Letter to Investors: COVID-19 And Residential Mortgage Market Outlook
Dear Investors,
Many have you have reached out to ask questions about the performance of our fund and what this unprecedented medical emergency might mean for Automation Finance. I am sorry I have not been able to speak to you individually but you can imagine how busy it is at a time like this. There is nothing I like more than talking about the business – so please accept my apologies and hopefully, this note answers your questions. If not, my contact details are below.
What does this emergency mean for our business? A lot of opportunities….
The median American household has $11,000 in savings and a mortgage payment of $1,050. For most families, their mortgage payment is about 35% of their monthly income. So, for a very large minority (likely, several million households), the current crisis will mean that they run out of money. Some will tap credit-cards, others may have credit facilities…but I expect many of them will have to make some very tough decisions in the next 3 months; which bills to pay?
As you know, we are in the business of buying mortgage loans where the borrower has fallen into arrears and has stopped paying. Many of these borrowers got into financial difficulties in 2008….and they will again in 2020. It is inevitable.
What does that mean for AF?
It means two things:
1. There will be a lot of new non-performing mortgages. I suspect that this 2008 all-over-again (though the recovery may be a lot faster). There will be a significant spike in unemployment (our model suggests 15% up from <4% today). These unfortunate families will have to decide which bills to pay – paying all of them will not be an option. Who would you pay…
– Car? Miss a couple of payments and the repo men will call.
– Phone? Miss a couple of payments and the line goes dead.
– Cable? Miss a couple of payments and the screen goes dark.
– Mortgage? Miss a couple of payments and ….. you get a letter and maybe a phone call…not the end of the world..! There will be a large spike in delinquent mortgages. Federal programs may help but not quickly enough.
2. A lot of smaller banks and mortgage companies will need cash quickly. As I am sure you can imagine, few new mortgages were written this week. The mortgage industry is wondering; where is next month’s cash going to come from? This will lead to loan sales….I suspect a lot of sales…of non-performing mortgages. It will also lead to real estate price reductions. We expect to see at least a 10% pull-back…maybe more.
What does that mean for our investment?
Firstly, it means we will help maybe 10 times the number of American’s as we were able to help during the last crisis. We have grown a lot in the last 6 years and we are very well prepared.
Our business processes are battle-tested, we have significantly more capital on hand and our investor-base has grown substantially. We are seeing the early signs of forced selling. Well publicized deals that should have closed this week haven’t closed….investors are hoarding cash in anticipation of lower prices tomorrow. I fully expect lower prices next week and the week after. Sellers expect prices to snap back to what they were a few weeks ago. That is not going to happen, period.
The next year may represent the best buying opportunity we have ever seen in the non-performing mortgage space. Below is a chart I used just 2 weeks ago in a room of professional investors. Little did I realize how important this single chart would be just 14 days later….a new supply is around the corner.
The average homeowner has significant equity in their home…while many may stop paying their mortgage, people with equity in their homes go to great lengths to protect it. As soon as the crisis has passed, we will repeat the processes we pressure-tested during the last recession to modify their loans so they can start paying again. Remember, we have been through this with more than 2,000 borrowers. While past performance is no guide to the future, we believe we are very well placed to grow very rapidly in the coming 12 months.
I fully expect AF to buy a lot of loans. The early signs of distress (deals failing to close) will soon become a steady stream of deals at lower prices. We will start buying when we see significant value and once we do….we will put substantial funds to work.
Not only will that help large numbers of vulnerable families get back on their feet, it should make our investors very happy.
Please do not hesitate to contact me if you have any questions. I will do my very best to respond to each one individually
With very best wishes to you and your families at this difficult time,
Yours faithfully,
Paul Birkett
Chief Executive Officer – Automation Holdings LLC
Phone: +1 (332) 209 4092
