners in this game, not adversaries. Preaching it from the heavens for nearly 25 years.
The credit card companies, many of them are waiving late fees and now we have big data to back this up. The big data says that if we don’t charge them more for being late especially in a needs test. We’re finding out that they didn’t just lose their job, but their job was pulled out from underneath them and that they have a job the second the economy turns around. We all had a job. There was only 3% unemployment. We all had a job. They’re saying risk management because it’s a risk of loss. If I don’t charge extra fees and if I’m willing to accept lower amounts against the principle and the interest, some are cessation, ceasing interest on overages.
In a previous episode, I said that the Consumer Financial Protection Bureau suspended the demands that the Fair Credit Reporting Act puts on lenders to report paid as agreed, if only if it’s paid as agreed. Some lenders are exploring and some are beta tests. They’re exploring it, but if you owe $200 and can afford $125, they will take it and still say paid as agreed in the reporting? It’s never heard of before. These are paradoxical times. Stay tuned with your lenders because it costs them dearly to get you as a customer. 99.9% of these lenders want to keep you as a customer.
The ability to mitigate, to lower their risk is based on how well they take care of you and set up needs assessments. They can find out who’s defrauding them, who’s faking it and who are the great people who can pay, have paid faithfully and just needs help from their partner. I’ve been preaching the gospel of partnership forever. I’ve been saying even in my book, “Somebody’s got to go first. Somebody’s got to seek to reconcile this relationship first.” In COVID, lenders are choosing you first. You better acknowledge it in some small ways or in massive ways, they’re choosing to partner with you. I’ve watched four different things on the FICO seminar series. Four seminar presentations that are sponsored by FICO were all about nurturing the client in these times.
How do we take care of them? How do we keep them in the fold, still protect our portfolio, and still protect our investments? They’re choosing in. I don’t want this to be a loss. To finish up on the mortgage, lenders do not want empty fields of homes. They don’t want inventory. They want you or buyers, the people that they originally approved. They want you in that home and then do needs tests to make sure that when the moment is possible, they can start getting paid. Some are testing being willing to take smaller payments without doing a loan modification because a loan modification ends up on a credit profile and they know that you become not fundable to some degree if you have a loan mod.
They’re all working out because this has been a massive machine. They’re putting a little sand in the gears, to figure out new ways. In fact, one of the things from Brad’s presentation is they’re saying everything is about this pivot. Everything is finding out, “How do we handle and mitigate loss? How do we lower our risk? How do we take care of our clients so that they stay with us?” Here’s what’s fascinating to me. We were all pivoting because of COVID and the prospects of a recession. Thirty-six million people have filed for unemployment. Do you realize that in 8 out of 10 markets, appreciation is still occurring for real estate while we have 36 million people filing for unemployment?
This is what I mean by two things existing at the same time that are opposite to each other, that don’t belong in the numbers. I would love to be on the inside. I need to get to an economic conference. I would love to attend an economic conference to find out how they’re doing the math, what dots they’re connecting because you don’t have 36 million people filing for unemployment, and have appreciation continue to grow. The economy is slowing in real estate, at least in numerous markets, is continuing to grow. Fascinating times that we live in. It’s not the zombie apocalypse I was anticipating. These lenders are choosing in and experimenting with different ways to do so, including giving us credit for less than full payment and thank paid as agreed without renegotiating or doing an entire loan modification. Be on the lookout for those.Stay tuned with your lenders because it costs them dearly to get you as a customer. Click To Tweet
Some of them are doing it behind the scenes. I’m attending industry seminars. They haven’t made any of this public. What you can count on from me is attending these insider conferences and finding out at least what they’re talking about. If you owe $5,000 and someone’s supposed to pay a payment of $200, there’s nothing gained by sending them to collections when it’s an external force and this is the math that the lenders are doing. If someone can stay paid as agreed since they suspended the Fair Credit Reporting Act, reporting rules, if someone could pay half of $200, three-quarters of $200, I don’t know where the cutoffs are. These are all experiments, all are whiteboard analyses so far. Imagine if paid as agreed is a partnership agreement like you do with a renter. When somebody walks in and says, “Can I pay you on the 10th because I get my bonus check?” You’re like, “That’s cool.” You’re a partnership. You’re figuring this out together.
Lenders on a nationwide basis, on an entire client basis, are looking at creating these exact types of relationships so that it’s more one-on-one where we can establish it. It’s freaking amazing. Deferment process, one deferral, the second deferral, and even in perpetuity deferral. In perpetuity doesn’t mean forever. It means that there’s not a timetable on it. There are multiple versions of risk and needs assessment with the borrower. These are parts of their risk management. They keep somebody who cares about the home. The children are in that neighborhood. They’re going to school. Your commute used to be X and now you’re looking for another job or your job is waiting for you the second the hotel opens back up. All of those are on the table.
Extended deferments and case-by-case, lower payment evaluations. Way back, when I went to FICO, I had that whole thing when I’m among the borrower side of the universe. Sometimes I can be one of the smartest men in the room. My commitment to you is to continue to be the dumbest man in all of these rooms. I’m here to learn what is in their heads, what is on their whiteboards, what is in their strategy sessions so that I can keep you updated on exactly what is happening. How we can continue to lean into their leaning in. This is about the partnership, it always has been. Now, we’ve been slapped across the face, both lenders and us, because now we need each other to be good partners with the other.
Another thing that happened because of COVID and sequestering, the shelter in place rules, there has been more people comfortable doing things from home. However, one of the things they’re working on risk mitigation is that when you were at home, your IP address at home or at work, all that stuff is a track when you’re communicating with a lender. It’s part of their fraud prevention. They want to know where you are what computer you’re using when you’re filing applications. That shelter in place may keep us home more but also, we may be doing things at other people’s homes.
I use it all the time, but going to Aunt Mable’s house, we’re taking care of Aunt Mable and we may do some of our financial work from Aunt Mable’s IP address. Lenders even have to open up. The bull’s eye is, you always do check your financial information and pay your online payments. Do all those things from one IP address at home. If that’s expanding, they have to figure out what’s not fraud because it’s a different IP address. All the big data, FICO leading the charge, they’re all working on collecting this data so they can process to see instead of being an approval or update, IP address as a bull’s eye. They now have to account for who’s who in a wider marketplace.
How many times did you work from home or you’re at home in the evenings, the weekends doing your finances or you’re at the office? The two IP addresses, 1 to 2 IP addresses may be the extent of us. Some people, I never leave. When we were in the office, everything we did, two IP addresses, all my lenders could count on those two IP addresses. They’re looking at ways in which to mitigate their risk. Lower their risk and protect their resources. I believe the language was, “A touchless white-glove experience.” While they’re tier two 80%, it could have been Capital One’s rep in this panel, because we’re all sequestered, a touchless white glove customer experience. Those words have not come out of the mouths of lenders before.
Living In A Paradox
The end game is that we are living in a paradox. We have many things going forward simultaneously that are opposites. I want to end on this note that the reason why some people have asked me, “Why are there two deferment periods, six months and then six months?” Everybody who’s beginning at the time that this is published, their bars are opening up, restaurants, some hotels, more and more people are traveling. There is a huge belief that it is too soon and that is going to create a new wave of COVID and that wave is going to increase. It’s like a double-dip heading down, right here, another dip. Be careful. Do as little as possible. Be conservative with your health and wellbeing of you, your families, and your loved ones.
I don’t want a double-dip. I’d rather take it now, get rid of it and move on. There are a lot of people who want to get out. There was a rally at the State Capitol Building in Utah and there was one poster that said, “Give me liberty or give me death” Hold on because we have no idea where this is going to end. There may be another wave. We need to be prepared with our finances, to take advantage when new opportunities arise. The most important message of all is that lenders have proven over and over through this entire thing is that they want to lean in. They do not want to lose you as their partner, as their customer.We need to be prepared with our finances. We need to be prepared to take advantage of new opportunities when they arise. Click To Tweet
They want to do everything that they can and are experimenting widely on how to nurture that relationship. In their words, how to give a touchless white glove customer experience to you through all of us and keep you loyal and wanting to be in a relationship with them. Lean in. Those are the words you always hear for me, always lean in and do the most you can. Don’t take advantage of a deferment if you don’t have to. Don’t take advantage of lower payments if you don’t have to. They’re coming to the table. You come to the table and say, “Thank you. That’s a generous offer and I can keep going.” I love talking to you about what’s going on. It’s fascinating to me. Be well and have a spectacular rest of your day.
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