I started my business in 2005 when just about anybody could get a mortgage on an investment property. At that time there were lenders who could finance an unlimited number of properties with 0% down based on your stated income (i.e. no tax returns). It seemed so great at the time …. of course we all know better now. It was probably in my first year of business when we felt the shock of lenders moving away from 100% financing and requiring an earth shattering 5% down! Little did I know – that was just the first of many shifts in the mortgage industry that I would have to manage over the next several years.
Eventually, the mortgage industry moved to 20% down requirements, limited the number of properties an investor could finance, revamped the entire appraisal system, changed seasoning requirements, and basically made underwriting a nightmare for even the most qualified borrowers. For about 7 years straight it seemed like the credit markets were constantly tightening. I can recall numerous meetings with local banking institutions even as recently as last year that went something like this: “Ken, we love your business model and feel you are a qualified borrower, but our bank just doesn’t have an appetite for residential real estate right now”
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The Market Always Responds to New Demands
Over the last couple of years, it has been interesting though to watch how the investment industry has responded to the tight credit markets. We’ve watched as self-directed IRA’s have exploded as an alternative source of capital. Investors who couldn’t get conventional financing or simply wanted to use retirement funds moved their money to the myriad of new custodians that had popped up to meet this new demand. Additionally, a handful of alternative lenders created non-recourse loan products to work in conjunction with the self-directed money that was pouring into the market.
Additionally, we saw many private lending institutions spring up that could provide higher interest loans to investors who couldn’t obtain conventional loans (for reasons such as lack of citizenship,10 existing financed properties, credit issues, etc). We also watched as many investors became private lenders themselves to cash in on the opportunity to help other professionals operate and invest in the market.
The Market May be Opening Up
It’s been a very interesting ride to say the least. However, I can say for the first time that I am finally seeing signs that perhaps we’ll start to see lending becoming a little more available in near future. One of the first signs is the fact that my primary mortgage company recently acquired a lender on the secondary market that can finance more than 10 loans. Granted, I haven’t run a loan through them yet, but the fact that a new product is out there is a great sign.
Also, one of our regional banks here in Atlanta has finally developed a product for residential investment properties. This is the same bank I met with only 2 years ago that told me the bank simply didn’t have the ability or appetite to do residential loans. Well, I suppose they have licked their wounds long enough and are ready to get back into the residential space again. With tight inventory levels, real estate values steadily on the rise and conventional Fannie and Freddie loans as the only other option, I think it makes complete sense to develop this type of product at the local level. I believe once word gets out and we see investors flocking to this new product, we’ll see other local and regional banks follow suit as well.
As frustrating as mortgage lending has been for investors over the last several years, any movement towards easing is a cause for celebration. I am hopeful that in the coming year(s) we’ll see not only new products to compete with conventional loans, but the availability of commercial lines that will enable investors to hold multiple properties on a single line. While a very small percentage of local banks have something like this now, I believe we’ll see more and more of these types of loans becoming available to the general population as real estate recovers and banks begin to work with investors again.