Non-bank lenders offer easy credit to US landlords as rental market grows
Loans to property owners mark shift to less regulated shadow banking, with non-banks accounting for a quarter of home loans in the first half
Mortgage credit remains tight for most US 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.
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 per cent 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 specialised mortgage companies or private equity firms, marks a shift to less regulated shadow banking lenders from banks subjected to stricter controls.
In the first half of the year, non-banks accounted for nearly one in four of all US home loans made by the nation's top 30 mortgage lenders, up from about one in six a year earlier, according to Inside Mortgage Finance.
Second, it contributes to the decline in home ownership, long encouraged by successive administrations as a foundation of individual prosperity and the health of the US economy.
"How are people going to build wealth now?" says Toni Moss, chief executive of AmeriCatalyst, an advisory firm specialising in housing finance. "They have stagnant wages, they can't get into the housing market and rents take up 30 to 40 per cent of their income."
The home ownership rate slipped below 65 per cent in the second quarter, its lowest since 1995 compared with a peak of over 69 per cent in 2004.
Lenders, however, say there is 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.
"It's less paperwork," says Brian O'Shaughnessy, the head of Athas Capital, a mortgage lender. "If you go to a bank … 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 and Blackstone Group,have set up units to offer landlords financing. Blackstone has also spent US$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 to 6 per cent in interest compared with about 4.25 per cent for traditional mortgages.
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 per cent, are single-family rentals, according to Keefe, Bruyette & Woods.