Will We See More Banks Fail?

Foreign.

This is the no Closer show where you get the latest developments in distressed note investing and learn the secrets of how you can control millions of dollars worth of property for panties on the dollar. Get educated and entertained by someone who has closed thousands of deals and lives to support you in achieving the same. Now here's your host, CEO of We Close Nodes, Scott Carson.

Good morning, good afternoon, good evening, everybody. Welcome to this episode of the Note Closure Show. As always, Scott Carson, excited to be here today. Today it's as I'm recording, it's March 13th, Monday, I guess the start of spring break for a lot of folks out there. We got south by Southwest going on here in Austin, Texas. And the weather looks nice outside, but it might be partially cloudy with a chance for rain or bank defaults or bank failures. Obviously, the news that's being highlighted this morning over the weekend was obviously the fail failure of the second largest bank failure in the country was Silicon Valley Bank, Tom, and then also Signature bank in New York closing its doors on Sunday. Financial institutions, bank stocks, regional banks specifically are getting hammered extremely hard today. And I'm going to tell you, ladies and gentlemen, this is not really anything that's too surprising. Silicon Valley Bank's primarily issue for them going out of business really dives into the FTX and the cryptocurrency fall. They were one of the biggest banks that were tied into that debacle and it was just a matter of time until things got out of whack. And it's kind of like having a three, a four prong stool and you knock one leg out. Yeah, it might sit there and be good for three, but all it takes is leaning the wrong way and the whole thing tumbles over. Now, somebody said, well, Scott, they don't have a lot of real estate, residential, commercial. Well, every bank's got some commercial loans behind it. But my whole thing is, are those the first couple? Is it going? Are we going to see a tsunami? We're going to see this huge tidal wave, this hailstorm of banks defaulting and going out of business. And the answer to that is I don't know. I'd be willing to bet they are not the only two banks that fail. When you look at a couple things that most regulators don't look at, everybody gets so tied into the default rates and asset rates. And that's a very, very important thing to look at. But a couple things that I like to look at, all right. I like to look at other signs that a bank is in trouble. Okay. And one, which kind of tells you ahead of time. We can look back 90 days, six months ago and start seeing all these lenders that started closing up shop or banks that started laying off their mortgage origination staff. Right. They weren't gonna be originating loans as much. Right. They're cutting their staff because they're losing millions of dollars or billion dollars in profit loss, you know, from the last quarter because of interest rates going through the roof and their mortgage business coming to a screeching halt or severely drying up. Well, as rates go up, that leads to not only less origination, that means less profit, less deposit, less, less money coming in. It also leads on the opposite side of the scale. If you're in an arm of any sort or you're looking to refinance out of a short term loan, a commercial loan, usually three to five years, you're going to run into problems because now the interest rate is double, maybe triple of what you expected it to be when you originally bought the property. And we saw, let's just face it, we saw multifamily properties just going through the roof. People overpaying with the idea that they could do some things to, you know, really. Oh, you know, redistribute. Well, I'm not redistribute wealth, reallocate assets or re gentrify a C class property with B or a B into an A or a D into a C. You know, you buy it cheap and hold on to get cash flow and refinance out three years. Well, for many individuals, many organizations, many syndications, that refinance opportunity is gone, it's no longer around. And when you have issues with property values dropping, interest rates increase, it means your, your operating income reduces, it means your value drops, it means your cap rates drop, reduces the value of the asset. Banks are then going to come to you and say, hey, you need to be at least, you know, 125% of you know, your debt service coverage ratio. You're not there. So we're going to ask you to bring 10, 20, 30% in cash to the table to reduce it. Well, most operators don't have that. And it's, you'll see this happening on small things, but you rarely expect it to happen on very large things. Right. And if you look, think back in January, you may not have heard the news, but San Francisco's biggest landlord defaulted on a, a huge massive loan. Veritas, which is San Francisco's is there's a lot of distressed real estate in San Francisco. Surprise, surprise, wouldn't be most expensive market okay. Veritas, the city's largest apartment landlord defaulted on a $448 million loan. Okay, that's huge. It's secured by 62 properties, more than 1700 doors. Okay, then you also had earlier last month or actually just about two weeks ago, three weeks ago. Now Blackstone has a $270 million a floating rate loan backed by 11 Manhattan rental properties that have gone into special servicing. Okay, These are two big ones that you don't expect to be that they may know what the hell they're doing, but their stuff is going to special servicing. They're, you know, you got to rent rights in one of the most expensive cities in America and then they're defaulting on their loan. You ain't got to be genius to figure out the trickle down effect of that is happening across the country. There is distressed real estate in every market, in every market a little bit different. Now I live in Austin, Texas. We don't see that much, but there is still some stuff that's distressed here. Look at your. If you want to see a good sign of distressed real estate, reach out to your local realtor, reach out to your buddy Joe or Jim or Julie, what are the realtor name might be and ask them, hey, can you pull a list of price reductions in the last 90 days and I guarantee you you'll see a lot of price reductions across the MLS as people are getting nervous about selling their property. Yes. And, and the big thing has always been like so many defaults on a property over the last few years, they've got a lot of equity. Right. They can just sell the property. Well, people don't necessarily want to sell their house to cash out their equity. They'd rather do other things. Well, the refinance, cash out, refinances, well, that's kind of gone away. So if people are struggling, they need to sell their house. Well, if they can't sell their house at the top of the market because now the market's flush with real estate, they have to do what they got to do, a price reduction. We had John Burley on last week, a week before last, talking about his strategy out in the Phoenix market. And John's obviously the guy behind rich dad, Poor dad was behind Robert Kiyosaki bought all the real estate back in the day for that book. Still a very active investor and it's one of the things he was talking about on whether buying stuff off strictly off the MLS pretty properties with their goal of to wrap around finance, offer owner financing or terms to other Buyers who can bring some cash down and hold on to it for a period of time. All right, well, you're going to see those issues in a lot of areas. Now he's in the Phoenix market. Phoenix is really, the residential market there is really taking a big hit. Commercial market's taking a big hit in a lot of places across the country. But a sure sign that there are a lot of banks that have distressed deals on their asset is a very simple job search. You could go to monster.com you go to LinkedIn.com and do a search for banks or do a search for special asset managers. Look for job postings that say special asset manager. This is department handles your note sales. This department handles distressed asset sales in a bank. In February alone there was 120 job postings on LinkedIn that we saw. Now LinkedIn, would you agree that's the number one job place for job postings? No, it's not okay. But there's enough on there to share with you like who the heck is offering this job? Who's, who's looking to hire? Now the smart thing, if I was a bank that needed distressed assets, I need to hire more people. I wouldn't go out there and say, hey, Scott Carson bank is looking for distressed assets. I would hire a third party firm, a contractor on my behalf. So it didn't initially track back to that my company had distressed assets looking to sell. But you still see plenty of banks posting job postings. Okay, that's, that's a sure sign that that bank has distressed assets. Now can you buy those? Well, yes and no. It depends on what's going on. You're not going to buy from, you're not going to call Silicon Valley bank and try to buy from them. No. You're not going to buy from Signature bank in New York. Not at all. Most of the time when a bank is sold, they're going to have to be acquiring institutions get to sign a loss share agreement where they can't really sell that bank's. The bank's assets that they purchased below 85, 90 cents the dollar for a year. They've got to hold on to it for a year. But the fact that they're buying Those assets at 20, 30 cents the dollar gives them all the flexibility they need to hold on to those assets for a year. Right. Years ago, bank of America reported record earnings the year after they bought Countrywide because why they paid for country 20 cents of the dollar, 25 cents of the dollar. They held onto it for a year. Then Refinanced or modified or forbearanced or did whatever they needed to do, mostly modifications to people and forgave them of principal reductions. Took their negative AM mortgage and turned it in 30 year fixed rate mortgage at 4% without people having to qualify. Yeah, that looks really good in the books. That'll give you profitability. Taking something that's a steaming pile of crap and turn it into a reperforming note, a 30 year mortgage. Now that's not at true value. They give a true valuation asset versus something that's upside down about 20%. So that's the thing to keep in mind is banks that are being bought or being sold, you're not gonna be able to buy those assets. But make sure you pay attention to what those banks are doing with that legacy assets with this, that portfolio a year from now. Because a year from now you can call up those banks, say hey, do you have anything on your assets you want to move? And we've bought assets like that, especially during the last crash after that stuff happened. Hey, what kind of legacy assets that you're looking to get rid of? And they were looking to move them and it might not have been 5 cents on the dollar, you might not get it at 5, 10, 20 cents, but you still get them at a pretty sizable discount because it's almost all profit from the, that end game aspect of it. They buy it at 20, they can double their money at 50, 60 cents. It's a good day, they'd like to get 80. But depending on where they're at and what kind of profit margins they need to show to recoup that investment, who knows? I think I saw somewhere that Signature Bank's assets sold for a buck to the company, purchased signature bank for $800 billion or something like that. It's just stupid out there. I mean money is just getting printed and shuffled in a matter of zeros and ones these days. But here's the thing. When you have companies like Silicon bank, do they affect other institutions? Of course they affect the high tech. You know, Silicon Valley, us, South by Southwest going on here in Austin, Texas today, there's been a bit of a shutter as a lot of these startup tech firms had their money and uninsured on FDIC insured accounts. Anything over 250,000, they weren't insured. But obviously it looks like Biden and the Fed have come and said that they're going to secure those investments. That's great for them. May not be so good when you start looking at the domino Effect. And I really do believe that Silicon Valley bank was that first domino. Now how big a domino? Who knows? All right, I'm not God, but I can tell you this. There are other banks hurting out there. And if this virtual run where stocks are being hammered and people are pulling money out or moving them with money over more secure locations or other banks, it's going to lead to more banks losing deposits and not being able to cover their numbers. That in turn leads to them closing. In terms the, the banks, the people that they represent, the payrolls that they're paying, having to let people go because they don't have the money to cover payroll, or they're having to close shops, at least a layoffs, that leads to unemployment, that leads to mortgage defaults in different parts of the country. So keep an eye out for those things and realize there is opportunity in the water right now as the market's corrected itself. Yes, there are markets that are not going to change that much. Okay, but there is, there is opportunity if you know where to get now it's not, you're not. I wouldn't approach it as oh my God, this guy's falling and scared. Ah, Chicken Little. Okay, but look at this as. Is this your chance to get back in? Like back in 2008 when Lehman Brothers collapsed, when Washington Mutual, the largest bank failure collapsed, who knows? I'd be willing to say yes. There's opportunity. If you are doing things, if you are marketing, you're reaching out, if you're in the know business is a great time. If you're sitting here on the sidelines waiting to get started, you need to get in the game because another great opportunity can pass you by. Is this going to be a thing that we used to think back in when we were really at the first few note conventions back in like 2008, 9 and 10. Oh, this is only going to be a three to five year thing. Well, it turned out to be a really almost a ten year cycle. Maybe not quite a ten, but closer to seven or eight years. This, this is not a surprise. We knew that small commercial banks, small mid sized banks were actually carrying the brunt of the load with the commercial debt that's been hammered the hardest. And you're starting to see that happening. Especially many of them may have had that one leg kicked out and they were handling balancing on three legs. If it, if it lean starts to lean a little bit more, hey, things can collapse. Things that go out. The most disturbing thing is looking at what the Fed has available to bail out, they don't have. They can't be bailing out everybody, okay? They're bailing out Silicon Valley bank because it covers a lot of other things. It's the first, first to cry wolf. Hey, I need help, Tom. Other banks may not be so lucky. Other institutions may not have that success. So it's very, very important to keep an eye out and see where the opportunities lie, those that get hammered hard. There's going to be some institutions, some Wall street firms that come in and gobble up that been sitting on cash for a while now waiting for these opportunities to arise that they can gobble up assets or gobble up opportunities at a big discount. And that's the opportunity. You may not be buying a million dollar or multimillion dollar portfolio of loans, but there are going to be plenty of crumbs that fall through the cracks or assets that need to get moved. For investors like you and me that are A class assets to us, but maybe D class assets to bank base because they were too small or it's a one off asset or things like that. So if you can do anything, double down your marketing to asset managers. I would not necessarily start dialing for dollars but I would definitely. Email blast, email blast and I would definitely be reaching on LinkedIn to asset managers on LinkedIn, those two, three big things and trying to see what they have in their books they're looking to get rid of and start making those connections as soon as possible. You could also identify some opportunities by going to the Bauer Financial and pulling a list quarterly filing. Their first quarter filing should be out here in the next week. Well, no, I take that back. It'll probably be out in April 1, the second week of April because it is March right now. So you've got about a month left. So you could still pull Q4s which would have been out the second week of January as a good guiding point to see who's struggling and who's got stuff that's in default right now and who's also got stuff coming down the pipeline this next quarter in default. So those are a couple of tools that I would use. Look, if you're just looking for deals, hang around, there's going to be more deals available for you. But don't be afraid to jump in the game. Don't be afraid to start marketing and sharing things. A lot of people are paying attention what's going on right now because like I said, it's the first to second domino falling. It just depends on how big those dominant are set fall and the the ripple effect they have across their organizations, their communities, their borrow, you know, their clients and who's involved with those clients. Yes, it's great to get bailed out to first off but the banks, the U.S. the Fed cannot keep writing blank chunks of COVID because they just don't have the deposits, they don't have the cash, they don't have the line of credit to be bailing out every bank that has struggle time. And I wouldn't be surprised you see more of that this week. So stay tuned, keep watch the markets. It might be a good time to pick up some stock on some of these bigger banks where the stocks have fallen a little bit as an opportunity for you. I wouldn't necessarily buying small regional bank stocks or financial institution stuff but it definitely could be something on some of the bigger banks at a discount. So but you know we, we have a lot of companies out there that are already walking zombies if you think, I think I saw an article somewhere talking about how The S P 500, this 500, 500 companies on there, a lot of them are zombies where they don't have cash, they don't have a lot of cash deposits. There has has to constantly be going out and raising capital survive. Companies like Carvon and others out there are struggling and are hemorrhaging money, trying to stay alive and they're just, you know, this might be the, the visit by, you know, the angel of death saying hey, it's time we go ahead and cease to cease to breathe and time to head up to the shiny pearly gates as an organization. So stay tuned. The idea here, ladies and gentlemen is knowledge is power. Know what's going on the markets, know the opportunities arise and know how to pivot if you're stuck in a bad example, bad situation. But if you've got more than 100 grand sitting in an account, you may want to move that to another FDIC account, that's what's insured or move it out, move it to something that's going to be paying you on a regular basis performing notes or buying a non performing note at a big discount that you know is going to increase in value over the next two to three years. So go out, take some action everybody and we'll see at the top. Sam.