[00:00:00] Speaker A: Welcome, listeners.
[00:00:01] Speaker B: Welcome, listeners. You're listening to Deeds in the desert.
[00:00:06] Speaker A: The place where real estate investors tune in for the latest news and available investments at Ignite funding. If you're on the hunt for a low effort passive income stream, then turn up that volume and pull out the hammock as we get ready to feed you your weekly dose of real estate investing insights.
[00:00:29] Speaker C: All right, deeds in the desert today I have with me Pat Vassar, director of underwriting, Misty Bethany, our chief compliance officer, and myself, Carrie Cook, who's the president of Ignite funding. And why are we here?
We are here because the topic of forbearance has come up a lot lately, and I think it's important that we have a very candid conversation about it, both from the borrower perspective as well as the investor perspective. So here's how we're going to do this. We're going to look at the pros and we're going to look at the cons of this situation from both the borrower perspective as well as the investor, because I think it's important. We've said it time and time and time again. We want to protect our investor capital and we want to make sure that the financial strength of our borrowers stays intact. That is what makes us and our investors very successful. So, Pat, we're gonna start with you.
[00:01:28] Speaker B: Ready?
[00:01:29] Speaker C: Let's first describe what a forbearance is.
[00:01:33] Speaker B: Well, forbearance is simply any modification to the original promissory note, deed of trust or obligation from the borrower to ignite funding and therefore the list of beneficiaries, whether that is a change in the amount owed, the interest rate owed, the duration of the loan, any sort of negative covenants associated with the loan, really anything within those four edges of that piece of paper, if it's modified at any point, for whatever reason, is technically a forbearance, a modification.
[00:02:03] Speaker C: And for this discussion, I think what our investors are seeing is the duration of time extending. So we're going to hone in on that today, and we're going to look at that from the pros and the cons, from both the borrower and the investor side of things.
I'm going to go back to you one more time, Pat. Let's talk about the pros.
Why would we want a forbearance as a borrower? What's the pro to the borrower for a forbearance for duration of time to be extended.
[00:02:33] Speaker B: So if you're just looking at the duration of the time to be extended, really the only benefit to the borrower is a cost perspective. It typically almost always costs less to enter a forbearance agreement than it does to enter a loan modification or more importantly, a refinance. When you do so, you're paying origination points, closing costs, and fees associated with not only our loan, but the third party vendors, whether that's the title companies, the escrow companies, the inspectors, paying your property taxes, current recording fees, you name it. There are additional fees that go into play, not just from a company's standpoint as a lender, but also that third party. So the primary pro to a forbearance for a borrower is the cost perspective.
[00:03:20] Speaker C: Absolutely. But with cost, if we're not refinancing these loans, is the company ignite funding? Making any money off of these forbearances much, much less.
[00:03:32] Speaker B: Unfortunately, as a company, we make our points through two different avenues, originating loans and servicing loans.
Through a forbearance. We are not originating new loan, therefore we aren't collecting origination points. We are, however, collecting the servicing points as we would otherwise. But that is no different than if we were refinance it and put a new loan in place. So our refinancing of a loan doesn't impact us in any benefit monetarily. It's usually almost always a detriment. We could have made more money by refinancing it than doing a forbearance.
[00:04:07] Speaker C: Okay, what else could be a pro for the borrower to get that extended period of time? Why are we doing that? Why are we suggesting to investors to approve an additional extension of time? Why is that happening? And we're seeing a lot more of it. Why?
[00:04:24] Speaker B: You know, that's a really loaded question, and there's a lot of really good answers and really good what I'll classify as excuses associated with it. At the end of the day, it's really just an excuse, right? We went into an agreement with a borrower for a finite period of time, for a finite amount of capital, for very definitive specifications, as what that money was to be used for, how it was to be dispersed, and ultimately when it was to be repaid. Now, there are a multitude of different reasons as to why a loan could and have gone into a forbearance. But at the end of the day, it's just because things are slower. Now what, what do I mean by that? That means not only are they running into supply chain issues, not only are they running into labor shortages, some counties are still not open full hours after COVID.
Really, at the end of the day, it's just, it takes longer. It takes more time to get things done. And because of that, we have run into a situation where many of our loans, or I shouldn't say that more loans than previous have gone into an extended period of time and therefore a forbearance.
[00:05:31] Speaker C: Yeah, absolutely. And just to put it into perspective, for individuals, if we're taking our entire loan portfolio, we have about 15% of the entire portfolio that's in a forbearance status right now. That's a pretty small percentage when we're looking at the grand scheme of things as an investor. So from your diversification standpoint, you may have a loan, maybe two loans that are in forbearance, depending upon the volume that you have invested with us. But it's relatively small, but larger than we're used to.
[00:06:02] Speaker B: Definitely larger when used, sir, larger than we're used to.
[00:06:05] Speaker C: So that's why we think it's important to have that conversation at this point. Any other pros? To the borrower that I've missed?
[00:06:12] Speaker B: It really just comes down to the cost, really. At the end of the day, that's what it's all about.
The duration of time needs to be extended. Not all times. Is it nine months, a year, two years, one day. It really runs the gamut.
[00:06:25] Speaker C: It does.
[00:06:26] Speaker B: And because of that, there is no special amount of time that will get more of these borrowers into a good position. And so it's really on a case by case basis as to how much time is needed. But at the end of the day, boils down to just needing a little bit more time.
[00:06:44] Speaker C: Yeah. All right, Misty, I know the investors may not see forbearances as a pro. I know I do as an investor. But let's talk through that a little bit. What is a pro to an investor, to approving a forbearance for additional time?
[00:07:00] Speaker D: Well, investors come to us because they want to earn monthly interest.
[00:07:03] Speaker C: Right.
[00:07:03] Speaker D: So if they are on a loan that is going into forbearance, the positive for them is that there's no downtime between investments. They continue to earn their interest rate, and they actually don't have to do additional paperwork.
[00:07:17] Speaker C: And I'm going to point out there is a borrower of ours.
If you're on the loan, you know who it is. But there's a borrower of ours that has forbeared a lot a few times. It's been a while. Right. And investors are starting to ask questions like, how long is this going to go on? Well, they've had to employ a variety of extension or, excuse me, exit strategies, all of which continue to pay our investors.
[00:07:47] Speaker D: Yes.
[00:07:48] Speaker C: Right. They haven't missed an interest payment, but their strategy of exit has changed numerous times. And whether that's to their detriment to the economy, to labor shortage, whatever it happens to be, the reality is the investors have the opportunity to vote as to whether or not we continue to forbear.
[00:08:11] Speaker D: Absolutely.
[00:08:12] Speaker C: But I would highly recommend that investors also look at what their original investment amount was versus what they've earned as interest already.
[00:08:20] Speaker D: Right.
[00:08:22] Speaker C: And really look at the probability of risk that you have with a continued forbearance. You have to take a look at that. So from an investor's perspective, a pro definitely is. When we talk about forbearances in this particular scenario that we're talking about today, it is with borrowers that are making their interest payments, asking for additional time.
That's what's happening in the grand scheme of things. That's what's happening.
Any other pros to the investors as it pertains to forbearances? I can think of one. Less paperwork. Well, yeah, yeah, exactly. Who loves those 32 pages, baby? Like we all do. Right. But here is our reality. It is specific to collateral that you're invested in. Your funds are invested, they're making money. Exactly the intent you came to ignite funding. Nothing's really changed in that regard. And we'll continue to update you if we feel like there's an issue with the property. Obviously the communication's going to be a little different. There's never been a time where ignite funding hasn't been forthcoming if we have an issue. But issues arise when borrowers stop making payments, and that's not what we're talking about with these forbearances.
[00:09:35] Speaker D: So, no, actually it's a great thing.
[00:09:37] Speaker C: Right.
[00:09:38] Speaker D: The borrower is still making interest payments. They're doing so for a reason.
[00:09:41] Speaker C: Mm hmm. Yeah. So got a little equity there they're protecting, huh?
[00:09:45] Speaker D: Exactly.
[00:09:46] Speaker C: They don't want to give up their collateral.
[00:09:47] Speaker D: Nope.
[00:09:48] Speaker C: All right. And I'm okay with that. We're not in the business of taking back properties. We do if we have to, but that's, again, not what we're talking about here with forbearances. So let's flip the coin here. What's the cons of allowing borrowers to continue to forbear like?
I mean, is this a good old boys club? You're just giving them a little handshake like, what's going on, right? I mean, is there a con in us continuing to kick the can down the road with the borrower, you know.
[00:10:15] Speaker B: It really depends on the property specifically. But just an overarching answer would be that the con associated with it is more internal. We as a company make money by originated loans. We are stifling our ability to do that by allowing a forbearance to go into place. Because of that, it lowers income for us. As far as the borrower is concerned, one of the cons associated with it is they will have to report that on potentially other loans that they're looking to get, they have to say that it went past maturity, that they were unable to pay it off in the allocated amount of time. So that is something that they need to really look into and make sure that's they can deal with, that it's.
[00:11:01] Speaker C: Not going to harm them, right. For a potential refinance or anything along those lines. But to that point, when we talk about those cons and they're potentially being an issue with them refinancing it, I think it's important that individuals understand that they will reach out to us and find out if they're current.
And if a borrower has maintained being current on their interest payments, refinances are a little bit more kind. Although it may have taken a little bit longer. I don't know anybody right now from the financing side of things, any industry where there hasn't been an extended period of time to get things done, whether it's buying a home, I mean, at a large national bank, to a small bank, I mean, it is just taking longer. It's just the reality of the environment we're in right now.
[00:11:52] Speaker B: Absolutely. And it's not just us as ignite funding. It's not just real estate as an industry, it's across the board. It's across the board. It really is. All services, all sectors are feeling the same type of crunch when it comes to getting things done quickly. The word quick has a different meaning now post COVID than it did previously. If you look at our average duration, pre COVID to post COVID, it's a lot longer. If you look at the average cycle time to build a house, it's a lot longer. The average time to get a property entitled, it's a lot longer. You can look at different industries, it takes longer to make a car than it did before. It takes longer to install fiber optics in new communities. It just takes longer for everything. That's just the new reality of it. And until we start to see that shift, we will be in this situation. Good news is we have started to see that tide shift a bit and we are seeing that the average maturity come down and we are seeing the forbearances become fewer and fewer. However, they will continue, but hopefully not at the same velocity as they once were.
[00:12:59] Speaker C: Yeah, it'll shake out. It's just going to take some time to move through that process. So you talked about a pro being the financial side, but it could also be a con to the borrower, could it not, having this loan out for an more extended period of time?
[00:13:15] Speaker B: Yeah, absolutely. You know, at the end of the day, our loans are not cheap. Our loans are not intended to be takeout financing long term solutions by any stretch of the imagination. With that said, every day that goes outstanding is another day our investors are earning interest at a higher rate of return than the borrowed up otherwise be paying to a more traditional lender. And because of that, they are incentivized to get us paid off and transitioned over to cheaper financing, whether that is through the sale of the asset, which eliminates their debt completely, or a refinance of our loan, which will always reduce their monthly obligation to their lender.
[00:13:56] Speaker C: All right, flipping to the investor side, the conversation, you know, we've had many conversations about this one, Misty.
[00:14:03] Speaker D: Yes, we have.
[00:14:04] Speaker C: And, you know, Pat will come to us after having some conversations with the borrowers and he will say, you know, they're going to need at least three months.
What do we do in those situations?
[00:14:16] Speaker D: I usually double the time that Pat tells me because I know things happen. Right. So it is concerning to some investors when they get a ballot. And so therefore, if I add in a little cushion to what Pat tells me, I know that the chances of me having to re ballot if there's a slight delay are less and if.
[00:14:40] Speaker C: It pays off earlier, great, great. But it's very important, based on what Pat was saying, that these unknowns, these variables of time that is happening, please, please try to get behind us when we ballot for this and we're taking these extended period of time.
It's to your benefit. It's to the borrower's benefit.
It's not to say that they won't pay it off in a month. It's not to say we won't have to forbear longer. But we're trying to make our best judgment call on how long we believe it's going to take not being in that particular area, not specifically knowing what issues they're going to stumble across in the next three days, 30 days or three months. There are a lot of unknowns that are out there. One thing I know is that of the 15% of our portfolio that's in forbearance, every bit of it is paying interest payments that I know.
[00:15:44] Speaker D: Yeah.
[00:15:45] Speaker C: And so that's something that we can stand behind. And as investors, you should be able to stand behind. When you see your statements, you see your monthly interest payments coming in. Yes. Some of your loans are going to be in forbearance, but they're also paying you. And so that's why we get behind the borrowers. We get behind our investors. We ballot, we make sure, you know, what's going on this podcast is to really just talk about it and figure out, you know, are we providing a benefit to our borrowers? Well, yeah, to some degree we are. Do we believe it's in the best interest of our borrowers to do it? Yes, we believe it is.
Do we think our borrowers are having obstacles that they haven't had in the past? Yes, absolutely. Do we think this is going to continue? Maybe.
But we are starting to see, as Pat said, a tide change where we do believe that we'll see less and less of this. Will we prepare for this in the future? Probably. You may see loans at nine months with two nine month extensions, not because we think they're going to use it all, but because they might need it. And so we want to be forthcoming with you as investors to realize that there are extended circumstances that are occurring everywhere. And so that's why we're changing some things around, making the loans a little bit longer. You should prepare for that as well. From the investor standpoint, we'll continue to communicate as we always have. If you have questions, reach out. Call us.
I think there's more pros to this than there are cons. Again, we started with keeping the investor capital safe and making sure that our borrowers are financially strong. And I believe we're doing both of those things. So. Yep. Are we weathering a little bit of a storm here, maybe? Or is this the new norm?
[00:17:41] Speaker B: Only time will tell.
[00:17:42] Speaker C: Only time will tell. Right. What have we missed? Is there any pros, cons, something that investors should know about forbearances that we haven't touched on?
[00:17:54] Speaker D: Well, the one thing to keep in mind is, just like you said, if it's under forbearance, it's paying interest. If that were to stop, then that would be another communication. The forbearance, as it states would be, would end, and that would be a whole different scenario. So forbearance is not the f word that everybody thinks it is.
[00:18:17] Speaker C: Oh, well, Pat, you got anything after that?
[00:18:24] Speaker B: You know, I would just add in that because we are collateralized real estate debt and that the beneficiary's name is associated with every deed of trust that we lend on each loan is looked at to be individualized. They're independent of one another. If we were a bank, we could refinance that loan and it'd be no harm, no foul. But if a loan is underwater or if a loan no longer meets our threshold for refinance, we would not put a new loan in place to put a new group of investors in that loan to satisfy or quell concerns of an older group of investors. That's never going to happen. And because of that, we would be doing a disservice to the new investors and this company as a whole if we started to kind of feed into the idea that loans need to be paid off right now and need to get their money back because they're looked at completely independently of another, we need to make sure that that new loan can stand on its own 2ft and isn't being done simply to refinance an old loan. If it is, we won't do it.
[00:19:33] Speaker C: Absolutely.
[00:19:33] Speaker D: Good point.
[00:19:34] Speaker C: And the other thing, I'll just end with this. The other thing that we need to consider is our regulations. Yes, and I know sometimes from an investor perspective, no matter what state you're in, we reside in the state of Nevada. That's where our corporate headquarters are, and therefore we have to comply with Nevada law. And Nevada law is usually a lot more stringent than any other state. Pat's over there laughing because he's like, ugh, Nevada. Right. We're not in Nevada. Why don't we have to comply with this? We choose to put that layer of regulation across every state that we operate in. And in doing so, we just had a situation where this occurred, where we had a Nevada loan and the borrower needed some additional time and kind of we did too, in order to refinance it. Because of the circumstances of time, that took a bit longer. So we are required under our regulations to ballot investors for the forbearance before we could refinance that loan. That wasn't to put fear into investors, that was to comply with our regulations. And if our regulations say that we have x amount of time to get a ballot out to you to forbear that loan so that we can refinance it a couple weeks later, then unfortunately that's what we have to do. We do not have a choice but to be compliant. So we're going to continue down that path. So if you ever see anything like that, to Pat's point, this isn't shenanigans. This is regulations that we're following. And so I hope that that doesn't come across as what are they doing? We know exactly what we're doing. We are complying with our regulations. We're making sure that we're refinancing those loans when it's the opportune time.
That's all it's about. And I think if we don't talk about the regulations, we're kind of shooting ourselves in the foot here because that's what we're complying with. So I'll leave it at that. I think for the most part, I think everybody understands what a forbearance is.
I think all investors probably have experienced a forbearance. If you've been with us for a few years, you've been on a forbearance.
There will continue to be forbearances. It's not gonna just stop. I do think it will slow down, but it's not going to stop. Forbearances mean the borrower will continue to make interest payments to you until which the loan is either refinanced or paid off. Is that fair? That's right. All right.
Well, thank you both. I appreciate your time. I know you're dealing with the borrowers. You're dealing mostly with the investors. So thank you both for joining me today, and we'll talk to you guys later.
[00:22:24] Speaker A: Thanks for joining us this week on deeds in the desert, where short term investments meet long term investors. We hope you enjoyed the content so much that you share it with all your friends. Who doesn't like learning about passive fixed income, right? Still hungry for more education? Visit our
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