MReport November 2018

TheMReport — News and strategies for the evolving mortgage marketplace.

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24 | TH E M R EP O RT FEATURE F oreign buyers of U.S. homes are a significant and important source of business to builders and lenders alike. It's essential that savvy loan originators under- stand the scope of this market, regulation impacting foreign investment, and the options available. In the 12-month period through March 2018, foreign nationals purchased more than 284,000 properties in the U.S., according to the National Association of Realtors. The dollar volume of these purchases was $121 billion, or about 8 percent of the entire market for existing home sales. Though this percentage is down about 10 percent from 2017 due in part to higher home prices, a strengthening dollar, and politi- cal tensions, foreign investment remains significant to the U.S. housing market, with states such as Florida, California, and Texas particularly impacted. Understanding the Rules and Regs L oans secured for homes can be divided into two types: consumer loans and business- purpose loans. Consumer loans are generally loans to owner-oc- cupants and are regulated highly by a variety of federal and state regulators. TILA-RESPA Inte- grated Disclosure (TRID) and a variety of other laws dictate how a mortgage-loan originator must determine the suitability of the loan for the borrower and disclosures, among other topics. In contrast, business-purpose loans are relatively lightly regu- lated. Business-purpose loans include loans to investors who are not owner-occupants. Dennis Doss is a California- based lawyer who specializes in mortgage lending. According to Doss, "State and federal consumer protection laws apply to loans to foreigners, so don't lower your guard." Nema Daghbandan, another California lawyer, adds, "The Truth-in-Lending Act—or TILA—deems properties as owner-occupied if the borrower resides in the property 14 or more calendar days per year. Also, if the property is occupied by the child of the owner, for example, while that child attends school in the U.S., consumer-lending laws apply as if the owner himself or herself occupied the home." Exploring Financing Options F or owner-occupant foreign- national buyers, selected banks are open to making loans. These loans are sometimes called "non- QM" loans because they do not fit in the normal box of "qualified mortgages." As with other non- QM loans, down-payment require- ments may be larger than for U.S. citizens—with a 30 percent down payment being a typical require- ment for foreign buyers. Rates will also be slightly higher, due to the limited number of lenders and in- vestors participating in this market and the perceived higher risk of default by a foreign national. For business-purpose loans, there are two types of options available, depending on whether or not the home is rented out and generating steady cash flow. If it is rented, certain specialized lenders will provide financing at rates slightly higher than the rates for owner-occupants, as long as there is debt-service coverage in place to service the loan. In other words, the net operating income (NOI) of the property after accounting for all expenses must be enough to cover the monthly mortgage payment, plus a small margin. A debt-service coverage ratio of 1.2 is typically required for rented residential-property loans, mean- ing that NOI is 120 percent of the mortgage payment. Typically, these rental property loans have significant prepay- ment penalties. For example, a five-year loan may have a 5-4-3-2-1 prepayment, with each number representing the percentage of the loan balance that must be paid as a fee to the lender, depending on the year of prepayment. In the first year, the fee is 5 percent; in the second year, 4 percent; and so on. Some lenders charge prepayment penalties because of the work involved in financing an investor loan to ensure that the lender and originator receive a return for un- derwriting and funding the loan. Also, many of these loans end up being securitized, and mortgage securities typically only allow for a small percentage of loans in the security to be prepaid. The penalty discourages borrowers who aren't sure they want to keep the loan long term and covers the costs associated with substituting a new loan into the security in case of prepayment of the first loan. Real Estate Goes Global Understanding the ins and outs of financing foreign homebuyers is helping loan originators enter the global marketplace. By Jan B. Brzeski

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