Lenders remain wary of real estate investors

August 22nd, 2008 by Sue McAllister
Mercury News 

Cupertino accountant Richard Smith wants to buy a few bank-repossessed houses in Antioch and Brentwood priced at about $200,000 and rent them out. He can make down payments of about 30 percent, and can afford the mortgage payments. But he can't find a bank who will make him the loans.

"I'm a very active investor, I'm self-employed with a solid income, and every one of my properties have positive cash flow," said Smith, who has been buying rentals in California and Texas for 30 years. "I've never had a problem getting a loan. All of a sudden I've just run into a solid wall."

The problem? Few if any lenders these days will make loans to those who already have four or more mortgages. Smith has about 100 current mortgages, he said.

Banks' new restrictions on the number of mortgages available to borrowers won't bother typical home buyers. But it's hobbling people like Smith who invest in rental properties, and could even prolong California's housing slump, some observers say. That's because investors are among the most likely buyers for many of the bank-owned foreclosures now lingering on the market in the state's inland valleys.

"If we can't participate, we can't burn through these inventories and help the market correct," said Geraldine Barry, president of the San Jose Real Estate Investment Association and a friend of Smith's. More often lately, she said, "What I'm hearing from our members now is, "I have a deal; I can't get money'.''

Barry and her husband recently bought a foreclosed house in Sacramento for $114,000; the previous owner owed about $250,000 on the property when the bank repossessed it. Even with a 25 percent down payment, they were unable to find a loan because they have more than four outstanding mortgages, so they paid in cash.

Lenders have curtailed what's available to investors for good reason, said Chris George, president of lender CMG Mortgage in San Ramon and a board member of the California Mortgage Bankers Association. Over the past several years, many financial institutions funded loans for "non-owner-occupied" property purchases by borrowers who provided little documentation of their income or assets, then got slammed by losses as thousands of those borrowers defaulted on their loans.

Consequently, the industry has "dramatically retrenched" on non-owner-occupied loans, George said, and is reverting to lending guidelines last seen eight or 10 years ago.

That means banks once again view these loans as riskier than loans for primary residences, and to qualify borrowers typically need down payments of between 15 and 30 percent, credit scores of 720 or higher, and income and assets they can prove. Lenders also charge higher interest on such loans. Smith, for example, is paying 8.25 percent on the three most recent loans he obtained to buy properties in Dallas. The national average rate for 30-year mortgages for owner-occupied properties, however, was 6.43 percent last month, according to Freddie Mac.

In general, George said, making credit available to consumers is good for the economy and can help the housing market. "However, making credit available that will just create another round of defaults two years from now is not sound decision-making," he said. "We can't afford to continue to do this wrong."

With banks turning them away, those determined to invest in multiple properties will seek alternatives. One option is private-money lenders, who typically demand high rates for short-term loans. Smith said some of his clients who own a dozen or more rentals will add to their portfolios, using money taken from the equity in their primary residences to buy in cash. Community banks might also be a source, George said, even though major banks are shunning investors' business.

Geraldine Barry said she wants to buy more bank-owned California properties in coming months, but has yet to figure out exactly how she will finance deals, if lender restrictions remain in place.

"There are only so many houses I can buy in cash," she said.