Credit will continue to remain tight
Since the financial crisis of 2008 and its aftermath, numerous banking laws were enacted to protect consumers. In so doing, the overall effect was to create an extremely tight credit market – especially for property investors. While federal banking rules have helped stabilize a U.S. economy that was in freefall at the time, property investors, most notably novice rental property investors, as well as younger ones investing in real estate without the credit experience and background, have fallen prey to the huge tightening of credit mortgage markets. Basically, they have been excluded from the leverage abilities for investment opportunities that older and more experienced property investors with track records can take advantage of, and secure from lenders. Well, you can now add to the excluded group those investors in more rural areas of the country. This is because banking regulations remain in place, even for the smallest of community banks across the country.
The rural area disadvantage
According to a recent report from HousingWire.com ( “Half Of All Rural Banks Don’t Qualify For QM’s “Rural” Exception,” HousingWire.co, January 27,2015, by Trey Garrison), local small lenders in rural areas around the U.S. , despite their tiny size relative to their big-city counterparts, have the same regulations placed on them. The net result? They simply have gotten out of the residential mortgage lending business, en masse. According to the article, “three-quarters of community bankers surveyed say that new mortgage regulations are keeping them from making more residential mortgage loans in their communities, according to the Independent Community Bankers of America.” Mr. Garrison goes on to say ““ICBA’s 2014 Community Bank Lending Survey validates what community banks have long predicted—that new restrictions on mortgage lending are reducing much-needed access to mortgage credit for many Americans,” ICBA President and CEO Camden Fine said.” “The survey also shows the avalanche of new regulations coming down on community banks from Washington is having a negative impact on their lending.”
And the survey says…
Highlights of the above-referenced survey include: “73% of community bank respondents said regulatory burdens are preventing them from making more residential mortgage loans; significant percentages of community banks are no longer active in the residential mortgage market, are considering an exit from this line of lending or are exiting the market; 44% said they originated fewer first-lien residential mortgage loans in 2014 compared with the year before; half of all rural banks said they do not qualify for the QM rule’s “rural” exception, which demonstrates that exemptions from the standard are too narrow, limiting access to credit for consumers who need it.”
The bottom line
And what do you suppose the effect has been on rural property investors because of this? You guessed it! Less mortgage lenders means less competition by area banks. And when you have less competition, interest rates can naturally creep up…but only in these rural areas. It’s like a double whammy: first, there are less opportunities for rural investors in a tight credit market to turn to for applying for their rental property mortgage loans. (And this can apply to conventional or FHA loans.) And large lenders, like Chase mortgage, for example, may not be lending in extreme rural areas that they don’t geographically cover. And secondly, for those rural banks that are making mortgage loans to investors, less competition means less incentive to keep interest rates down. If they know there are half as many mortgage lender options in a particular community, interest rates are certainly going to creep up amongst the smaller pool of existing mortgage lenders. And that means that rural property investors will be paying more, on average, for their debt retirement than their city and suburban investor counterparts. As a rental property investment strategy, keep this potential increase in mortgage expense in mind when crunching numbers, as you search for new property acquisitions.
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