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The New Economy and Future of Investor Financing

The New Economy and Future of Investor Financing
(Or: The Future of Investor Financing)

Just a few short years ago, in the late 1990s, a real estate investor
using conventional financing had a completely different set of
challenges than they did during the decade between then and now. In
1998 a real estate investor would need a minimum of 20% down, have the
burden of proving positively your income and assets and be required to
demonstrate a strong credit history. Proof meant copies of everything
official and nothing could bend the rules except cash.
“By expanding the type of loans that it will buy, Fannie Mae is hoping
to spur banks to make more loans to people with less-than-stellar
credit ratings.” ? New York Times, Sept. 30, 1999
Fannie Mae showed the first signs of making some mistakes stretching
lending limits and obfuscating guidelines because the new breed of
“sub-prime”, also called “non-conforming”, loans had started to take
its share mostly of borrowers with challenges in credit, assets or
income. Soon what Fannie did began to spread in to non-owner occupied
real estate investment loans. Interestingly enough, as a side note, in
that same New York Times article we find the following: ?”From the
perspective of many people, including me, this is another thrift
industry growing up around us,” said Peter Wallison a resident fellow
at the American Enterprise Institute. ”If they fail, the government
will have to step up and bail them out the way it stepped up and
bailed out the thrift industry.”
Soon a new president was elected, the dot com boom and bust were in
our rear view mirrors and the future looked pretty bright prior to
September 2001. We had a robust American economy, lending had loosened
under President Clinton and Fannie Mae Chairman Franklin Raines, jobs
were growing with unemployment hitting an amazing 3.9%, Gross Domestic
Product was at 4.1% and interest rates were falling from 8.5% to 7.48%
during the year 2000.
By the mid 2000s interest rates were in the 5% range, housing values
had skyrocketed, housing starts were at all time highs, investors
could borrow 100% of the sales price of a home if they had a 620
middle score. Income was not important and assets were not important
because of a very dangerous loan some of you crave today called a “no
doc” loan. Then the very loud sound of the secondary mortgage market
collapsing into a hellish abyss called “today’s economy”.
Where we are headed depends largely on how quickly we can
de-socialize, de-nationalize if the “s” word is offensive to you,
banking and private enterprise and distance ourselves from the
foolishness turned to pain of that period. As long as the government
or their appointed agents are guiding, or at best limiting, the
decision making process you can default to lending not being in the
favor of the small real estate investor. That does not, however, mean
the bells have tolled for the industry. In fact we may be at the
apogee, the point farthest away from where we were or where we’re
headed.
Several years ago people in my position in the mortgage banking
industry began predicting cash would once again be king as it had been
in 1998 and before. Little did the majority of us know fully how far
the mortgage industry would implode. Today, in fact, it is very
difficult to get a real estate investment loan from a conventional
mortgage bank. Fannie Mae does have guidelines for you to own up to
ten properties on credit yet lenders have guidelines which are
superimposed on the top of Fannie’s guidelines. There are, in fact,
only a couple of national mortgage investors purchasing real estate
investment loans which means those who originate cannot extend the
credit to you.
Today the investor who is winning is tapping in to alternative methods
of acquiring properties or simply paying cash. Investment clubs which
originally sprang up many years ago to pool cash and team investors
will resume their stance as they did in their infancy. Though they
expanded to hundreds or thousands of members in the boom most of those
people have disappeared back to whence they came. Old techniques like
“wraps”, also referred to as “subject to” purchases, will begin to
show up again especially as interest rates continue to rise – and rise
they certainly shall.
The first signs of recovery will be when inventory levels are
approaching a six months or less supply instead of as much as four
times that number. As the number of available properties decreases
prices will stabilize and even begin to recover. Stabilized values
mean less risk to lenders and our investors which also means lending
guidelines will stabilize and lending itself will loosen up. Do not
expect stated income or stated asset loans to return any time in the
next several years but expect lenders to actually remove some of the
overlays on top of Fannie guidelines.
Once lending is returned to the street , values have stabilized and
inventory levels return to manageable levels then you can expect
private lenders, small real estate investment trusts and buyers like
many of you to enter the market once again. Saying exactly when this
will happen is a guess at best and depends very much on how soon the
jobs market recovers and the economy takes a deep breath signaling an
end of this long, fast, sprint to the bottom.
Even though rates are bound to rise, quite possibly to 1998 levels or
higher, improving values on homes will mean you are still able to
purchase below future market values so even an eight percent to ten
percent interest rate is manageable. Only those who did not experience
investing before the new millennium grimace at the thought of double
digit rates. Remember, it’s not the rate, it’s the return and return
it shall.