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   ARTICLE   |   From Scotsman Guide Residential Edition   |   July 2005

Foreign borrowers create strong option

In a time of market changes, more originators seek ways to extend their business boundaries. Wider arrays of products are emerging as solutions. Forecasters continue to take a positive-yet-cautious view of mortgage lending and recognize that flexible offerings continue to change and improve the industry.

Programs that are geared to international borrowers also are gaining popularity rapidly. Many U.S. regions are attracting savvy, foreign-national buyers to purchase second homes and investment properties. Realtors, mortgage originators and lenders are finding a wealth of opportunity in meeting these buyers’ mortgage needs.

A strong currency-exchange rate and a robust housing market provide an attractive avenue for foreign investors — especially our European and Latin American neighbors. These factors help the buyers create equity and wealth in American real estate.

Real-estate investments provide for-eign nationals with significant returns on equity and wealth-building opportunities. Although some foreign buyers purchase high-end homes, many prefer the convenience of condominium ownership. Condominium ownership provides these buyers with an upscale environment plus benefits such as on-site maintenance and security that can accommodate foreign homeowners’ travel schedules. Areas with a good saturation of this property type are in highest demand.

To capitalize on this market, Realtors and developers are aggressively advertising overseas to attract foreign buyers to U.S. real-estate purchases at an inexpensive yet comfortably appreciating level. In addition, investment and private bankers are advising their foreign clients to take advantage of the current marketplace to pursue the “American Dream.” Meanwhile, connected originators are relying on referral relationships with advisers and communications with prospective borrowers through seminars worldwide.

From a lender’s perspective, the foreign borrower might seem to be at a high risk. Historically, though, loans to these individuals have performed at an acceptable level. Much of the actual risk for lenders lies in a speculator who is looking for a quick return by “flipping” a property at a profit. Lenders have started to protect themselves from this practice by imposing prepayment penalties or offsetting the potential resulting losses with slightly higher interest rates or margins. This product has not become a popular secondary-market offering, so portfolio lenders in this arena are challenged to protect their balance sheets from “flipping.”

Loan-to-value ratios are generally low, as the exchange rate adds to our foreign neighbors’ robust liquid-market position. Borrowers recognize the value of investing in a strong equity return, which is incrementally higher in most targeted markets than other forms of investments in any country.

From a risk perspective, lenders receive added comfort and risk-aversion in transactions with different types of verification documentation in other parts of the underwriting process.

For true foreign nationals or permanent resident-alien borrowers, documentation of legal status is necessary. These borrowers’ international credit reports can provide background information for credit history, but they are structured differently than domestic reports. Their verification also can be time-consuming. To provide quicker fulfillment, direct credit verification via bank- and credit-reference letters are acceptable.

Full- and limited-income verification loans are offered, depending on available documentation and the borrower’s convenience needs. Appraisal requirements are generally the same as those for domestic borrowers. They depend upon the size of the loan.

Though many foreign-national borrowers travel to the United States for their closings, others have closing documents shipped to an appropriate agent in their native countries. In these instances, the settlement must be properly witnessed and verified, as required by the lender and Bank Secrecy Act guidelines.

On a larger level, foreign-national lending is similar to limited-documentation domestic lending. The differences can lie in minor requirements of prudent business practice of the lender and the allowance of more-flexible credit-sourcing guidelines. Reaching this segment does not require tremendous experience.

Providing this product can create a profitable niche for those willing to extend excellent service to foreign borrowers. Originators who recognize and act upon the opportunity to add these programs can increase their pipelines with sizeable loan amounts. 


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