What are the obstacles to being a landlord?

August 29, 2010
Joe Nocera addresses the question of who might buy houses to rent them out:

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Joe Nocera addresses the question of who might buy houses to rent them out:

It’s even become nearly impossible for well-heeled investors to buy rental properties. This is no small matter. At the peak of the bubble, the rate of homeownership approached 70 percent. Now it is falling toward 65 percent — which is more or less where it was before all the housing madness of the last decade. That means that millions of Americans who were briefly homeowners need to become renters again. They need a place to rent.

But somebody has to buy the homes they are leaving behind and turn them into rental properties. The most likely buyer is a professional investor who purchases rental properties for a living. Yet, absurdly, government rules have made it exceedingly difficult to make loans to investors who want to buy up rental properties. This only adds to the shadow inventory.

I wish the online version of his column had a hyperlink in there somewhere, so that I could work out what government rules he’s talking about. As far as I can tell, the most recent change to government rules took place in February 2009, when Fannie Mae amended its rules on loans to investors. The changes made it easier for professional and semi-professional investors to buy houses, but a bit harder for someone wanting to get their toe in the door; they were understood at the time to be an easing of Fannie Mae policy.

The new rules allowed investors to have Fannie-backed mortgages on up to ten different mortgages; the previous maximum was four. At the same time, however, Fannie Mae closed a few loopholes which allowed people buying an investment home to have liquid reserves of less than six months’ worth of payments on the new home. And the definition of what was considered to be a monthly payment, for such purposes, was expanded beyond just mortgage costs and taxes to include things like ground rent and owners’ association dues.

This seems like sensible underwriting to me. The days of lending only against home values are long gone; we have to move back to a world where lenders look at borrowers’ wealth and income too.

That said, it’s worth remembering, in this context, that mortgages in most of the US are, to all intents and purposes, non-recourse. Some states, including California, have no-recourse laws, while in others it’s simply vanishingly rare for a mortgage lender to go after a borrower personally for funds they haven’t been repaid. And I’d assume that individual landlords lie somewhere between homeowners and businesses on the spectrum of how likely they are to simply return a property to the bank if it falls into negative equity.

As a result, even Nocera’s “well-heeled investors” can be bad credits, if they don’t put down a substantial downpayment which gives them real skin in the game. Does that make it “nearly impossible” for them to buy rental properties? Maybe it does, if they don’t want a lot of equity. In which case it might be worth trying to construct a parallel mortgage system which gives bank a bit more recourse than they have at the moment, at least for investment properties.

Nocera’s bigger point stands, though: it’s in everybody’s interest for landlords to be able to buy up properties without silly obstacles being thrown in their way. If such obstacles exist, let’s try to find a way to remove them.


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