What's going on, BiggerPockets, Matt Faircloth. So interesting conversation, for the last
nine years, it's been very easy, people don't realize how easy it was because I invested
in 2005 through 2010, currently it's been very easy to get a loan. Back then, it was
too easy to get a loan in 2005, '06, '07, and '08 with the no doc stuff, and everything
like that. But then '08, '09, and '10, it was very hard to get a loan. Now we're experiencing
a world where it's hard to get a loan. How do I get money? I want to buy deals, how do
I get money?
The first way you get money is to reach into your network and use books like Raising Private
Capital, my book that I wrote with BiggerPockets, to find money out of your own network. After
you read that book and form your own network for money, you're also going to want to get
bank money because bank money is about as cheap as you're going to get. And people might
ask the question, "Matt, interest rates are ..." Today I can tell you Fannie Mae, Freddie
Mac and a lot of small community banks are all lending money. I'll put the rates up here,
in the realm of say 2.5 - 4%, that's today's rates. Today's April 2020 and rates right
now are somewhere in that range. Fannie Mae's come down, they were above 4 right after corona
crazy happened. Now they're sub 4 again. Most small community banks are going to be in this
range too.
And that has to do with the fact that with the source of where banks get their money.
They're basing their money based on either the LIBOR, based on the 5, 10, 30 year treasury
on those treasury notes. And all those things are super, super low and even zero right now.
And they're charging something above that called a yield spread. If they're basing it
on LIBOR, let's say LIBOR's at one, they're going to charge a yield spread, of say, 2
and that makes their rate 3. So the yield spread is where they make their profit. So
people say, "Money's so cheap right now, Matt, how come I can't get a loan?" Let's talk about
why it's hard to get money right now and how you can get it. Okay, you guys in? All right,
I'm in.
First of all, where banking some money because most banks, some banks have something called
a balance sheet are balance sheet lenders, balance sheet lenders. Balance sheet lenders,
and a lot of your small community banks are balance sheet lenders. What a balance sheet
lender means is, they're taking the money off of their balance sheet, out of their cash
assets, or getting it somewhere out of their own pocket one way or another, and they're
lending it to you. It's their money, they're going to loan it to you and you're going to
pay them back on an interest rate, and everything like that. They're not going to go and securitize
the money. Now I'll talk about what that means next.
But a balance sheet lender is not going to securitize the loan, which in essence, means
they're not going to sell it. People don't realize this, loans get sold. For you guys
who might not own a home or anything like that yet, you might not have seen this. But
it's very common for you to go to a closing on your home, on a new purchase, or a refi,
or whatever, and you go in, your lender is bank A at closing and that's just a regular
loan. You get a letter from bank B two or three weeks later saying, "Hey, we've now
purchased your loan, we're now going to be servicing it. So loans get sold, a more complicated
way to call is securitizing those loans.
But these banks that our balance sheet lenders do not sell those loans. Most small community
banks are doing that, are balance sheet lenders. That's where we can get monies by going to
a balance sheet lender and asking them straight up. You want to act like you know what you're
talking about, use that term. "Hey, are you guys a balance sheet lender?" "Oh yeah, well,
we actually are. It's funny you know that term." Speaking their language now, right?.
The other way they do it is, as I said, they securitize it and I'll just say they sell
it. They sell the loan and that's where this stuff comes in more and more commonly. Because
they're trying to develop a yield spread and their profit margin on the loan, and maybe
they're selling you the loan at 4% for your interest rate, but they're going to sell it
to somebody else behind them at 3.5 so they can make their half a percent spread, and
points and origination fees, and all that kind of fun stuff, that's well beyond my pay
grade and my level of understanding. But I happen to know that in selling mortgages,
a lot of stuff happens behind the scenes. I do know a lot about this, but I want to
keep this a basic level conversation. Some banks are selling the mortgages.
Now, those that are selling the mortgages, well, how are they doing that? Well, they're
maybe not lending out their money. They're getting something called a warehouse line.
A warehouse line, now what a warehouse line is, is a gargantuan bank or somebody like
the Federal Reserve or a large institution is giving these banks big, big, big lines
of credit saying, "Okay, we're going to give you a half a billion dollars." Put your pinky
next to your mouth with me, a half a billion dollars, 500 million dollars. "We're going
to give that to you as your line of credit, and you're going to take that and you're going
to originate loans with it." Now you can't just go take ... if they were to just lend
out a half a billion dollars in loans, they would be done. They can't just lend out that
amount of money and stop. They've got to keep the wheels churning, keep their loan officers
moving, keep the loans coming out.
So what they do is, they'll take the warehouse line, originate the loan, write somebody a
loan for ... you borrow a million dollars for a small apartment building from them.
They write you that loan. "Here's your money bucks, congratulations on your closing, get
on down the road." Then they sell, then they package that loan with a bunch of other ones.
That's them selling it. Then they sell all those loans and then they pay back the warehouse
line. They're really originating loans. And the large organizations behind them, like
Fannie Mae, Freddie Mac, or even bigger banks, or they get rolled up in something called
mortgage-backed securities. Again, complicated to a two level stuff. But there's large organizations
including Wall Street level stuff that buys all this stuff back. By the way, watch The
Big Short if you really want to understand how this happens, watch a movie called The
Big Short.
There's a commercial mortgage-backed securities CMBS world where they collaborate all these
commercial mortgages and sell them up on mortgage-backed security stuff. And there's mortgage-backed
securities that back our home mortgages for the homes that we all own together. So that's
folks that sell. Now I've gotten beyond this, reason number one on why it's gotten hard
to get a mortgage is because of corona crazy and because of the instability of the world,
these warehouse lines have dried up. That's a fact. The folks that were writing warehouse
lines and giving banks enormous lines of credit to allow them to go out and run around the
world and originate loans, and then, "Hey, I'll borrow a million dollars from you, warehouse
line folks. Give Matt Faircloth a mortgage for his apartment building," and then quickly
sell that to somebody else.
That warehouse line has pulled back partly because a lot of that's Wall Street money.
And you saw what happened to Wall Street and partly because of the unpredictability of
the world. We're just not sure where things are going now. These warehouse lines are dried
up, so these are now gone. If that's gone, that means I have no capital to go and put
in to originate loans anymore. So a lot of, on the commercial side, apartment buildings
and stuff like that, bridge lenders, folks that are doing big rehab loans and things
like that for apartment buildings, those guys are all on the fence right now. Fannie and
Freddie are still there. Fannie and Freddie can still lend into mortgages, but we'll talk
to that. We'll talk about that in a second, about Fannie and Freddie and how to still
make things work here and why these guys are still maybe a little skittish.
Securitized lenders are gone for now. That's reason number one, why it's hard to get a
mortgage. The reason number two as to why it's gotten so hard to get a mortgage is this.
When banks look at your deal, what they're doing is they're looking at the financial
viability of your deal. That's what they're doing when they underwrite your property.
They've got an underwriting team that evaluates your asset and they look at the financial
viability. Now, if your loan is based on real estate, it's really based on the income that
you have, any loan really, is based on making sure that you've got the income to pay your
debt service to maintain the mortgage payment. And that there is a pretty good guarantee
that income is going to stay in its place for the foreseeable future, at least for the
life of the loan. That's about as basic as it gets.
Are there going to be checks coming in from some form or fashion that are going to be
big enough that they can maintain the debt service and also pay the expenses for the
property and also hopefully pay the owner a little bit of income. There's something
called debt service coverage ratio, this is something you guys should look into, DSCR.
It's really the factor they're doing there, and all they're doing is just making sure
that you're making enough money you can cover your debt service and your mortgage and a
few bucks for yourself too. Up until now, up until what I've been calling corona crazy,
up until corona crazy, a multifamily or even just all residential real estate, which is
what a lot of BiggerPockets subscribers and followers are owners of, or want to be owners
of, residential real estate.
That's what I'm talking about has been fairly stable even in 2008, even with the crash,
and like that. I'm not talking about property value. I'm talking about from a income perspective,
it has been fairly easy to predict what residential housing is going to do from an income perspective,
from a rental payment standpoint, in this country. And that's in a multifamily, single
family homes, all of it has been fairly stable. Yeah, it's moved a little bit up and down,
but for the most part, even during the recession, if you look at what rents were during the
2008 recession, rents stable. Property value went like this, but rents fairly stable across
the board. And that's because it is the first thing that people pay, their housing expense.
As long as people are making income, put an asterisk next to that, as long as people are
making income, most people are underwritten to spend about 25 to 30% of their income for
housing.
And if they can't make that income, then they're going to go get it from somewhere else, or
God forbid, you've got a victim and they're going to have to go and live somewhere else
or move in with family, or whatever it is. But you can easily replace that person with
another tenant that is going to be willing to pay 25 to 30% of their income for your
housing unit. Now I am totally compartmentalizing and making people seem like little statistics.
It's not the way I look at the world. I look at my tenants as people, a little asterisk
in there, so you guys won't come after me talking about evicting people like that.
But it is a fact. Up until now, banks have looked at real estate, their residential rental
real estate, as a fairly stable asset class to invest in. Meaning, if the rents are this
today, they're probably going to stay about the same, if not go a little bit through the
foreseeable future. They don't really have to bake in twists and turns in the market.
That has changed. Is there going to be income on your rental property? And I'm talking about
today, we live in a big fat question mark right now. That's where we are. There's more
questions than there are answers because of corona crazy right now. And unfortunately
and because of, not just because of coronavirus, but because of a lot of things that were happening.
Lots of debt, and corporate debt, and national debt, and all this other kind of stuff, has
all come to a head mostly because of corona crazy.
But we're living in a big fat question mark and there's a lot of questions on whether
or not people in the US are going to have the income that they had before. Let's put
my beliefs aside and what I think, at the end of the day, banks are not sure whether
or not your rental property is going to be able to produce the income that it did over
the last couple of years in the future, especially in May, June, July. That's biggest thing is
why it's so hard to get a loan these days. Like right now, there's no telling whether
or not your May rent is going to look the same as what's your February rent did. And
any landlord will tell you that, even landlords that have collected most of the rent, they're
not going to bet their life savings on May rent coming in on time unless they're 100%
Section 8, or something like that.
Section 8 is a whole other thing. You can leave Section 8 comments in the comment box,
we can talk about that if you want. But for the most part, we're going to talk about market
rate housing. We're not talking about subsidized housing, because that really takes income
off the table. We're talking about market rate housing for folks that are taking a portion
of their income from their jobs and paying it in. We've had such a shift in this country
of employment that we were 3% unemployment rate and now, some will say, we're in the
15 to 20% unemployment range overnight, over a couple of weeks. So the income question,
the biggest thing that banks use to underwrite your deal is income. So because this has shifted,
that's another reason why it's become hard to get a loan. Now your balance sheet lenders,
your small community banks, are going to use this to evaluate your deal.
So if you've got a deal that had good April rents, then you're standing on really solid
ground and you want to tout that. So if you guys had really good collections in April,
then you want to go to your bank and you should consider a refi now. Why? Those interest rates,
you're not going to see rates like that for, I mean, rates like that maybe you'll see them
for the foreseeable future. But these small community banks are willing to lend, are probably
still looking to put some money to work. They may be sitting on their hands. These guys
are done, the warehouse line folks and the folks that were selling mortgages, and things
like that. They're done, forget it. But your small community banks and balance sheet lenders,
they likely will still play ball if you can show that you had income in April.
That's a caveat, if you're not sure if you can guarantee it, if you're buying a property,
then set up a refinance, if you're buying a new property and you can't really show good
April income. Guys, we're looking to refi a lot of our stuff that had really good April
income right now. That's what we're doing because we had a pretty good April, so we're
going to look to refi some of our properties because that can show we had income. I think
we're going to have a good May too, can't really show, it's really speculation, but
hey, if I had a pretty good April, I'll have a good May.
Fannie Mae and Freddie Mac lend on super small, on residential real estate the people live
in, like single family homes and duplexes, things like that. But they also lend on the
whole underwriting spectrum, they lend on big multifamily, think a hundred units and
up. That's what they lend on, things that have a multimillion dollar purchase price.
Fannie and Freddie, because they're government-backed, are still in the business. Now, because they're
government-backed, they're still in the business, but because they're the only one standing,
because these guys went away, Fannie and Freddie, call them F + F, you could still get money
from them. You can still get a loan from Fannie and Freddie, but it's become hard to get money
from Fannie and Freddie because Fannie and Freddie changed their terms because they're
the only one standing and because they want to make sure about this income. Goes back
to this.
Fannie and Freddie have required an enormous amount of money to get held in escrow. Escrow
means money gets held with them for just in case. So escrow could mean, what they're requiring
is anywhere between 6 to 18 months worth of your monthly payments on your debt service
to be held in a savings account on their side. And they'll give it back to you after you've
proven that your property is going to be able to make its monthly payments and not have
an income problem. But they want you to pay a lot ahead and just hold onto it. They want
you to pay your monthly payments for interest and your principal. They also want you to
hold it to escrow your taxes and insurance. So that can kill a lot of big apartment building
deals, or even small apartment building deals. Because at the end of the day, instead of
you having to put together this much money for your deal, you're now having to put together
this much money for your deal to cover all that interest and all that stuff they want
you to escrow.
Now, like I said, they give it back to you after a period of time. If you can show that
your deal's able to perform, you do get that money back, but you've got to hold your breath
for a little bit to get it back. So Fannie and Freddie are really, because of the last
guy standing in the midsize multifamily world, they've changed their terms a lot. Their interest
rates have changed a bit, now they've come back down. But they went way up and now they're
back down. But they're requiring an enormous amount of escrow. This is hard to come up
with, this escrow arrangement, especially if you're buying a new property. You got to
be able to prove income, warehouse lines are gone, so bridge loans and lenders that were
willing to help you get from one place to another like a bridge, and then rehab lenders,
those guys are done for rental real estate, and there's balance sheet loans.
Now there's another lender out here which we're not going to talk too much about. Those
are hard money lenders, hard money lenders maybe are still going to lend. Those are going
to go company by company, because some of those guys were getting their money from warehouse
line. They're done, they're gone. If they're getting the money from a warehouse line, forget
it. If they're raising their money from private investors, if they read my book and started
up a hard money company, it's possible. If they're raising it from private investors,
they maybe are still in business. Rates may have changed a little bit, their terms may
have changed a little bit. So hard money lenders may still be in business, but again, that's
going to go company by company. That's going to have everything to do with where they're
getting the money from.
Now, things change. Things are changing daily, so let's keep this conversation going. This
is not just about the day I release this video. This video is intended to be the state of
the market today and why it's hard to get a loan. But I want to hear success stories,
"Hey Matt, I just got a loan at 3.9% from this local small community bank." Tell me
about it. Tell me what you're getting. Tell everybody else about it. Let's use this video
to support each other and have conversations about what we're seeing in the market from
lending. This is what's happening today, but let's use the video to monitor what's happening
forward, so use the comment bar as an ongoing conversation.
Thank you guys. This is a complex conversation, but it is something that we can get through
together through resources like biggerpockets.com. You guys are the best. I appreciate you. Have
a great profitable week.
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