Unique financing terms and customer base makes for strong housing segment
The refinancing boom of the last couple of years may be in retreat – what with escalating rates, inflation and the like – but that doesn’t mean there isn’t still strong demand. Just ask Jeff Ball, CEO of Visio Lending, who deals in the single-family rental market which is a hotbed of activity despite the changing market forces.
“Our typical customer owns between 10 to 15 homes, and is self-employed,” Ball said during a telephone interview with Mortgage Professional America. “For most of these people, a portion, or large portion, of what they do is their own personal employment.”
Yes, “obviously interest rates have gone up materially,” Ball noted. And in April the FHFA, which regulates Fannie Mae and Freddie Mac, increased the loan level pricing adjustment for investment properties and second homes, he added. “What had been the most cost-effective financing for owning rental properties in the form of conventional financing that was backed by Freddie and Fannie got quite a bit more expensive this year.”
Still, those factors haven’t put much of a dent in business: “In our space, again, we finance slightly differently, so the rates now running [in] our space are about 7% to 7.25% range for the typical borrower, and the typical borrower would be someone who would have a 740 FICO – so these are high-quality borrowers. And we’re continuing to see investors purchasing properties. Depending on where you are in the country, there are still purchasing opportunities.”
The key lies in the differences between markets, he suggested. “One of the things in the rental space is that rents tend to lag property values. Most properties are rented on either 12- to 24-month leases, so even in a particular market around the country, home prices have gone up anywhere from zero to maybe 30% over the last two years. Rents take several years to catch up to that.”
Another factor benefiting the segment are unique relationships between landlord and tenant: “The other part of it is that tenants can be pretty sticky to landlords,” Ball said. “They’re loath to have to kick out a tenant just to raise pricing if it’s a good tenant. So it takes a while for rents to catch up with property values, and being in an unusual environment, obviously, with really strong home price appreciation, we’re continuing to see purchase activity.”
One area where rental loans are slowing down is in rate-and-term refinances. With a rate and term refinance, a borrower gets a new loan with a lower rate and a new longer term, and pays off the old mortgage:
“We’re seeing less rate-and-term refinances because a lot of folks locked in low interest rates over the last couple of years,” he said.
“So they’re not refinancing into lower rates now,” Ball said. “The vast majority of the loans originated over the past couple years are fixed rate mortgages rather than variable or adjustable mortgages.”
Cash-out refinancing, on the other hand, is prominent now, he said. “The third bucket we finance are cash-out refinancings. In our market, being single-family rentals, a very common strategy for investors is they use cash that they have to acquire the property, renovate the property and once they get it leased, they’ll bring it to a financier like ourselves and they’ll do a cash-out refinancing and then they’ll do it again.”
Exacerbating the housing market aside from inflation and rising rates is a shortage of new housing stock for would-be homebuyers. In spite of a record low supply of homes, sales of previously owned homes in January – single-family homes, townhouses, condominiums and co-ops included in the mix – rose 6.7% from December to a seasonally adjusted annualized rate of 6.5 million units, according to a recent study by the National Association of Realtors.
This certainly speaks to pent-up demand for such properties and yields another advantage in the single-family rental market. “As long as there are properties that are in need of renovation and improvement that are going to be held as rental properties, there’s a good demand for cash-out refinancing,” Ball said.