Nathan Birch defaulting on IP mortgages...

Discussion in 'Property Market Economics' started by hash_investor, 5th Jan, 2018.

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  1. hash_investor

    hash_investor Well-Known Member

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  2. BarneyRubble

    BarneyRubble Well-Known Member

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    Without knowing any more than the story, and his latest blog post, does not look pretty.

    Who ignores court action, especially when it is going to cost you significant funds?
     
  3. Ouchmyknees

    Ouchmyknees Well-Known Member

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    Pretty scary stuff!

    Key points:

    1. $535,000, 30-year interest-only mortgage. (Maybe the article is incorrect? I thought IO loans only last 10 years tops? Then it get changed to P&I. The 30-year mentioned in the article is probably the entire duration of the loan. )
    2. A variable interest rate of 6.94 per cent plus late payment fees at an additional rate of interest of 5 per cent a year. (Holy moly, he must be mortgaged to the eye ball and lost his mind, no sane person would agree to 7% interest rate unless he/she is greedy, desperate and crazy!)
     
  4. HGM

    HGM Well-Known Member

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  5. hobartchic

    hobartchic Well-Known Member

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    Most lenders have moved to IO terms of only five years now (if at all) but this is probably an old loan.
     
  6. Terry_w

    Terry_w Well-Known Member Business Member

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    Very strange indeed. All he had to do was to keep making the repayments - about $2500 per month.
    When he got behind he could have quickly got up to date before the bank took further action.
    Now he has to refinance the loan - which still should be easy to do using private lenders.
     
  7. hobartchic

    hobartchic Well-Known Member

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    Some one in financial trouble?
     
  8. twobobsworth

    twobobsworth Well-Known Member

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    Some new plates for the Bentley.
     

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  9. Karina

    Karina Well-Known Member

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    I can imagine with such a massive portfolio it must be hard to stay on top of all of the loans and when they are due. Perhaps it was an administration oversight that it got to the stage it did. I am sure APRA changes would have really affected the cashflow across the portfolio with lenders increasing rates for IO loans. Nathan will be just fine once he makes some changes to his portfolio to adjust to the tighter lending/ IO rate rises. Real estate takes time to sell unlike shares so it maybe a bit of a juggling act to support cashflow whilst the portfolio is modified to adapt to the new financing restraints. One thing you can't deny about Nathan is that he has courage he has built an incredible property portfolio and business. Just a bump in the road for him I am sure.
     
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  10. euro73

    euro73 Well-Known Member Business Member

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    I guess we shall see... but I have always maintained his numbers didnt add up. 500K income from 200 + properties is very poor from the so called king of cash flow.

    Blind Freddy could quickly calculate that's 2.5K per property. With an average price of 250-300K one would only need a 1% rate rise to underwater pretty quickly . Add some P&I into the mix and he'd be drowning. And thats if you are on mid 4% rates... you'd already be in trouble with rates near 7%....

    So what happened in 2017? IO rates went up by @ 85 bpts and IO quotas were introduced...with heavily geared investors having little or no capacity to extend IO terms or refinance elsewhere. I imagine a good number of his properties have started drowning...

    It should serve as a warning to all. As I have said many times, when you have weak cash flow you will ultimately end up having to sell. And here it is for all to see... it isnt net worth that matters when you need to hold your portfolio. It is net cash flow that matters.

    He should be concentrating on debt reduction for the next few years...because he's going to have an increasing number of loans rolling into either higher rates or P&I , and it would appear his model is particularly susceptible /fragile to any such changes... just like most investors.

    Its not important that he owns 200 + properties compared to regular investors owing 2,4,6 properties... whats important is the cash flow generated by the portfolio. It needs to be sufficient to pay down some debt ( preferably non deductible, non income producing debt such as PPOR mortgage, credit cards, car loans etc - but any debt repayment will do if you are honest with yourself ) during the IO term and it also needs to be sufficient to hold its own- or at least go close to it, when it reverts to P&I- as it eventually will... the P&I trap will catch everyone eventually you see... In other words, it needs to be sufficient to buy you time to ride it out if the wind changes...
     
    Last edited: 5th Jan, 2018
  11. Terry_w

    Terry_w Well-Known Member Business Member

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    But they would have received notifications from the lender - probably many times before court action.

    Yes he probably will be fine - but strange that he let it get this far.
     
  12. Terry_w

    Terry_w Well-Known Member Business Member

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    Perhaps a lot of the IO loans also reverted to PI at the same time.
     
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  13. melbournian

    melbournian Well-Known Member

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    @Terry_w @euro73 would the default affect his credit rating and ability to borrow?
     
  14. sash

    sash Well-Known Member

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    Karina....the issue is that he as massive portfolio...if you are in default...that is pretty serious as they would have called for him to settle-up numerous times and would have issue follow-up paperwork. The amount would have seem to be a very small amount. The fact he did not settle-up...is very suspect. If he has serious CF problems he will not survive.

    Just reading between the lines....there are more things in play lets see what happens.

    I can given an example of where due to someone at a bank not setting up the direct debit up the first months repayment was not made...I called to recitify this and again they did not sort this our the next month. I got a call...I asked them to fix it and told them in no uncertain terms I would be issuing a legal letter of demand for their incompetence ...they reversed all penalties and rectified the situation pretty quickly. For the process to get this far it would be at least 6 months in. I am thinking he was trying to sell his assets but due to them being inferior quality...they are having a hard time selling.

    The fact it made it to the front page of a newspaper is not good...something else is going on.
     
  15. sash

    sash Well-Known Member

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    The fact it is being reported by the financial review would make his other creditors very nervous...they might even have issued a letter to pay down some of his loans.....I reckon there is a lot more going on behind the scenes.....
     
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  16. sash

    sash Well-Known Member

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    Mwwaaahhhh.....the ole interest rate cliff....I hope people got 10 or 15 yr IO......

     
  17. melbournian

    melbournian Well-Known Member

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    that's probably another good reason to have quality assets - no point having 10-20 Ips in some low socio economic area when they is minimum upside.
     
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  18. Karina

    Karina Well-Known Member

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    Sash,
    Publicity wise for Nathan its really unfortunate that this is out in the media. I can only imagine it will affect his business but I do think he will get through it. His portfolio is massive and those rate rises as well as not being able to draw on equity would have hurt but I think he has enough good properties "sydney properties etc" where he has made good money to sort things out. The thing is you need time to sell to and adjust and real estate is not that quick to liquidate hence the short term cashflow problems. You can't grow that big and not run into problems from time to time. He has too much ambition and drive to let this get the better of him.
     
  19. sash

    sash Well-Known Member

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    Karina...I get that as @melbournian puts it...quality assets are paramount.

    This sort of things can be a house of cards....the number of properties he holds are few compared to the CF stuff he bought of much lower quality.

    The issue is even if he sold the best assets would it cover his position for the poorer quality assets?

    I can be a house of cards....I have a seen a few others run into trouble also....

    This is one of the reasons why I am dumping 1-2 of my dogs now.

    I also have plan to bring down my conservative net debt levels from the current 38% LVR to under 20-25% over the the next 2-4 years...whilst also buying some assets along the way. This strategy change which I have posted is a consequence of the lending environment and associated risks. Its like running a business. Thus why I also am careful about concentrating risk in one market...people who only put money into Sydney might be in the same predicament if the market turns....interest rates increase...and their I/O period runs out and cannot extend...some things to think about.

    The fact that he is in trouble would indicate his net wealth and financial position is now where it should be...I believe he indicated he had a net wealth of $20m on $30m of assets...based on my maths it would have been nearly impossible to get into his predicament unless he overcommitted in other areas of his business.

    Obviously...the facts will come out over the next few years.
     
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  20. Pete Arendt

    Pete Arendt Well-Known Member

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    I understand he had to liquidate properties to make the payments, hence the delay in doing so. It took time for properties to sell and settle.