Real Estate Investment Loans – Will There Be a Lender Revolt?

Posted @ 3:58 pm - Filed under BawldGuy Axiom, Economy, Financing, Market Correction, San Diego Property Owners, Texas

After living through so many iterations of various markets, both home and in several other states over four decades, I’ve come to believe in my favorite lender axiom more and more.

BawldGuy Axiom: Lenders lend. When they begin to see the lender ’stamp’ on their forehead fading away, they realize it’s lend or die. They’d rather lend.

The most recent example of this has been in Texas, and not even with owner occupied properties. A institution totally new to investment property lending saw the opportunity to make a killing. They made it known they’d lend 80% LTV on small residential income props. They charged just a smidge over normal points, and a slightly higher, but acceptable interest rate.

What happened?

They found out quickly they were unprepared for the pent-up demand for reasonable loans on income property. 30 day loans took 45 days, then 60 days, but they eventually got done. Borrowers showed up from all points on the map wanting loans for their Texas purchases. They didn’t even make it to the 4th quarter much less to the end of the year as I’m sure they’d planned. They were swamped from Day 1.

Lenders are now dealing with an investment market sporting handcuffs designed by Fannie Mae and friends. The changes they’ve implemented have been good, bad, and just downright silly. The net effect they’ve had on the market is to retard it, not help it.

One of the helpful changes has been the way appraisers are assigned. It’s much more random now. I say helpful, but in the case of new construction or new mostly undeveloped areas of a region, this can backfire on the purpose intended. An analogy would be who you choose to maintain your car. If you owned a Mercedes, taking it to your local Ford dealer for its 50,000 mile service is risky at best. Reasonable folks can agree that even a highly experienced Ford-trained mechanic will simply not be prepared for what he finds under the hood of a Mercedes.

Appraisers unaccustomed to a neighborhood a few miles from where they usually work, don’t know the ins and outs of that one compared to the ones they’ve been appraising for years. This isn’t complicated, is it?

Then there are the underwriting changes. Upping the credit score requirement makes sense, though I strongly suspect folks with less than a 720-740+ score aren’t moles sent by Satan to sink the economy. But seriously people, some of them defy explanation, even by the lenders themselves. Here’s an example.

Last year you bought a duplex. Since ya haven’t owned it for two years, they force you to count the mortgage payment on your application, but NOT the income. Let that set in a bit. This results many times in superb borrowers appearing to be way in over their heads. Yet it presents an artificial (nice way of saying BS) i.e., false picture of the borrower’s true financial position. Imagine having cash flow from your various investment properties half as much as your job income — and you make almost six figures annually! This new ‘accounting’ makes you appear to be almost struggling financially.

How does that help?

When a real estate investor puts 20-30% down plus closing costs, they don’t do it on a whim. They’ve thought long and hard about putting $50-80,000 of their hard earned money into an income property. How motivated do ya think they’ll be to make that investment a long term success? Duh. The arguments made for this 1984 approach to underwriting language are laughable at best, and fraudulent at worst. That’s a discussion for another day, but suffice to say the next lender who gives me a plausible explanation without stuttering, while avoiding eye contact, will be the first.

Then there’s the now infamous four property limit. Gimme a break. My Grandma thinks this one is stoopid, and she’s been dead for over a decade. I’ve railed about this before, but it’s so counterproductive, one can’t wonder what the real intention was. Ya get four props — this includes your residence too which is another rip. You want more, but now the underwriting, gulp, gets even dumber. Of course, this is if ya can even find a lender who’ll make the dang loans. Currently there are only two lenders, B of A (Save us, Lord) and Wells — that’s according to the word I’ve gotten from several lenders who don’t do them.

Lenders don’t like living in a world in which they’re not lending. I have colleagues and personal friends who’re both mortgage brokers and employees of direct lenders. The stories they tell me are literally so dumb sometimes I almost make ‘em swear on their kids they’re not makin’ them up. These guys, for the most part can make loans in the majority of the states — and still their companies’ leadership has made life so tough at times, two of them are considering changes.

At some point some board of directors meeting is gonna explode at the nonsense with which they’re forced to live. It’ll be at that point we’ll begin to see some cracks in the dam. They’ll become relatively proactive in changing the status quo. Even the investors buying these loans are beginning to grumble. The siren song of higher yields generated by highly experienced borrowers, with significant skin in the game is beginning to keep them up at night.

Watch for the grumbling to become audible — sooner rather than later.

To contact me — call 619 889-7100. Have a good one.

This entry was posted on Wednesday, November 4th, 2009 at 3:58 pm and is filed under BawldGuy Axiom, Economy, Financing, Market Correction, San Diego Property Owners, Texas. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.