Most commercial mortgage brokers will not be surprised to hear that foreign nationals represent a significant market opportunity within real estate finance. Brokers may not know, however, that undocumented foreign nationals offer the best potential for lucrative deals.
These undocumented borrowers, which include foreign investors, have some key characteristics that create much better business prospects for brokers. They represent a population that is nearly as large as that of documented foreign nationals and, because they are perceived to be more challenging and riskier to work with, the majority of institutional lenders will not consider providing financing to them — especially because lending requirements have tightened since 2008.
Undocumented foreign-national borrowers usually need to acquire specialized financing from the few lenders who will fund them. They generally seek knowledgeable mortgage brokers who understand their needs and have connections with lenders willing to fund them.
Foreign nationals who seek commercial real estate financing fall into two groups. The first group has documentation and is relatively easy for brokers and lenders to work with. Often, these foreign nationals come to the United States through the EB-3 or L-1 visa programs. They usually have a Social Security number, as well as a credit history and a place of employment that a lender can verify. In short, they have all the characteristics of a typical borrower, except they lack U.S. citizenship or permanent-resident status.
The second group is comprised of foreign nationals, including sophisticated investors, who do not have the necessary documentation. They don’t have Social Security numbers. Their work history generally involves employers outside the U.S. and their bank accounts are often issued by foreign institutions, making their financial background more difficult or impossible to verify. Overall, they do not fit most — or sometimes any — of the criteria of a typical borrower.
On the surface, the first group of foreign nationals appears to be much better to represent. But you should remember the old saying that looks can be deceiving. It is actually the second group of foreign nationals — those who are undocumented — that you want to bring to lenders.
Foreign nationals who have all the requisite documentation on hand are problematic for commercial mortgage brokers for one main reason. Because they are not considered risky, they generally seek and acquire financing from traditional lending institutions. Because they don’t need creative funding solutions, they rarely require a mortgage broker’s assistance.
On the other hand, undocumented foreign nationals have an opposing set of characteristics that make them a much better opportunity for brokers. Their higher perceived challenges and risks are unique conditions that create specialized-financing scenarios for commercial mortgage brokers. These specialized loans often deliver a considerably higher return on investment than conventional loans. And, unsurprisingly, undocumented foreign nationals are willing to pay much higher interest rates and produce much larger downpayments to acquire specialized financing.
Downpayments for these loans can range up to 30 percent or more, while rate spreads also can vary widely depending on conditions, such as how quickly the borrower needs a loan approval, how much documentation they can provide, how long they’ve been residing or operating in the U.S. and what domestic assets they have. Loan-to-value ratios can go as high as 75 percent with rates in the high single digits and low double digits. And, in fact, these supposedly risky loans can contain less risk than conventional loans.
The fact that foreign nationals may lack traditional documentation and easy-to-verify employment or financial records creates a few big fears in the lending marketplace. Some lenders worry that undocumented foreign nationals will be constrained from finding high-paying jobs because of their immigration status. Other lenders worry that these borrowers will fail to pay off their loans because they reside or can easily disappear outside the U.S. Many lenders, however, simply worry that undocumented foreign nationals may be detained, deported or denied employment altogether.
These are valid concerns on paper, but in the marketplace, they rarely materialize. As a whole, the population of undocumented foreign nationals often perform better than their A-paper counterparts. Some lenders that issue residential mortgages to borrowers with individual tax identification numbers (ITINs), for example, report delinquency rates of about 1 percent, which is lower than the 3.25 percent delinquency rate for all residential mortgages as of this past second quarter.
When adverse events such as detention, deportation or loss of work do occur, many lenders who have dealt with this population have found that borrowers continue to make their loan payments on time. These points alone are not enough to make undocumented foreign nationals an easy sell to lenders. But there are additional actions that mortgage brokers can take to further reduce a lender’s real or perceived risks with these borrowers.
To find undocumented foreign nationals who seek funding, you should look for commercial real estate agents who are focused on servicing this population. Often, these agents reside within the ethnic communities of the borrower’s nationality. Lenders that provide these types of loans are seeing substantial opportunities among Chinese foreign-national populations, and employees at embassies typically seek these types of loans more than other groups.
Most lenders that work with this population are niche lenders that specialize in these types of transactions and advertise their willingness to help. Once an appropriate lender is identified, it is always a good idea to contact a lender representative and ask for their specific guidelines and eligibility requirements for these loans, as they may vary from company to company.
For the most part, lowering a lender’s risk is not a particularly different process regardless of whether the investment opportunity involves an undocumented foreign national or a more conventional prospect. As a commercial mortgage broker, it’s your job to delve into the deal and piece together what is not obvious on paper. You need to listen to and understand the challenges your borrower faces in their business and in their investment objectives. You need to explore their history in order to put together the appropriate deal that addresses their needs and goals.
The borrower’s collateral is a critical element in the lender’s underwriting process, so it’s important to collect as much information about the property as possible. Be sure you can tell the lender what type of property the borrower owns or is looking to purchase, its location and size, whether or not the borrower occupies any portion of it and how much income the property generates.
It is simply a much greater risk to lend to someone who has all of their assets in a foreign bank.
So far, these tasks are not radically different than with most borrower contexts. Here is where the work swerves in another direction, however. You will have to perform a little extra legwork on a few key elements of the borrower’s profile when working with an undocumented foreign national.
You will need to meet face to face with the borrower before you present their opportunity to a lender. This can be a challenge if there is a language barrier. The borrower may not be fluent in English, requiring you to find a trusted third party — a family member of the borrower, for example — who can help bring some clarity to your communications.
You also will have to run the borrower through the USA Patriot Act database and acquire much heavier documentation than you would with a conventional borrower in order to verify their investment accounts. It is simply a much greater risk to lend to someone who has all of their assets in a foreign bank. In general, the more domestic liquid assets you can confirm, the better. Cash, stocks and marketable securities in a domestic entity all bring strength to the case you are building.
There are many small logistical details that are helpful to work out before looking for a lender. Seek to find the answers upfront to as many of a potential lender’s questions as possible. In summation, the more work you can do ahead of time to vet the foreign national and their deal, the easier it will be to present them and their opportunity to a lender. If you are ready to do this work ahead of time, then your only other challenges involve finding these types of borrowers and the lenders that are willing to work with them.
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Commercial mortgage brokers should see the value in representing the large but often ignored segment of undocumented foreign nationals who seek funding. Although they may appear risky at first glance, these borrowers offer some of the best opportunities for brokers and lenders alike in today’s commercial real estate market, as long as you perform proper due diligence.