Why the mortgage industry remains closed to legal cannabis workers

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Editor's Note: This is part one of a three-part series on mortgage lending to workers in the legal cannabis industry. Read part two and part three.

There is an emerging industry that employs as many as 230,000 workers and is expected to create over 283,000 new jobs in the next three years. Its businesses have a net worth of $7.2 billion, with a projected compound annual growth rate of 17%.

Those kinds of numbers would usually prompt financial institutions to go out of their way to establish a market foothold, both to extend credit to companies and establish consumer relationships with employees — particularly when the Bureau of Labor Statistics expects traditional sectors like utilities, agriculture, manufacturing and even the federal government to shed jobs through 2024.

But this budding business is the highly controversial legal cannabis industry that, so far, mortgage lenders and other financial institutions have been reluctant to work with.

Marijuana is legal for recreational use in eight states and the District of Columbia, and for medicinal use in an additional 21 states. But the federal government regulates it as a Schedule I substance (one with a high potential for abuse and no currently accepted medical use), and there is no guarantee that the Department of Justice won't seek to prosecute recreational or medical use providers operating legally under state law.

For mortgage underwriting purposes income legally derived from cannabis businesses cannot be used to qualify a borrower for an FHA-guaranteed loan. Fannie Mae and Freddie Mac, currently under federal conservatorship, have similar policies in their seller guides.

But even lenders that offer less restrictive loans outside of the federal Qualified Mortgage guidelines can't, or won't, serve these borrowers.

Many cannabis business workers come into the industry knowing it's "a lifestyle that is nontraditional. They're not likely going to be able to get a mortgage; I think they just accept that," said Lori Glauser, chief operating officer of Signal Bay Inc., whose EVO Labs subsidiary tests cannabis for safety and efficacy.

It appears that no lender is willing to be the first to try it, out of risk of being made an example by regulators. But as higher interest rates, plummeting refinance volume and housing inventory shortages continue to constrict originations — and the cannabis industry continues to grow in size and legitimacy — taking on this new strain of risk may soon become a more lucrative proposition.

"The potential opportunities for job creation in cannabis-related sectors remain very strong and will significantly dwarf the numbers that we have here."
— John Kagia, executive vice president, New Frontier Data

The legal cannabis industry has two sectors: hemp, which has a number of industrial applications like rope and textiles, and marijuana, whose businesses are largely focused on consumable uses. Each sector has cultivation and manufacturing segments, while the marijuana sector also has a retail segment.

Each dollar spent on retail marijuana resulted in $2.40 in economic output in Colorado, according to an analysis of the state's legalization law conducted by the Marijuana Policy Group, a Denver-based consulting firm. For the general retail business, including alcohol, the report found that economic output was $1.88 for each dollar spent.

Marijuana legalization created 18,005 full-time equivalent jobs in Colorado in 2015, of which 12,591 were directly involved with the marijuana business, the report also found.

"Additional employment is also generated when marijuana employees and proprietors spend their income on local housing, food and entertainment," according to the report. "This is called an 'induced employment effect.'"

That category was responsible for 2,518 jobs in 2015.

What's more, these jobs cover "everything from minimum wage ranging up to six figures a year," Glauser said. "The industry hires high-level chemists and technical personnel that can operate sophisticated equipment such as extraction equipment to process certain materials, and they are very highly paid. And, yes, in some cases they are likely getting paid in cash."

As more states are expected to legalize cannabis for recreational and/or medical use and industrial uses for hemp products expand, "the potential opportunities for job creation in cannabis-related sectors remains very strong and will significantly dwarf the numbers that we have here," said John Kagia, executive vice president of New Frontier Data, a data and analytics firm in Washington, D.C., that specializes in the cannabis industry.

The firm analyzed the national job and economic impact of the cannabis industry by extrapolating from the Marijuana Policy Group's Colorado study. In addition to the projections of 283,000 new jobs and the industry's $7.2 billion net worth, New Frontier found legal marijuana sales will generate an estimated $745 million in state tax revenue in 2017.

By 2020, it could grow as high as $2.3 billion.

Colorado and Washington were the first states to legalize the recreational use of cannabis.

Denver is one of the nation's hot housing markets. Home prices in the metro area increased 8.3% in July over the same month last year, ranking eight nationwide according to CoreLogic. Seattle was the leading city with growth of 14.55%.

On a statewide level, Colorado recorded an 8.3% increase; the state with the largest increase was Washington at 12.9%.

Such growth can't be strictly attributed to legalized cannabis; Utah, where it is not legal, had 10.8% year-over-year price growth, making it second, while Idaho was third at 9%.

Denver's economy was doing well prior to legalization, said Kagia. But "cannabis has been just one of the contributing factors to the very strong state economic performance over the past few years. It has created very high rents, higher mortgages."

So housing in general "has become a challenge for lower income earners, both in the cannabis industry and outside," said Kagia.

Part two: Legal marijuana sales keeping Colorado's housing market blazing

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Purchase Underwriting Real estate Qualified Mortgages DoJ Fannie Mae Freddie Mac FHA Colorado Washington