Prashant Gopal over at Bloomberg really freaked me out with his piece on vacation mortgage loans and their prevalence in vacation destinations…(Bloomberg)
- “A special kind of business loan is fueling the boom. It lets borrowers, including the self-employed, qualify based not on their salaries but on the projected future income of the property they’re buying. In industry jargon, they’re known as “debt service coverage ratio” loans, referring to the way that rents must be at least enough to cover monthly mortgage payments.”
Investment-property loans have seen an eightfold increase since 2018 with loans totaling $9.9 billion in 2021. This, however, is still a fraction of the almost $4 trillion in originations that same year. And of that 9.9 billion the vast majority of those loans are supported by regular-paying tenants on long-term leases, according to experts.
However, despite the reassurance of the minimal impact of these loans, there were some quotes from the article that seemed like they could have doubled as cut scenes from the big short…
- Chelsey Jones, a 29-year-old former grocery store manager in Columbus, Ohio, bought four rentals in the Smokies…Jones expects to make a $150,000 profit this year from her rental properties: her Smokies homes, along with one in Ohio and two more under construction in Florida. That’s almost four times more than she earned in her grocery job, which she quit in 2019. “What a dream come true to be able to work from home, be my own boss, and make that kind of money,”
- HomeXpress Mortgage Corp., based in Santa Ana, Calif., and owned by New York hedge fund Seer Capital Management. HomeXpress is trawling for more brokers to sell this kind of loan. “No income verification, no job listed,” Christopher Berrey, one of its account executives, posted on his LinkedIn profile. “AirBNB and VRBO are ACCEPTABLE!!!” In an interview, Berrey says the loans’ simplicity makes them popular. “There’s less underwriting,” he says. “Less of pretty much everything.”
No doc loans? I don’t like that. However, once again, looks can be deceiving. “Jeff Ball, co-founder of Visio Lending, notes that borrowers must make down payments—at his company, often 30%; they are also required to have the equivalent of six months’ worth of mortgage bills in reserve at the bank,” Ball goes onto note that these loans perform extremely well because people with good credit have a history of paying their obligations in good times and bad. When asked by Gopal about a recession and an impact on vacation rentals Ball responded ” “It’s an interesting question,”
About halfway through that article I was terrified, however, as I read about the amount and some of the safety guard requirements I did start to feel a lot better. I was reminded of Mark Zandi’s prediction that we discussed yesterday that certain markets could see 1 5-20% if a recession became reality. Patricia McCoy, a former assistant director at the US Consumer Financial Protection Bureau, told Gopal “Inexperienced landlords may not be accounting for volatile rents or the cushion they’ll need for unexpected repairs.” I don’t think this is just possible but likely. If you want to know where those 15-20% corrections could be? Look on a map and find the most Airbnbs.