a 3.5% mortgage rate for a new loan at 7%. Much to the Fed’s chagrin, this lack of inventory led to bidding wars on the few homes coming to market, causing home prices to begin to increase again. According to the National Association of Realtors, the median price of a home sold in June 2023 was only 0.9% lower than the median price at the peak of the market in June 2022. The FHFA reported that prices on homes pur- chased with loans backed by Fannie Mae and Freddie Mac were actually 2.4% higher than the prior year. For investors, a triple whammy: extremely limited supply, unpredict- able home prices, and significantly higher finance costs. The typical interest on a fix-and-flip loan jumped from between 7%-9% in 2022 to between 11%-12%, and many private lenders tightened credit requirements. Investors without an established track record of success or without preexisting relationships with lenders found it harder to secure a loan, as lenders looked to mitigate risk in what had become a much more volatile market. WHERE’S THAT FORECLOSURE TSUNAMI? Many investors, especially with market conditions like those described previously, look for distressed properties. These are often homes that are in foreclosure or have been repossessed by the lender. Both fix-and-flip and buy-and-hold investors can purchase these properties at a discount and then repair and renovate them, adding value and generating a profit in the process.
Home-Flipping Profit Trends GROSS PROFIT GROSS ROI
$90,000
0.0%
$80,000
60.0%
$70,000
50.0%
$60,000
40.0%
$50,000
$40,000
30.0%
$30,000
20.0%
$20,000
10.0%
$10,000
$0
0.0%
market virtually dried up, because the federal government enacted unprecedented consumer protection programs to protect homeowners from foreclosures caused by COVID-induced economic distress. First, it declared a moratorium on foreclosures for any loans backed by a government entity (i.e., Fannie Mae, Freddie Mac, the FHA, VA, and USDA), which comprises between 65% and 70% of all active mortgage loans. This moratorium ultimately lasted for more than two years, and foreclosures were largely limited to vacant and abandoned properties or commercial assets. Next, as part of the CARES Act, the government launched a first- of-its kind forbearance program, allowing borrowers to skip mortgage payments for more than two years by simply notifying their mortgage servicer that their income had been impacted by COVID. Consumer advo- cates fretted that borrowers would default on their loans once they were
no longer protected by the program, creating a tidal wave of defaults. But that simply hasn’t been the case. More than 8 million borrowers entered forbearance, which began in March 2020, and there are now only about 200,000 borrowers left in the program. Of those borrowers who exited the program, about 36% either had their loans fully reinstated or paid them off. Roughly 46% entered into a loan modification or loan deferral program which reduced their monthly payments; to-date, 75% of those borrowers have maintained on-time payments. And about 18% left the pro- gram while still negotiating with their servicer. Less than one-half of 1% of borrowers who exited the forbearance program have defaulted on their loans. Meanwhile, a booming economy, a thriving jobs market with a very low 3.5% unemployment rate, rising wages, and strong borrower credit combined to ensure lower-than-normal mortgage delinquencies and defaults even as
Despite dire predictions of millions of foreclosures and
evictions in the early stages of the pandemic, the distressed property
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