Current State of Lending - EP12

Today's special guest originates more new construction fourplex loans each year than anyone in the country. Lane Aldrich sits down with the FIG team to discuss the current state of lending and more...

• Where are interest rates headed in 2022?

• What does the current real estate lending market look like?

• Thoughts on Zillow losing 420 million in 3 months.

• Qualifying for build-to-rent projects and BRRR owner-occupied opportunities.

"Yet the government doesn't build homes. They can't. They can only sponsor and promote an environment where someone else can. And when you take a portion of that out of the market, when the country is already short $5.5 million housing, you’re just further creating or exacerbating the problem." - Lane Aldrich, First Colony Mortgage

Steve Olson: Welcome to the build-to-rent podcast. I am Steve Olson here with Sherida Zenger and a guest host, Lane Aldrich.

Our friend Chase Leavitt broke his finger, playing softball. He must be terrible at softball. He's actually not. No, he's legit. He's crazy. We played in a company softball tournament, and I think he was number nine. And I heard the guys on the other teams "that number nine guys everywhere. He can't get it around him." So apparently he got the ball wrong, broke his finger.

So, we have Lane Aldrich of First Colony Mortgage here with us. Sherida and I spend most of our time doing a fourplex master plan project and Lane is our preferred go-to lender on all of those.

We thought it would be good to have him in here to talk about some of the intricacies and financing, because when you're going to build a rental product, single family home up to four-unit properties, up to a fourplex. If you've got the option Lane, as a lender would be somebody you would want to go through. Terms and everything associated with those kinds of loans is, are better than your, your garden variety, commercial loan.

You're doing a little one-off deal, or maybe you're doing five or six fourplexes. You need to investigate your financing Lanes here to help us out with that.

Lane Aldrich: Happy to be here. Thank you for having me. I am glad that you didn't bring up the fact that we played in a softball tournament together a couple of years ago, where I played one inning with your team and blew up my MCL in that one inning as well.

So, I'm not on Chase Leavitt's level as far as playing. Um, but as far as getting hurt you know what? We just don't have to go there.

Steve Olson: So, your professional softball career ended that night.

Sherida Zenger: I actually came over and watched your kids. I played Pokemon with your son.

Steve Olson: Right? Oh, that's true. That's true. I remember.

Lane Aldrich: These are some tender moments that are surfacing.

Steve Olson: Lane was never drafted. And then the knee injury only lessened his chances. I think he's given up all hope, but luckily, he's good at something else.

Lane keeps his eye on the macro side of lending, as it pertains to conventional loans. Somebody gets a loan to buy a house and live in it. That's a conventional loan and you can get a conventional loan and live in a duplex and rent out one side, or you could get a conventional loan and investor-owned a fourplex, not live in any of it and just rent it out purely for cash flow and appreciation purposes.

Lane, we talk all the time about some of this stuff, and Fannie Mae and Freddie Mac, the main agencies got kind of cute recently on some of this, they've walked it back.

What are you seeing on the macro level about the appetite for lending and anything unique that you feel is worth knowing?

Lane Aldrich: In a lot of ways, and investors will know this, it has been a unique year in, in both home building home finance, the market in general lending did not go unscathed from some big adjustments from the new administration coming in.

And also assessing what needs to happen to try to create a healthier market for real estate, create opportunities, people that want to come in and purchase a home to owner occupy. And as part of that Fannie Mae and Freddie Mac are in conservatorship, meaning that they are essentially run by the treasury, even though they're publicly held, it's a unique situation.

And as part of that, the treasury gets to dictate the type of guidelines and restrictions as part of their stock agreements for these entities. And there was a hidden clause in there that had been ignored for a long time that says for Fannie mainframe max overall portfolio, they really wanted to limit the scope of second homes and investment properties as a part of the overall lending that runs for their system.

And they decided earlier this year that they wanted to enact that meaning that they wanted to keep the number of second homes and investment properties being financed and, and funneled through, these financing. Down to typically about 8% or less of their portfolio when it had been running a lot hotter than that for the last couple of years, particularly this year, there was a lot of money that came into business owners, through PPP loans, a lot of stimulus money.

The people were more liquid than normal. And one of the first things they did was turn to real estate. I want another second home. I've got more money for investment properties, and that was straining home buyers’ abilities to come in and purchase homes. They, they decided to enact that guideline or enforce it essentially and got very aggressive with it instead of, “Hey, we're going to, we're going to phase this in over six months, 12 months, they came to lenders like First Colony or some of the larger banks that you would have heard of and said, Hey, you have got two months to wind down your investment, property financing.

It hit everybody. It kind of caught everybody off guard and that was in March or April or so. And so, investment, property financing, you could. but it was offset by higher interest rates and lenders saying, “Hey, we want to do less and we're going to make the financing less attractive.” So that's what we dealt with a lot over the summer.

And then something happened where the current administration said, we realize we want to create more affordable housing and investors who are building and acquiring properties to create rental units actually create or help promote affordable housing because of inventory, right. So shocking revelation.

Investors are good for the economy. They're good for housing. And it turns out when you restrict an investor's ability to get financing, you're also essentially restricting the ability, to create or promote an environment for more affordable housing. And so, this new rule that they enacted in March has actually walked back about six weeks ago, where they came back and said, look, this was not as effective as we thought.

And we needed to reverse. And so, this is a concern that I get that gets brought up with investors. Hey lane, is there going to be financing for Fannie Freddie stuff? What about these two to four units? I'm under contract on new construction for the time being. There's nothing to worry about that. And the market will always find a way. While that restriction was taking place, there there's a lot of new portfolio loans and different options were coming to market to absorb what Fannie and Freddie had walked away from.

And so, if something like that ever happens again, the market's going to be more ready than. But that's a concern that gets brought up a lot. I'm happy to be able to come and deliver good news about that, that the, the environment for investment property financing, not only our rates in terms attractive, but the, the current administration and government officials recognize the need for the role that investors are playing here.

Steve Olson: That's good. I keep thinking of Jeff Goldblum in Jurassic Park, " the market finds a way." What you said stuck out to me, it's interesting. You have this gap, and it appears to be widening.

Homeowners want somewhere to live. Let's not even call them homeowners. Let's call them occupants. Whether you own the place that you occupy or rent it. We, we have a need for that sort of thing. And then you look at what business owners, what the market can deliver, and they cannot satisfy the need of many of those people, primarily because of costs, land, and labor.

And we've talked about that a lot on this podcast. And so, I'm actually relieved to see that politically they understood it's investors that are filling that gap, right? If investors have the capital and the appetite for risk to come in and close that gap, otherwise, where are these people and the live.

Lane Aldrich: Yet the government doesn't build homes. They can't. They can only sponsor and promote an environment where someone else can. And when you take a portion of that out of the market, when the country is already short $5.5 million housing, you’re just further creating or exacerbating the problem.

Sherida Zenger: You're getting these investors to come in and they're having to put 25% down.

They're putting more skin in the game. We're not talking about somebody that's coming in trying to put three and a half percent, 5% down. So, there is more skin in the game and the guidelines I think have tightened around qualified qualifying for it as well.

Lane Aldrich: Being a business owner has had a lot of pros over the last couple of years for many people if you're able to tap into government resources and relief programs. But it's a little bit more difficult to get financing right now if you're a business owner because things will be more volatile than normal.

This is not referencing the BRRR model where you're going to come in rehab it, those are owner-occupied, and there's still the ability to come in and get great owner-occupied financing on a one-to-four-unit property.

But in most of the markets where I lend in that, you've just kind of priced out of that as free from a loan, a loan program perspective.

Steve Olson: For everybody listening. Lane talks about the BRRR model. Buy, Rehab, Rent, Refinance. That's a good model, but man, that's hard to do right now.

In fact, In the news this morning, Zillow takes a major dive. I don't know if anybody's listening to this, but, and I talked to so many real estate agents and rehabbers that were just furious about this, right?

Because look, if you're in this business, if you do anything with single-family homes and rentals, you already hated Zillow with the fire of a thousand sons. Because how many times has a tenant or an O a buyer comes to you and said, well, Zillow said, oh geez. Right.

And sometimes they say valuable things, but Zillow opened a home flipping division. Brought all that institutional capital. Get all that money out of Silicon Valley and come in and you can, you can pay exorbitant fees for houses in Tennessee and Missouri, and Nevada.

Lane Aldrich: Oh, sweet mercy. It turns out their algorithms about pricing, which for the record have always been wrong. It turns out that Zillow was the only entity that didn't know that they're wrong.

And they were buying properties for bad prices and overpaying. Where typically you'd want to come in and find a distressed property or a quick sell or something. Cause that's where your Delta is when you're a house flipper. There's no Delta, there's nothing there. How deep into purchases were they?

Steve Olson: I don't know, but I heard, I don't know if it was the CEO or somebody on CNBC this morning saying, “Hey, look, we're shareholders in our company. And the responsible thing to do is to shut this thing down. That's bleeding cash.

There's a reason appraisers don't use Zillow. Preston says they lost north of 360 M in a quarter!

Lane Aldrich: And they're laying off 25% of their workforce.

Steve Olson: That, that stinks for them. But it'll be interesting to see what happens in the. Does that free up inventory for owner-occupants or smaller investors who now don't have to compete with the Zestimate, right?

Lane Aldrich: A lot of people are going to be happy about their little mishap here.

Sherida Zenger: One thing I want to ask you, where do you see rates going? I know that's a big question that people are asking.

I know on a lot of our projects; we're looking for stuff that probably isn't going to go into long-term financing for about 12 months to 18 months. So, we usually say to you, on our horizon, what are you seeing? What have you been told where you think rates are going to go?

Lane Aldrich: That's a fun question.

It's a loaded question too because we're in uncharted territory in the sense. Interest rates historically have, have come down. We're in a low-interest-rate environment and it's been trending down since the eighties, but interest rates for mortgages and properties are, are tied to treasuries.

Treasuries are tied to inflation right now is as high as it's been in over 20 years. Yet interest rates and treasuries have detached because the narrative coming from the fed is, “Hey, they, they use the word. They're going to stop using it today. I know the is having a big announcement today.

They're getting away from this word transmit. Saying, “Hey, all of you are freaking out about inflation to us. It's not real. So, we're going to look past it and they have convinced everyone buying bonds, including themselves, that bonds can be sold at a discount because of this inflation that's happening.

Isn't real. That's not true anymore. And so, what we might see, what we're keeping an eye on too, is as these bottlenecks continue, and there's upward pressure on prices. Which should also mean inflation do rates catch up to that and interest rates? Honestly, there's upward pressure there.

Fed's going to wind down their bond-buying program where they're, they're artificially buying rates down. The market's going to have to catch up to what their appetite is. What it really is, but interest rates are headed up. I mean, you can still get the high threes on a 30-year fixed fourplex investment.

I see that moving into the forest. You could see it just run off for a little bit where it, where it spikes another percent or two for a couple of months. And then the market realizes that it can't stay competitive or keep up with those rates across the board and not just mortgages and they come back.

But that's a long answer to your question just because there's so much going on right now. And some of it you can gauge off historical data and some of it, you can't, it's just newer. And you're saying what's, this is so detached from what normally happens. What's going to happen here. But the overall trend is.

Up. But for the long-term, I don't think it's up substantially. So, I still think that the two to four-unit Fannie Mae Freddie Mac loan product is going to continue to be a great investor go-to for a while.

Steve Olson: Yeah. The economy is, is highly addicted to those low rates. Yes. It's, you know, whenever we get, whenever they start hiking that and they, they taper you get, they call it the taper tantrum.

Lane Aldrich: Yes. Right. 13 was a real big one that caught everybody off guard.

Steve Olson: It may just be kind of the new, the new normal, and you gotta wonder, could they even come down at some point, you hear about negative rates in western European countries, right?

What if you got paid to borrow?

Sherida Zenger: I'd sign up.

Steve Olson: Yeah, that'd be awesome. Now Preston clarified. It was $420 million that Zillow lost last quarter. No big deal. That's some bad flu.

We're going to have Lane on our next episode as well. We wanted to go through some of this macro stuff or we're going to get more into the micro and the nuts and bolts of this kind of financing because it's so important. If you personally are taking title to investment properties and how you position those.

It's a very valuable asset. These loans and come with a couple of tips and tricks, and we'll get into that on the next step. Thanks for joining us here on the Build-to-Rent Show, we will catch you next time.