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Cerberus, Blackstone Loosen Credit for Small Landlords

JUL 7, 2014 12:26pm ET
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Property owners with just one rental house can now get cash from Wall Street to buy more.

Cerberus Capital Management LP, which initially targeted landlords with multimillion-dollar loans, is financing low-volume deals for small investors through its FirstKey Lending, with looser terms than government-backed mortgages from Fannie Mae and Freddie Mac, said Randy Reiff, the business’s chief executive officer. Blackstone Group LP (BX)’s rental lending arm, B2R Finance LP, is making a similar push to mom-and-pop landlords.

“Our premise has always been to be able to lend to the middle market and entrepreneurial borrowers in the space, not just the institutional borrowers,” Reiff said. “The biggest guys have always enjoyed access to capital. The largest part of this market is really the entrepreneurial owners.”

The companies are competing to lend to owners of the almost 14 million rental houses in the U.S. at a time when many Americans are struggling to get a mortgage and homeownership is declining. Cerberus and Blackstone, along with Colony Capital LLC, also are racing to package debt on homes managed by separate landlords for the first multiborrower bond sale.

Blackstone, the biggest U.S. single-family landlord after amassing 45,000 houses since early 2012, has led Wall Street’s issuance of $3 billion of securities backed by properties owned by one company. The New York-based firm’s B2R unit is expanding the rental bet with plans to offer funding to investors who only need one rental home to qualify, starting this year, John Beacham, president of B2R, said in a telephone interview.

About 53 percent of the 14 million U.S. investor-owned or vacation houses were without a mortgage as of last month, based on data from property-research firm RealtyTrac, implying investors in about 7 million homes could get cash-out mortgage financing to buy more real estate or make other investments. There are more than 1.3 million property owners in the rental market who own at least two homes, according to Westminster, Colorado-based RentRange LLC.

Blackstone’s B2R was among companies offering loans last month at a Dallas meeting of HomeVestors of America Inc., which has 472 franchises for property investors in 120 cities, most of whom own fewer than 10 single-family homes, according to Co-President David Hicks. Small landlords have struggled to get financing until the last couple of years and most offers came with high interest rates, said Hicks, whose company advertises on billboards that say “We buy ugly houses” with a picture of a cartoon caveman.

“Now they have a choice of who to borrow from,” he said. “It’s like night and day.”

The Wall Street firms offer loans with interest rates of 6.5 percent to 7 percent, compared with 12 percent to 15 percent for non-bank hard-money loans, the most common source of debt for landlords who can’t get a bank mortgage, Hicks said. The lower-interest deals can come with strings, such as such as requiring an analysis of the cash flow from rents, a turnoff for many HomeVestors franchisees, who usually buy properties based only on the price, according to Hicks.

“They’re using Wall Street money and they’ve got all those rules,” he said. “Sometimes it’s just hard to relate that to an independent investor.”

Rental demand is climbing as tight credit, slow wage growth and the lingering effects of the foreclosure crisis limit purchases. More than 40 percent of borrowers in 2013 had FICO scores above 760, compared with about 25 percent in 2001, according to a Feb. 20 report by Goldman Sachs Group Inc. analysts Hui Shan and Eli Hackel.

The U.S. homeownership rate dropped to a 19-year low of 64.8 percent in the first quarter, down from a 2004 high of 69.2 percent, according to the Census Bureau.

Stagnating wages and an increase in student debt are keeping younger people from qualifying or even wanting to buy, said Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute in Washington.

“They don’t see it as a store of value,” she said.

Home sales will fall this year as higher prices and interest rates limit people’s ability to buy, according to Fannie Mae economist Douglas Duncan. Over the next 12 months, rent increases are expected to outpace home-price gains, 4.3 percent to 2.4 percent, Fannie Mae’s June survey of consumers showed today.

“Despite recent improvement, we now expect an annual decline in existing-home sales due to weak volume in the first four months of the year associated with the rise in mortgage rates mid-last year and the current dearth of supply of lower-priced homes,” Duncan said in a statement today.

For lenders, that’s an opportunity to expand credit to rental property owners, including those who wouldn’t qualify for government-backed loans or have outgrown the parameters.

“Investor loans are business purpose and not subject to the increased regulatory burden on consumer lending,” said Carl Bell, a managing director at Amundi Smith Breeden, the U.S. subsidiary of global asset-manager Amundi, which oversees more than $1 trillion. “From that perspective, it is easier for investors to underwrite the regulatory and liability risk than with the owner-occupant lending market.”

FirstKey has $500 million of loans either funded or in the process of closing, most for $5 million or more, Reiff said in a telephone interview.

Shifting the focus to property owners with fewer houses is “just an expansion of our efforts to service the entire scope of the single-family market,” Reiff said.

While Fannie Mae limits landlords to loans on a maximum of 10 properties, and Freddie Mac will lend on four, FirstKey will finance as many as 25 under its latest debt product, Investor Property Express. The company will offer 30-year fixed-rate mortgages to borrowers with minimum credit scores of 620 on loans starting at $100,000 for houses worth a maximum 75 percent of the property value if they are already leased, according to documents obtained by Bloomberg News.

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