NEW YORK (Reuters) - Mortgage credit remains tight for most U.S. borrowers, but one group is having little trouble getting loans: landlords.
For example, at Boston-based real-estate lender Edward Voccola & Co. clients who borrow to buy rental properties must simply provide identification, the property address and the expected annual rent.
“That’s all I need,” says founder Edward Voccola. “These loans take a half an hour to do.”
In contrast, regular mortgages require rigorous checks of income, credit history and outstanding debts and it usually takes weeks to secure one.
The Mortgage Bankers Association’s Mortgage Credit Availability Index, which measures the ease of obtaining a home loan, stood in August 70 percent below its pre-housing boom levels a decade earlier.
The difference in access to funding brings to light unintended, and potentially unwelcome, consequences of the regulatory push to make mortgage lending safer.
First, lending to landlords, which has become the domain of specialized mortgage companies or private-equity firms, marks a shift to less regulated “shadow banking” lenders from banks subjected to stricter controls since the 2008-2009 financial crisis.
In the first half of 2014, non-banks accounted for nearly one in four of all U.S. home loans made by the nation’s top 30 mortgage lenders, up from about one out of six a year earlier, according to Inside Mortgage Finance.
Secondly, it contributes to the decline in home ownership, long encouraged by successive administrations as a foundation of individual prosperity and the health of the U.S. economy.
“How are people going to build wealth now?” says Toni Moss, the chief executive of AmeriCatalyst LLC, an advisory firm specializing in housing finance. “They have stagnant wages, they can’t get into the housing market and rents take up 30 to 40 percent of their income.”
The home ownership rate slipped below 65 percent in the second quarter, its lowest since 1995 compared with a peak of over 69 percent in 2004.
Lenders, however, say there’s a compelling case for doing business with landlords.
For one, rents have risen steadily since the financial crisis while home prices gyrated. Mortgages for landlords are also exempt from new rules designed to protect borrowers from predatory lenders, meaning less legal risk.
That allows lenders to offer investors products such as stated-income loans where the borrowers’ wages are not verified and low-documentation loans that do not require borrowers to produce tax returns. [ID: nL2N0QJ2UR]
“It’s less paperwork,” says Brian O’Shaughnessy, the head of Athas Capital, a mortgage lender. “If you go to a bank, it’s like a small surgery. It takes 60 days.”
Furthermore, under new regulations introduced in January lenders who fail to verify a borrower’s ability to repay a home loan face the risk of the mortgage being challenged in court. Investor mortgages are classified as business loans and are exempt from the rule.
“The liability associated with making a bad loan to an investor is not the same as the potential to be sued for making a bad loan to an owner-occupant,” says Christopher Mayer, a professor of real estate at Columbia Business School.
Betting on the market’s further growth, private equity firms such as Cerberus Capital Management LP and Blackstone Group LP, have set up units to offer landlords financing. Blackstone has also spent $8 billion buying rental properties through its Invitation Homes subsidiary.
Unlike national banks, which largely screen borrowers regardless of the mortgage’s purpose, firms like Blackstone or B2R focus primarily on the property’s potential rental income.
“We’ll do much more of a deep dive on properties and less so on the individual,” said John Beacham, B2R’s president.
It remains a matter of debate how risky such lending is.
Some of the terms can be tougher than for owner-occupied homes, with higher down payments and many lenders requiring the monthly rental income to at least cover mortgage payments.
Landlords also typically borrow at higher rates, paying around 5-6 percent in interest compared with about 4.25 percent for traditional mortgages, experts say.
Finally, the market remains relatively small, limiting the potential fallout from defaults.
Out of the roughly 130 million homes in the United States, only 14 million, or over 10 percent, are single-family rentals, according to analysts at Keefe, Bruyette & Woods, Inc. Nearly all of those properties are owned by small-scale landlords.
But their presence is steadily growing. The value of mortgages for rental properties nearly doubled between 2010 and 2013 to almost $140 billion in 2013, or 7.3 percent of all mortgage lending, according to data from Black Knight Financial Services.
Some experts also warn lenders may be underestimating risks, given that in downturns U.S. landlords have been quicker to fall behind payments than those who risked losing their home.
“Historically it used to be that investors would default much more quickly,” says Columbia’s Mayer. “The data suggested investors were a really bad risk.”
Ironically, tight credit for primary residences has contributed to the rise in rental rates, making in turn lending to landlords more attractive. A research paper published by the Federal Reserve Bank of New York last month showed more than 50 percent of renters felt they had inadequate savings or too much debt to own a home.
Michelle Meyer, a housing economist at Bank of America, says the rental vacancy rate has fallen to its lowest since 1997.
“Part of the reason rental demand has remained high is because people can’t access homeownership.”
Editing by Tomasz Janowski
Our Standards: The Thomson Reuters Trust Principles.