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58Though home loan delinquencies are declining— 3. 6 percent were more than 90 days overdue at the end of 2010, from a high of 5 percent after the first quarter of last year, accord- ing to the Mortgage Bankers Asso- ciation (MBA)—the number of fore- closures remained at a record level of 2. 3 million at the end of January, according to mortgage tracking firm LPS Applied Analytics. Nevada and Florida have been especially hard-hit, with nearly a quarter of each state’s home loans delinquent or in foreclo- sure, according to the MBA. Fore- closures aren’t expected to decline this year, either, and they are taking longer to finalize. According to LPS, the average time foreclosed borrow- ers defaulted on making a payment increased from 410 days in January to 507 days by year’s end. REMOVING THE ROSE-COLORED GLASSES All players in the single- and multi- family market—including managers and lenders—face the difficult task of balancing customers’ needs and mar- ket realities with maximizing value and profit. Applicants affected by foreclosure, bankruptcy and other
increasingly common and prevalent
stressors of the past few years, have
changed the game considerably.
“The reality is, we went through
the biggest recession since the Great
Depression,” said Andrew Wilson,
vice president of Chicago-based
Aries Capital. “A lot of people were
put in a difficult position of not being
able meet some financial obligations.”
In and of itself, a foreclosure on
an applicant’s record isn’t the end of
it for most multifamily owners and
managers, and it certainly doesn’t
qualify as a deal breaker or red flag that an eviction or debt with a previous
landlord can be.
Atlanta-based RAM Partners, which manages approximately 25,000 apartments throughout the United States, screens applicants as tightly as ever,
according to Brenda Lindner, CPM, and senior vice president with RAM.
However, the firm also takes a consistent approach to reviewing declined
applicants to see what might be feasible. RAM has adjusted some of its
criteria, but it still goes by the basics—credit score, residential history and
employment—and will ask for a higher deposit from applicants who fall in the
“conditional” category.
“If you would have normally met our criteria but have a foreclosure, we’ll
just ask for a month’s rent deposit,” Lindner said. “We’re in a reality check here.
These are good people who got in over their heads and can still pay rent. We’re
really trying to work with people.”
WHAT’S THE SCORE?
Many owners and managers have maintained criteria related to FICO scores
and let market forces adjust other aspects of the qualifying process.
Several years ago, as the economy entered a recession, owners and manager
knew they had to reduce rents to compete with peer properties and attract and,
perhaps more importantly at the time, retain residents. Foster City, Calif.-based
Legacy Partners even enhanced its focus on FICO scores, said Scott Morrison, CPM, senior vice president, but decreased rent at many properties and
provided other incentives to attract new high-credit renters, who could have a
deposit as low as $99 if it was accompanied by a high enough FICO score.
“You have to be flexible and creative,” said Morrison, a CPM for more than
two decades. “It was much better to keep residents at a [minimal] loss and not
have vacancy versus a turnover loss and then having to re-lease at a lower rate
anyway. The criteria to lease are reduced when you lower rent because that
makes it easier for them to qualify.
“A lot of owners right now aren’t looking at ‘what is the value of my build-
ing?’” Morrison continued. “They’re saying, ‘let’s break even.’”
More and more, owners and managers have to look beyond FICO scores,
though. Los Angeles-based Charles Dunn Real Estate Services increasingly
asks for bank references and recommendations from two past landlords as well
as information on current income and consumer debt. Of course, the company
follows fair housing guidelines, but does not rent to felons and sex offenders or
applicants with multiple misdemeanors.
Like most owners and managers, open bankruptcy proceedings are a big red
flag, too. Still, lower-credit applicants who otherwise qualify may have to pay a
higher deposit, doubled in some cases, but will get an honest chance if they’re
showing signs and taking steps toward improving credit, said Eileen Conn,
CPM, and regional vice president at Dunn. A co-signer or a six-month lease
for conditional applicants can mitigate risk, too, Conn said, or they may recommend another unit or property that’s a better fit for the applicant’s financial
situation.
