Insight into PeerStreet’s Loan Performance Q4 2020
PeerStreet has always believed the more transparent, educational, and honest we are as a company, the better off all stakeholders in our marketplace will be. To that effect, PeerStreet continually strives to provide investors with more historical and current data of its loan performance.
This is Volume 2 of PeerStreet’s continued commitment to provide insight into loan performance. View our first blog post on historical loan performance to understand the trends we’ve seen from a longer horizon.
Key Definitions:
L-30, L-60, L-90, L-120 = This means a loan has not made a payment in 30 days, 60 days, etc.
Delinquent = PeerStreet classifies a loan as ‘delinquent’ when it is 60 or more days late (Late 60+).
Foreclosure = The action of enforcing the lender’s rights under the loan documents, and potentially taking possession of the underlying property, when the borrower fails to keep up their payments. Once the foreclosure process starts, the most common outcomes are either: (i) the loan is reinstated or pays off before the property is foreclosed on or (ii) PeerStreet takes ownership of the property at auction resulting in an "REO". Properties taken over as REO are typically then marketed to be sold.
Default = A loan is labelled as being in “Default” when PeerStreet commences the foreclosure process. Foreclosure timelines vary from state to state.
REO = “Real Estate Owned,” we have taken ownership of the property, usually as a result of the foreclosure process, but we have not yet sold it.
REO Sale = Sale of the property.
This report outlines the loan performance PeerStreet has seen historically, how that performance has been impacted by COVID-19 as well as an overview of the real estate markets as we move to a post-COVID era. It is worth noting that, due to the pandemic, certain qualifying borrowers were granted mortgage payment deferrals. Deferred loans are categorized as paid current in the data sets below.
Foreclosure timelines have been extended due to COVID-19.
*Foreclosure timelines are estimates and will vary depending on a variety of factors such as moratorium extensions, judicial impediments, etc., as well as loan-specific factors. **Cook County, Illinois (Chicago metro area) has issued a foreclosure moratorium until further order of the Governor, which may extend timelines further.
The foreclosure process, and associated timeline, varies by market. Some markets, such as New York and New Jersey, settle foreclosures through the judicial system which typically takes longer, while others, such as California and Maryland, typically handle foreclosures outside of the courts.
In reaction to COVID, many markets closed their court systems and issued moratoriums that prevented the filing of new foreclosures and halted the progress of foreclosures already in process. This stretched timelines out considerably, most notably so in New York.
Approximately half of PeerStreet’s defaulted loans are located in states with foreclosure moratoriums in place, delaying PeerStreet’s Asset Management team from working through loans in foreclosure.
As states begin to reopen the court systems and roll back foreclosure moratoriums, we are optimistic that timelines will return to pre-COVID levels once court backlogs are processed.
As foreclosure referrals continue, loans in foreclosure are beginning to payoff.
*Foreclosure payoffs include only loans that were referred to foreclosure between April 2020 and December 2020.
As courts reopen, we are starting to see progress on loans referred to foreclosure since April. This is an important step not only because it allows PeerStreet’s asset management team to move loans through foreclosure, but also because it puts pressure on borrowers to work out a resolution outside of the foreclosure process.
A quarter of the payoffs have come from California. Resilient property values and a straightforward process, has largely allowed us to move loans through foreclosure smoothly.
Florida, one of our most active markets, reopened their court systems in late November. After working through a backlog of cases, the state has begun scheduling foreclosure hearings again.
While some loans referred to foreclosure result in investor losses, the median return remains higher than the expected Investor Rate.
*Expected returns determined by investor rate and stated term of the loan. This data includes only loans (and REOs) that paid off by December 31, 2020 and excludes loans that are still outstanding, as the final return for outstanding loans has yet to be determined.
*Annualized returns are calculated based on distributions to investors. This data includes only loans (and REOs) that paid off by December 31, 2020 and excludes loans that are still outstanding, as the final return for outstanding loans has yet to be determined.
While foreclosures may delay loan payoffs and increase payment uncertainty, most loans that have entered foreclosure historically, have yielded positive returns to investors.
Returns vary for loans that go into foreclosure. Loans in foreclosure accrue default interest and other fees, which may increase returns to investors if collected. At times, however, decreases in property values, foreclosure expenses, and other factors can also lead to losses.
The equity cushion on loans, which is the difference between the appraised value of the property and the loan amount, can help insulate investors from losses. Things that can negatively impact that cushion are time to resolution, various costs that are absorbed by the loan investors (taxes, maintenance, selling commissions, legal). Real estate markets have generally held strong throughout the pandemic (with some exceptions), preserving equity in loan collateral.
Historically, the median return on foreclosure loans has been higher than the expected investor rate, while the average has been lower. This implies that many defaults end in positive gains for investors, while a few large losses have driven down average returns. Some foreclosures currently being worked out by the Asset Management team have been particularly affected by the events of 2020 and we anticipate the return profile on these projects to skew lower than the historical norm.
As performing loans have paid off and delinquencies have remained constant, active pre-COVID investments are increasingly delinquent. All loans purchased since July are current and performing.
*Late status buckets are discreet groupings based on month end loan status. Data includes all active loans serviced by PeerStreet within the reporting month through December 31, 2020. L-120+ includes all loans more than 120 days late with the exception of loans that have transitioned to REO.
*Data includes all active loans serviced by PeerStreet within the reporting month purchased between July 2020 and December 2020
PeerStreet closely monitored the impact of COVID-19 on the market and paused purchasing new loans in the Spring of 2020. Buying resumed in July and all loans purchased since have performed as expected.
Over the past 9+ months, payoffs of performing loans have outnumbered new loans funded through the platform. This, along with the inability to process foreclosures in states with foreclosure moratoriums, resulted in non-performing loans beginning to make up a larger percentage of the portfolio. These loans tend to take time to pay off as PeerStreet’s asset management team works through the foreclosure process.
New loan purchases provide investors an opportunity to reinvest proceeds back into performing loans. As of December 31, 2020, loans purchased since July have not missed a payment.
Diversification can be an important source of risk mitigation.
*Expected yields are the output of a downside scenario simulation modeled using the PeerStreet active portfolio as of March 31, 2020 to normalize for a decline in active loan volume since pausing loan purchases in March. The graph shows the range of outcomes between the 90th and 10th percentile of investor yields taken over the life of the portfolio. The model does not consider reinvestment of principal.
As the number of loans in a portfolio increases, the range of expected returns will shrink. In a downturn scenario, like the one modeled above, diversification may be an effective risk mitigation strategy.
Our foreclosure portfolio has a negative skew (average return is less than the median) due to a few large losses offsetting mostly modest gains. As more loans are added to a portfolio, the impact of any large loss on total portfolio return is diminished.
DISCLAIMER: the data provided herein was generated from PeerStreet’s portfolio performance to date, may not be exhaustive or reflect market-wide trends, and is provided solely for informational purposes. Past performance is not an indicator or predictor of future performance. PeerStreet is not an investment adviser and nothing contained herein is, or should be construed as, investment advice. Investors should not rely on PeerStreet to make investment decisions and should independently evaluate the risks and merits of any investment opportunity themselves or in consultation with their own professional advisors.
