By Chris Knoppe, Ohio Rehab Loans

America has long taken for granted the ability to get financing.  In the past decade, Americans have been able to obtain financing for nearly any purchase imaginable: cars, stoves, furniture, and houses could all be bought with the help of a loan, and anything else could be bought with a credit card.  We have recently been reminded by the humbling force of economics that financing is not a free hand out deserved by all.  Luckily for some, another beautiful force, capitalism, allows those with good credit to borrow money from those willing to lend it in exchange for a return on their investment.  The decade of increasing real estate appreciation in our country has caused our lenders to get careless by focusing on investment returns while ignoring the risk involved, thereby giving people loans who should never have qualified for them.  It didn’t matter when home prices where going up & the economy was doing well, because the worse case scenario was that someone with a debt problem could refinance at a favorable interest rate and use the “equity” in their house to finance their living expenses.  In the event that a homeowner fell behind on their mortgage, they could usually sell the house for more than was owed due to the strong housing market. 

Now we are waking up from this dream and realizing that financing is not something that can be taken for granted.  It is a hard earned & well deserved privilege for those who qualify.  Colossal losses have forced lenders to pull back the reins, collect themselves, and re-evaluate their Risk vs. Reward equation for lending money.  Somewhere along the way, banks began not caring who they gave loans to as long as they could sell the loans to Wall Street investors in the form of Mortgage Backed Securities.  In the good times, Wall Street investors (hedge funds, investment banks, mutual funds, etc) where willing to buy the loans because they could earn an extra 1-2% more than comparable bonds were paying.  Never did it dawn on them to consider the qualifications of the people obtaining these loans (no income documentation, low credit scores, etc), and what the realistic default rate may be, especially if the housing market cooled off.  All that mattered was that they were making an extra 1% return.   As it turns out, an extra 1% was not nearly high enough to compensate for the great risk many of these loans had of going into default.  As a result, our entire financial system is now in disarray.  The government has taken over Fannie Mae & Freddie Mac (who guarantee ~55% of the mortgages in our country), every day another bank is going out of business, and lenders who are still in business have tightened their lending standards to the point where hardly anyone can get a loan. 

So what does this mean for real estate investors?  We don’t know exactly how this crisis will play out, but until the credit markets stabilize, obtaining financing will continue to be difficult and the real estate market will suffer accordingly.  Investor loans are one lending category being hit especially hard with tightening credit criteria.  Conventional financing only allows someone to qualify for 4 or less mortgages, and many previously investor friendly local banks have dramatically changed their programs or stopped giving investor loans altogether.  Investors must adjust to current market conditions and get used to the fact that loans are hard to get.  Investing conservatively and maintaining a strong balance sheet (lots of cash) is the only way to survive until the rough seas have settled.  Investors should learn from this experience and hopefully be better positioned for the next market downturn.  Examine your real estate investment business like you are a large bank; focus on accumulating cash for unexpected hardships, don’t take risks without an adequate return, and stay in the game because if you can survive this atmosphere, you will thrive in any other.

For those of you who are having trouble qualifying for loans (don’t worry, you’re certainly not alone- most investors cannot), allow us to help you be successful in this environment & build your cash reserves by participating in our Profit Sharing Program.  Give me a call at the number below for more information.

Comments or questions can be directed to Chris.Knoppe@OhioRehabLoans.com. For more information about Ohio Rehab Loans, visit www.OhioRehabLoans.com or call 614-433-0570.