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GSEs should relax lending standards for two- to four-unit homes, the Urban Institute says

Two- to four-unit homes are often more affordable overall for borrowers and often serve lower-income tenants — the same people that analysts and government officials say face a shortage of reasonably priced homes and rising rents. But banks and conventional lenders are still largely avoiding this property type.

According to the Urban Institute, a progressive housing-policy think tank, conventional loans in the two- to four-unit space are especially hard to get because the government-sponsored enterprises (GSEs) have maintained tighter lending requirements for that property type since 2009.  

“When we talk about expanding access to credit, these are exactly the buyers that we have in mind,” said Laurie Goodman, co-director of the Urban Institute’s Housing Finance Policy Center. “Yet, we are imposing much more stringent rules for these properties than for single-family detached properties.” 

Goodman said that lenders historically suffered greater losses on these properties than on single-family homes. The overall loss rates for these units are still higher than with single-family homes, Goodman said. The Urban Institute recently produced a report on defaults and lending patterns in this space, however, and concluded that Freddie Mac and Fannie Mae should relax the downpayment requirements, which were ratcheted up significantly after the recession. The GSEs also have significantly reduced their loan purchases in the space. 

This space is important because the borrowers and their tenants seeking out these homes tend to be lower-income, many of whom are minorities in minority-dominated neighborhoods, Goodman said.  

“We would argue that you should be willing to tolerate a little bit higher loss on these units given their makeup,” Goodman said. “Moreover, if you did landlord counseling to teach these guys how to be landlords, you could curb a lot of [defaults].” She noted that the Federal Housing Administration and certain states offer housing counseling to landlords of two- to four-unit properties.

A hard money world

Lenders say that these loans are available, but the space is mostly the domain of private, hard-money lenders.

“It is not difficult to get the loans,” said Shea Pallante, managing director of California-based Civic Financial Services.

Pallante said that this market is geared more to the faster-moving private-money world, where deals can be closed in days.

“If you are purchasing a two- to four-unit property, there is high demand for those properties in the market, so they fly off the shelf,” Pallante said. “Buyers are looking to close quickly and, to be more competitive with their offers, they either have to offer full cash, or they have to get it with a hard-money loan. If you go with a conventional lender, it is probably going to take 45 to 60  days to close. It is just not quick enough for investors.”    

Pallante said that his company, Civic, is fully capitalized and can be more aggressive than a conventional lender. He noted, however, that credit in the space has likely been constrained because many private-money lenders are dependent on the banks for their capital.

Groundfloor, a private lender based in Georgia, is active in  New Jersey, where the demand for loans on these properties has been high, said Glenn Gilbert, the company’s director of loan originations.

Typically these deals involve developers who need quick financing to acquire and fix up the properties. The developers then sell the properties to an end buyer, who may occupy one of the  units and then rent the others.

Gilbert said Groundfloor has been one of the most aggressive lenders in its market, offering short-term loans that can finance up to 90 percent of the acquisition and renovation costs. He also noted that some lenders have left the space.

“When we look at our portfolio as a whole, there is still overwhelming demand for single-family home fix-and-flips,” Gilbert said. “However, lots of the low-hanging fruit in the single-family home fix-and-flip [market] has now been gobbled up. What is left are these multifamily plays, which have been nonperforming for a long period of time. They take a specialized player to come in and renovate them, and also the level of distress precludes them from more traditional sources of financing.”


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