Mon, 27 April 2020
You can postpone mortgage payments with forbearance.
If you collect rent payments from your tenants, can you pocket it all and not pay your mortgage? What a windfall!
(Complete episode transcript is below. Read along as you listen.)
In crisis times, your cash flow is your cushion.
Last year, the publication “Emerging Trends In Real Estate” forecast that the chances of a pandemic roiling the economy were low.
The CARES Act’s effect is discussed.
Payments follow five links in a chain: employer - renter - investor - mortgage servicer - mortgage-backed security holder.
What’s the difference between a lender and a mortgage servicer?
Ethics and greed.
Are there deleterious consequences of forbearance?
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Complete episode transcript:
Welcome to Get Rich Education. I’m your host, Keith Weinhold. You can potentially collect your rent income from tenants and then, turn around and NOT pay the mortgage loans on those properties for a few months, pocketing a nice profit. But should you?
In the pandemic-induced world of eviction moratoriums and mortgage loan forbearance, there will be winners and losers. I’m helping you sort that out so that you can be one of the winners - and more - today on Get Rich Education.
Welcome to GRE. From Olympia, Greece to Olympia, Washington and across 188 nations worldwide. I’m Keith Weinhold, this is Get Rich Education, and we are all living in strange times.
The squeeze for some of us, I think is encapsulated in Jerry Constantino of Queens, New York’s situation.
He’s talking with owners of the roughly 500 units that he manages, who are worried what’s going to happen if the rent checks stop coming in.
As part of his Property Management duties, Jerry is talking with tenants, many of whom he assumes will be delinquent this month because they either lost their jobs or they’re just choosing not to pay.
Jerry’s a hard-working guy and he knows that the tenant in Unit 31-A has paid his yet, and it’s a few days past due.
But yet Jerry knows that this tenant hasn’t lost his job and ought to be able to pay rent on time like he always did before the pandemic.
Jerry sees this tenant from Unit 31-A in the hallway and says, “Don’t mess with me dude, where is the rent?”
And by the way, Jerry got a little gruff and his words weren’t exactly “Don’t MESS with me…” but that’s the version that you get here on this unapologetically squeaky-clean lyrics show.
And besides MANAGING property for others, Jerry is also in discussions with banks, trying to figure out how he’ll make mortgage payments because he’s got properties that HE owns HIMSELF during this worsening global health crisis.
And, a lot of people find themselves in a situation similar to what Jerry is in.
Many apartments in the U.S. are essentially small businesses that tend to have less financial flexibility and will need some help ... in the coming months.
Now, there are some choices for the millions of Americans who lost their jobs and have no clear prospects for when they’ll get them back.
Three things that are aiding TENANTS right now, helping them pay the rent are: eviction moratoriums, unemployment benefits and cash payments - like those $1,200 stimulus checks - from the federal government that can help many keep a roof over their heads.
Nearly half of the nation’s 44 million renter households were already stretched financially: before the pandemic.
The University of Chicago found that ONE-THIRD of adults can’t cover necessities after missing just … one ... single paycheck.
One in four tenant families pay over half of their income just to make the rent payment.
We’re basically going to break down Jerry Constantino - the King Of Queens’ - situation here, being mindful that ....
In general, the average Get Rich Education listener is better off than the average real estate investor for a number of reasons.
For starters, one of our core principles here is that we invest predominantly in residential real estate. That is due to its durable utility.
Coronavirus has changed a lot in society, but it has NOT changed the fact that people still need a place to live.
You’ve got to be grateful that we focus on residential because it’s recession resilient.
Most landlords are still getting 80 to 90% of the rent income, even 100% if you’ve got a small portfolio.
Just think about how many businesses aren’t getting nearly 80-90% of their income now? The restaurants, and bars and gyms, airlines, cruise ships, hotels, on & on … are they even getting 30%?
Though it’s the exception, some businesses, like large retailers might be getting 105% of their usual income now.
We also focus on investor-advantaged markets here at Get Rich Education - with the principle that the market is more important than the property.
And so many people get that backwards.
We discuss the advantages of being invested in multiple markets so that your tenant income streams are from diverse employers. Anyone that doesn’t adhere to that is in more trouble.
Also, we focus on buying property that cash flows on the day that you buy it - where the monthly income exceeds the monthly expenses on your settlement day - on the day that you buy - not “maybe it’ll cash flow sometime in the future”.
Look, in times of crisis, your cash flow ... is your cushion.
Here’s what I mean. To keep it simple, if every one of your properties rents for $1,000 and has $800 in monthly expenses, you’ve got a $200 monthly cash flow on each one.
You’d have to lose - just outright lose - and never recover wholly 20% of your income and then you’d still break even on a monthly basis.
This is what I mean that in crisis time, your cash flow becomes your cushion.
If you have a 10% rent loss, your cushion is half-eaten, and your cash flow becomes $100 per door. You can’t kick tenants out for a while because there’s an eviction moratorium.
But, you can also be granted loan forbearance and not have to pay your mortgage. So you might be able to profit wildly at this time.
Each of these things - an eviction moratorium and mortgage loan forbearance are part of the recently-passed CARES Act. I’ve got way more on that later … whether you’re in Jerry’s situation or you’re better off.
Let’s pull back and look at how unlikely this Black Swan Event known as the coronavirus pandemic really is, first.
Here’s some perspective. Last year, the publication called “Emerging Trends In Real Estate” launched a survey that’s just so, so interesting now that we have the benefit of hindsight.
They launched a survey last year called “The Importance of ISSUES for real estate in 2020”. They were FORECASTING the following year - this year.
A pandemic was NOT forecast to be an important issue at all for real estate this year.
In fact, the #1 survey answer was predicted to be the political landscape. That could make sense as this is an election year, and divisive partisanship sure is not abating.
The #2 predicted factor was … government & budget issues.
The issue forecast to be the 3rd-most important real estate issue for this year was .... immigration. OK, makes sense. That was a hot topic for a while. And greater immigration creates more housing demand, sure.
#4 was Global conflict. OK, makes some sense. We had growing trade tensions with China, political tensions with Iran and North Korea.
The real estate issue predicted … last year … to be the fifth most important for this year was … Income inequality.
How long do you think that it will take us to get to a pandemic … or epidemic. No one foresaw this.
Sixth was Rising education costs. That definitely intersects with housing as giant student loan debts increasingly prevent people from forming a first-time homebuyer downpayment, which keeps them in the renter pool.
The seventh most-important real estate issue for this year was predicted to be Social inequality.
Eighth was terrorism. That’s going lower on the list as major terrorist acts in America continue to recede into memory, gratefully.
And number nine - yes, last year, what was predicted in “The Emerging Trends In Real Estate” survey for THIS year is … Epidemics.
All those other factors were deemed to be more important.
And that’s from a pretty respected publication. That source, Emerging Trends in real estate, is partly compiled by the Urban Land Institute.
So, it just goes to show you that, no one, not me, not you, not the expert economists that come here on the show with us - no one really knows.
Now, there was one Get Rich Education episode where I had a “glass half-empty” segment, maybe one year ago, where I was talking about all the things that could go WRONG in real estate investing.
I did mention a plague. I used the word “plague”. And what I was thinking about was, what if an awful bubonic-like plague wiped out, say 20 million Americans - which would be more than 5% of our population.
Well, that sad event would reduce housing demand, of course, if there are substantially fewer … live humans.
And as sad as COVID-19 is, no one is predicting that it will be fatal to even one-half of one-percent of our population.
And I certainly wouldn’t have predicted that by this year we’d be practicing things like sheltering-at-home or social-distancing. It still all seems like some sort of bad dream.
We’re talking about, “Do you get free money? Should you take mortgage loan forbearance?” here on Get Rich Education Episode 290.
In fact, if you’d like to read along while you're listening, the entire written transcript for today’s episode is in the Show Notes. You can access those at GetRichEducation.com/290 and follow along that way if you like.
In order for you to understand mortgage loan forbearance - and forbearance means that you can postpone making payments, understand the big picture.
You can best understand this as part of the five links of a chain.
Yes, forbearance allows you to BREAK a chain.
The five links in the chain follow the money. They follow the payments through:
Payment goes from Employer … to Renter... to Property Owner... to Loan Servicer... to finally, the MBS Investor. They are the five links.
Now, let's look at what happens here.
The first and second chain links involve that payment from Employer (first link) and the Renter (the second link).
Economically … how bad is it? We don’t yet really know how high the unemployment rate will get, though we expect it to be substantially higher than that of the Great Recession of 2008, when it was 10%.
Chain Link 2 to 3 is the Renter’s payment to the Property Owner. This is a link that you’re clearly quite concerned with. This is your rental income. This is the income that Jerry from Queens is trying to scrape together.
We don’t yet know what the eventual rent payment DEFAULT RATE will be, of course that’s going to vary among geography and asset type and many other things.
But be aware that at this point, about 75% of Americans have lost at least 25% of their income. About ¾ of Americans have lost ¼ or more of their income.
As you know, during coronavirus, most areas have an eviction moratorium. Meaning that if the tenant can’t pay the rent, you can’t kick them out for a while.
Now, what if you - the income property owner - Link 3 - don’t have enough rent income to pay the mortgage to Link 4, which is your bank or your loan servicer?
If this is your situation, you want to call the company that you pay the mortgages to. You pay your mortgages a mortgage servicer.
Now, what is a “mortgage servicing company”, anyway?
A mortgage servicer is the company that handles the day-to-day administrative tasks of your loan.
They send you your monthly statement, they receive your payment, and they manage your escrow accounts.
This is different from your mortgage lender. Your lender is the financial institution that gave you the property loan in the first place - back on your closing day.
So that is the difference between a mortgage LENDER - and the servicer whom you’re dealing with now.
Now, a mortgage servicer could either be a bank or a non-bank.
A bank “mortgage servicer” would be names that you’ve heard of like Chase or Wells Fargo.
A non-bank “mortgage servicer” could be a name like Suntrust Mortgage or AmeriHome. They’re names that you’re less likely to have heard of.
So, to review, money flows from your tenant’s employer, to your tenant, to you (the investor), to the fourth chain link, which is this mortgage servicer.
Now, if your mortgage is backed by the government (those would Fannie Mae, Freddie Mac, VA, FHA, or USDA - and it often is) - if you tell your mortgage servicer you're having financial trouble because of the pandemic, your mortgage servicer has to let you stop paying your mortgage for up to 180 days - that’s six months - with the possibility of another six month extension after that - and you will not have to pay late fees, and there will not be any foreclosure on your property, and there will not be a ding on your credit score either.
It gets even better than that. Because at last check, there isn’t any additional interest beyond your scheduled amounts accruing on your missed payments while you’re in forbearance either.
Now, you WON’T magically see a portion of your principal balance disappear though.
This all pertains to both primary residences and your rental properties for government-backed loans.
If your loan isn’t government-backed, you still might receive some similar-type of relief.
This is what is being granted to you during these exceptional times. And the mortgage servicer isn’t going to ask you for a bunch of paperwork or documentation of your hardship either.
But they might just ask you some questions over the phone - details about your income, expenses and other assets, like cash in the bank.
They’re just granting you the forbearance - letting you postpone your mortgage payments.
Now, that must sound great. And it is a good start.
Look, if you CANNOT make your payment due to economic hardship, then you should ask for the forbearance.
And don’t just stop making payments if you CAN’T make payments. Alright, you can’t do that. You DO have to ask for forbearance. But it will be granted.
Now, what if you CAN make your mortgage payments and you call up your loan servicer and ask for forbearance.
In this case, say that your total monthly rent income is $10,000 but you only got paid $9,000 of rent this month due to pandemic layoffs.
And your total mortgage payments are only ... $8,000.
Well, you could make the payment but you don’t have to.
So … could you pocket your $9,000 of rent this month and skip out on paying your mortgages completely & then have a $9,000 cash flow month instead of your normal $2,000 cash flow month?
Yes, you probably could! And this could totally feel like a windfall to you!
But … that would be dishonest - and it could come with consequences.
I’ve talked to two mortgage lenders this last week to find out what’s REALLY going on out there.
I learned about one case where, a borrower asked for forbearance, they were granted it, it didn’t ding that borrower’s credit SCORE.
However, on their credit REPORT, it is marked “Forbearance” on that report.
Hmmm … you wonder if this will impact that borrower’s creditworthiness in the future.
Here’s the other potential negative consequence if you are granted forbearance.
Again, forbearance means the ability to postpone payments.
What’s going to happen in the future? Well, no one really knows with any of this. This is uncharted territory and I can’t underscore that enough as we deal with the economic fallout of the pandemic. The situation changes quickly here.
When are you going to have to MAKE UP those payments? If you get six months of forbearance, would you owe six months of payments all at once - only six months from now?
If so, that probably won’t help you out. Because if your tenant - God forbid - missed six months of rent payments, they’re not going to make one lump sum rent payment for six months worth of rent.
However, for you, if you get forbearance, it appears more likely that your payments - will just get tacked on to the end of your loan - without any interest on top of what’s scheduled.
Now, that outcome would be … pretty awesome.
Alright, so we’ve established that you can take a pause from paying your mortgage loan servicers.
But here’s the crazy thing. The fifth and final link in the chain is the Mortgage-backed security holder. They get their money from the mortgage servicer.
Well, where is the servicer supposed to get the money if people like you - the property owner - declare forbearance.
No one knows that answer. That hasn’t been worked out yet.
Right now, the total share of loans in forbearance is 6%.
But, that number is going to go higher so the mortgage servicing industry has been crying out for help - your SunTrusts and AmeriHomes of the world.
Last week, a plan had come together such that mortgage loan servicers would only have to forward four months of missed payments to MBS investors.
But a lot of servicers don’t have that kind of money lying around.
Now, Wells Fargo, obviously, is a big bank and they do some servicing as well.
There's still lots of big banks servicing mortgages. And the big banks are actually in pretty good shape right now. They have enough money that they can deal with this situation for a while. They're stronger now than they were in the 2008 financial crisis.
And since the financial crisis, nonbanks have been taking a bigger and bigger share of the mortgage servicing business.
And these nonbanks - like SunTrust and AmeriHome - have much less money on hand than banks do, and they're not allowed to borrow from the Fed like a bank.
And even in the good times of the past few years, there were all these reports coming out saying, you know, if the economy were to ever turn down and people stopped paying their mortgages, these nonbank servicers are going to be in trouble.
This is what needs to be fixed right now - this connection between chain links 4 and 5 - from servicer to MBS Investor. The aid for servicers will probably be there.
The government is typically there to save most anything to do with homeownership.
Well, those are the five links in the follow-the-money chain - from employer to tenant to you, the investor, - to the mortgage loan servicer - and finally, to mortgage-backed security holder.
There’s more that I can explain there, but I won’t, because it could be speculation - so we’ll see what happens next there.
Let’s get back to you. I said that I suggested mortgage loan forbearance if you need it. Should you get a mortgage forbearance if you don’t need it?
No. If you don’t need it, don’t take it.
Now, why would I say that? Well, there could be some upsides to taking it.
But it puts you at some risk, like I mentioned and there is more that is absolutely vital for you to consider. I’m going to talk about that in a few minutes.
We’re talking about following the money along five chain links, and mortgage loan forbearance here on Get Rich Education, Episode 290 … as the world gradually has more & more bad haircuts as the coronavirus pandemic inches on … and you’re wondering if you’ll have “actual weekend plans” in your life ever again.
Coming up in the next few weeks here on the show, we’ve got a lot of great material. New York Times bestselling author John Assaraf will be here with me on Get Rich Education as we take a deep dive into abundance mindset during tough times …
… and a lot of other integral shows here as I focus on providing you with actionable guidance that you can use on economics and real estate amidst the pandemic.
I primarily reach you in two ways. There’s our audio show here, which as you know is released every Monday. You’ve probably been listening for years.
The other way is through The DQYDD Letter, which is e-mailed out about weekly. And lately the valuable letter is being sent to you on either a Wednesday or Thursday.
There is so much fast-changing news amidst the pandemic that the “Don’t Quit Your Daydream” Letter really supplements this show here well.
That’s why it’s never been more important for you to subscribe.
The letter is free, and all you’ve got to do is sign-up now at GetRichEducation.com
I’m coming back with more. I’m Keith Weinhold. THIS is Get Rich Education.
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Should you get a mortgage loan forbearance if you don’t need it?
No. If you don’t need it, don’t take it. That is my opinion.
Now, why would I say that? Well, there could be some upsides from you taking it if you don’t need it.
But it’s not quite like it’s free money.
It puts you at some risks, like I mentioned and … some of this comes down to a question of ethics & greed.
Now, I don’t know what Jerry, the property manager & investor from Queens, New York that I talked about at the top of the show - is going to do with his situation.
Me, I have … gosh … it guess it’s not quite one hundred thousand dollars worth of mortgage payments that I make monthly …
… but it’s well into the tens of thousands every month. I still have a good monthly rent collection. But I have some tenants that can’t pay due to losing their job from coronavirus.
But … I CAN make all of my mortgage payments, so I don’t have any plans to get forbearance now or anytime in the foreseeable future.
If I have agreed to pay someone, and I can afford to pay someone, then I pay THAT someone. That’s just treating other people well.
What is greed, anyway?
Wanting more money is not greed. You want financial betterment just like I do and most anyone does.
But padding your own cash reserves by pocketing your tenants’ rent and then not paying your mortgage loan servicer - that’s greed.
Because I’d be profiting from hurting others.
If I don’t make a payment, there are people counting on that payment - in either that fourth or fifth chain link - that servicer or that mortgage-backed security investor.
Do you know what’s really happened recently?
I know about an investor that closed a mortgage loan (and mortgage loans are still closing here in the pandemic, of course, but under tighter lending guidelines) - but this investor closed, then declared forbearance almost immediately - as soon as he practically could.
So he missed his very first payment, and then the bank put him in a status of what’s called “first payment default”.
Well, then the lender can’t sell that loan to a servicer & and then that bank has got to keep that losing loan on THEIR books.
Also, that “first payment default” status is tied to that borrower … and will that come back to bite them? I don’t actually know, but it’s probably not going to help them.
Could that borrower have made payments if they were able to qualify for the loan at the closing table just a few weeks ago? Yeah, probably.
If that impacts that borrower’s creditworthiness down the road, it’s pretty hard to feel sympathy for them.
It’s times of adversity like this when one’s ethics show through. Cheating the system tarnishes your character and it screws up the system for the honest people … where the taxpayer might have to end up paying for it.
So, either I can be part of the problem or part of the solution. I know what side I’d rather be on … and you can decide for yourself.
You can call it what you want, “karma”, or whether you’re religious or not, from Christianity, “The Golden Rule” is “treat people how you would want to be treated.”
It’s a maxim in other religions too. But it’s really just being a decent human being.
We don’t want to take advantage of a crisis by disadvantaging others. That’s what looters do.
Fortunately, we have an audience here that does want to do the right thing. Like I say, do the right thing before you do things right.
To summarize part of what you’ve learned today. There are five chain links in the follow-the-money path that the pandemic is pressuring - they are employer … to renter ... to property owner … to loan servicer ... to finally the MBS Investor.
Loan forbearance means that you have the ability to postpone your mortgage payments - and that’s on both your primary residence and your rentals.
Forbearance is being easily granted on most loan types - with some clear guidelines for gov’t-backed loans.
But you must ask.
If you need it, please DO ask.
If you don’t need it, please DON’T ask.
As a reminder, news changes fast and one mortgage loan servicer might outline different terms for you than another servicer does.
In fact, there is so much fast-changing news amidst the pandemic and strange economic aberrations like oil prices going negative last week. There’s such a glut of oil supply, that oil is being treated like junk.
Just like you would have to pay another person to take your junk, oil producers are having to pay people to take their oil.
About ten days ago, Chase stopped accepting new Home Equity Line Of Credit applications. Customers with existing HELOCs will be able to continue to draw funds on those lines of credit, but the bank is not accepting applications for new HELOCs.
Of course, the stock market has been more volatile than usual. Housing is way more stable, but it’s still too early to look at pandemic effects on housing PRICES.
Early indications show that there is even less housing SUPPLY on a market that was already undersupplied, so that’s substantial.
There is so much changing more quickly now, that the “Don’t Quit Your Daydream” Letter really supplements this audio show here. I don’t think it’s ever been more important for you to subscribe.
For example, in some good news, a recent letter informed you that any 1031 Exchange that you do with a deadline between April 1st and July 15th of this year is now moved to July 15th, and other things like that.
Get the “Don’t Quit Your Daydream Letter" free, at GetRichEducation.com
I’m Keith Weinhold and I’ll be back next week to help you build your wealth. Don’t Quit Your Daydream!