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5 Steps to Lower Vacancy Rates and Increase Renewal Rates

The simplest way for landlords and property managers to decrease vacancy rates at their rental properties is to maximize renewal rates. If you’ve found great tenants who pay rent on time and respect your property, avoid the overhead and stress associated with tenant turnover by focusing on retention.

Lease renewal rates in the U.S. have been climbing steadily over the past decade, reaching record highs in 2020 as many renters were unable or unwilling to relocate due to the pandemic. If you are struggling to secure lease renewals at your rental property or are looking to up your renewal rate metrics, here are some tips to consider.

1. Prioritize your landlord-tenant relationships

Fostering strong landlord-tenant relationships can take time. These relationships are likely to be a key differentiator when your tenants are considering whether or not to renew their lease (especially if they are being offered a lower rental rate somewhere else). One of the most common renter complaints is poor customer service from property managers or poor communication from landlords.

Respond to maintenance requests promptly, inform tenants of any news or updates as far in advance as possible, and ensure your tenants feel comfortable reaching out to you with any questions or concerns. Keep lines of communication open and touch base with your tenants regularly to see if they are experiencing any issues – every few months or so is usually a good starting point. Remember, your renters are your customers and their satisfaction should be your highest priority.

2. Be open to feedback

Keep tabs on any common complaints you’re hearing from tenants, and be proactive in finding solutions to these problems. If multiple tenants are requesting similar updates or amenities, carefully weigh the pros and cons of all reasonable requests. When tenants do move out or decline to renew their lease, create a protocol to ask them why they are leaving and/or what it would take to get them to stay. The information you learn will help you keep future tenants around longer, and potentially help you resolve a simple issue that will persuade your current tenants to stay.

3. Offer incentives

What can you do to sweeten the deal for tenants who are on the fence about renewing their lease? Offering incentives like discounts on rent, parking benefits, cash, gift cards, or even something like a new television often prove to be worthwhile investments that lead to increased renewal rates. Your out-of-pocket costs will be justified if trustworthy and responsible tenants are persuaded to stay, saving you tenant turnover costs.

Incentives can also come in the form of added amenities or reasonable upgrades to the property. If the only thing your tenants are missing is a dishwasher or a new air conditioning unit, it might be worth considering making the upgrade. Not only will it help with current renewal rates, but many upgrades and amenity additions will also increase the value of your property in the long run.

4. Raise rent the right way

There will come a time when you need to increase your rental rates to keep up with expenses and market value. Many tenants will use this as their reason for declining to renew their lease. While this is an unavoidable affair, try to build in small percentage increases upon lease renewal each year, as opposed to keeping a steady rate for several years followed by a significant jump. This strategy will help you avoid losing profits while expenses increase and keep your tenants happy with reasonable rent increases.

5. Timing is key

If your desirable tenants are considering a move, the earlier you can reach them in the process, the better. Asking them to renew before they have settled on a new place allows you to present incentives or see if you might be able to meet any of their potential requests. You will also set yourself up for success by knowing well ahead of time if you’ll need to market and show any units in the near future. It’s best practice to capture potential renewals early on by approaching tenants approximately 90 days before their lease is set to expire.

In general, year-over-year lease renewal is the best way for landlords to avoid tenant turnover and keep vacancy rates low. However, an important step in the lease renewal process is determining whether or not you want a tenant to stay at your property. If you’re dealing with irresponsible or difficult tenants, it may make sense to find a better fit in some cases.

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Final thoughts

Your retention plan is likely to change and evolve as you notice strategies that work and those that do not. Preventing tenant turnover and increasing renewal rates is a goal that requires constant attention throughout the lease term.

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Nation’s credit rating agencies are put under the SEC’s microscope

The U.S. Securities and Exchange Commission uncovered a total of 487 instances over the past six years in which the nation’s SEC-registered credit-rating agencies were deemed by agency staff to be in non-compliance with federal securities laws or related SEC rules, a recent SEC staff report reveals.

The bulk of the violations, which were uncovered during mandated annual SEC examinations, fell into three categories as follows: internal supervisory controls, 42.3%; adherence to internal policy, procedures and rating methodologies, 30.6%; and conflicts of interest, 11.5%. The report focuses on the nine rating agencies that as of year-end 2021 were registered with the SEC as “nationally recognized statistical rating organizations,” or NRSROs.

The report includes an analysis of essential-findings trends from examinations conducted between 2016 and 2021. It does not identify specific agencies or alleged violators by name, nor does it detail in aggregate any corrective actions ordered by the agency — although it does provide a few case examples absent credit-rating agency identifiers.

“For purposes of this report, the staff considers an ‘essential finding’ to be any instance of apparent non-compliance by an NRSRO [credit rating agency] with the federal securities laws or related commission rules applicable to NRSROs.”

The SEC report offers a portrait of the regulatory process ongoing behind the scenes in the rating-agency world, which is a key to maintaining transparency for investors and issuers across a range of markets. The sectors highlighted in the rating-agencies report include securities issued by corporations, the U.S. government, insurance companies and financial institutions as well as asset-backed security issuances and transactions in the private-label residential mortgage-backed securities (MBS) sector.

In addition to the tally of essential-findings violations data, the SEC report also provides an assessment of the ESG bond-rating environment and a market-share ranking of rating agencies in the residential MBS space. ESG securities such as bonds are backed by collateral, like mortgages, that can be defined as meeting environmentally sustainable, socially responsible, or good governance (ESG) criteria.

“Generally, the purpose of NRSRO examinations is to promote compliance with applicable federal securities laws and rules by identifying potential instances of non-compliance of NRSROs with their statutory and regulatory obligations and encouraging remedial action,” the SEC report states. “When appropriate, the staff may refer findings to the commission’s Division of Enforcement for investigation.”

The SEC report, released quietly in January with the vanilla-sounding title of the “Office of Credit Ratings Staff Report on Nationally Registered Statistical Rating Organizations,” is provided to Congress annually as required under the Credit Rating Reform Act of 2006. The report does break down the number of essential findings, or violations, from 2016 to 2021 by rating-agency size categories — with small agencies recording 195 alleged violations over the period; medium-sized agencies, 145 and large agencies, 147.

“From 2016 to 2021, the large NRSROs had an average of 8.2 essential findings per exam cycle, the medium NRSROs had an average of 8.1 essential findings per exam cycle, and the small NRSROs had an average of 8.6 essential findings per exam cycle,” SEC staff note in the report. “…The large NRSROs report employing 4,691 credit analysts (including supervisors), which is approximately 83.7% of the total number employed by all of the NRSROs. The small and medium NRSROs, in the aggregate, employ approximately 16.3% of all credit analysts employed by NRSROs.”

The large NRSROs, according to the SEC report, are Fitch Ratings, Moody’s Investor Service and S&P Global Ratings. Medium-sized rating agencies include A.M. Best Rating Services, DBRS Inc. and Kroll Bond Rating Agency (KBRA). The small NRSROs are Egan-Jones Ratings Co., HR Ratings de Mexico and Japan Credit Rating Agency Ltd.

The SEC report also indicates that the number of essential-finding transgressions from “the 2016 examination cycle was higher in several review areas, which was likely related to the new and amended rules that became effective in 2015.”

“Essential findings have generally decreased in subsequent exam cycles,” the SEC report continues, “which indicates the NRSROs’ greater awareness of applicable laws and their obligations as regulated entities.”

A chart in the report shows that the range of essential-finding violations in 2016 averaged between 14 to 18 across the small, medium and large agency categories. For 2020, the range drops to an average of between four to seven violations across the three agency-size categories.

For 2021, based on the chart in the report, the average number of essential findings across the three agency categories declined even further — ranging on average between two to four violations across the three agency-size sectors. The biggest improvement over the period was seen in the large agency category sector, which had an average of 18 violations in 2016. That had declined to an average of about four essential-finding violations in 2020 and two in 2021.

Case Examples

The SEC report on credit rating agencies details a handful of case examples that better illustrate the nature of the alleged essential-finding violations discovered by SEC examiners — though, again, the examples do not include identifying information about the specific rating agencies or bond issuances. In the case of one large NRSRO, the SEC staff report indicates that the agency failed to report an allegation of fraud, for example.

“The NRSRO issued a credit rating on a bond after the underwriter for the bond communicated to an analyst of the NRSRO an allegation of potential fraud relating to the authenticity of a letter of credit upon which such credit rating was based,” the SEC report states. “The staff also noted that the NRSRO did not withdraw the credit rating for some months during which the NRSRO had knowledge of a potential fraud.”

In another case involving a medium-sized rating agency, the SEC report noted the following:

“On some occasions, an analyst participated in a rating committee while holding securities of the rated entity in a managed account. The staff recommended that the NRSRO establish, maintain, and enforce written policies and procedures reasonably designed to address and manage conflicts of interest with respect to securities held in employees’ managed accounts.”

Finally, in another example highlighted in the report involving a small NRSRO, SEC staff found the credit rating agency’s conflict-of-interest policies lacking.

“The NRSRO’s policies and procedures did not appear to be reasonably designed … to prevent the occurrence of the prohibited conflict of interest,” the SEC staff report states. “…The NRSRO’s policies and procedures allowed employees to receive gifts with a specified limited dollar amount but did not limit such gifts to items provided in the context of normal business activities, such as meetings.”

Market Share

The SEC report also examines market-share information for residential mortgage-backed securities, or MBS. The report defines MBS as “securities secured by U.S. first-lien mortgages on residential properties.” However, it excludes Fannie Mae and Freddie Mac issuances as well as “securities secured by non-performing or re-performing mortgages; subprime [or non-prime] mortgages; … mortgages financing single-family rental businesses [investment properties]; and refinancings of previously offered securities.”

That definition means the MBS deals analyzed in the SEC report were limited to private-label issuances secured by prime mortgages, such as high-balance mortgages or jumbo loans, for example. Through the first six months of 2021, the market share leaders based on prime residential MBS issuance, the SEC report shows, were as follows:

Fitch, 48 deals with an aggregate issuance volume of $21.9 billion — or 68.1% market share based on loan-pool value.
Moody’s, 39 deals valued at $21.8 billion — 67.9% market share.
KBRA, 22 deals valued at $9.1 billion — 28.1% market share.
DBRS, seven deals valued at $3.1 billion — 9.6% market share.
S&P, six deals valued at $2.3 billion — 7.2% market share.

The report also shows that the prime residential MBS deals reviewed by the five rating agencies over the first six months of 2021 (a total of 72 deals valued at $32.2 billion) eclipsed the value of deals rated during all of 2020 (80 deals valued at $30.1 billion). In some cases, however, the SEC report stressed, more than one NRSRO may have rated a particular transaction, accounting for market-share figures exceeding 100% on a combined basis as well as any discrepancy between individual agency figures and MBS market totals.

“The highest market shares for the U.S. MBS segment have been achieved by two of the large NRSROs [Fitch and Moody’s],” the SEC report states. “KBRA and DBRS had achieved market shares of over 40% in this segment in 2019 but have since seen their market share decrease in 2020 and the first half of 2021.”

Still, KBRA and DBRS, according to the SEC, were quite active in residential MBS-issuance categories not included in the analysis. “For example, DBRS rated 69% of the re-performing mortgage transactions that priced in the first half of 2021,” the SEC staff report states.

“Additionally, DBRS and KBRA were active rating securities backed by subprime [now typically referred to as non-QM] mortgages and risk-transfer securities [such as agency credit-risk transfer deals] during the first half of 2021. For securities backed by subprime mortgages, DBRS rated 32% and KBRA rated 28% that priced during the first half of 2021; for risk-transfer securities, DBRS rated 50% and KBRA rated 14% that priced during the first half of 2021.”

ESG Analysis

Another area of overview in the report is ESG-related products and services offered by credit-rating agencies and their affiliates. The SEC staff report found some issues of concern on that front.

“Development in the area has grown rapidly, and competition has increased among NRSRO and non-NRSRO providers, leading the [SEC] staff to identify several areas of potential risk to NRSROs,” the SEC report states “These include the risks that, in incorporating ESG factors into ratings determinations, [credit rating agencies] may not adhere to their methodologies or policies and procedures, consistently apply ESG factors, make adequate disclosure regarding the use of ESG factors applied in rating actions, or maintain effective internal controls involving the use in ratings of ESG-related data from affiliates or unaffiliated third parties.”

Potential for conflicts of interest also exist, according to the SEC analysis, in cases where a credit rating agency “offers ratings and non-ratings ESG products and services. “

“Standardization has been a challenge, so an issuer may look to present their own [ESG] program a certain way based on how they do things,” said Roelof Slump, managing director of U.S. RMBS at Fitch Ratings, in a prior interview focused on the ESG market. “The issuers are not necessarily all working … to come up with one standard for the overall market.

“… The lack of standardization is something that’s been an obstacle, but it is still very early on [in the U.S.]. Europe is much further along on these things.”

The SEC report notes that KBRA recently published a white paper focused on the ESG market revealing that it “believes that ESG factors that impact credit risk need better disclosure….”

The KBRA report itself said ESG investing may have noble goals, such as moving the world toward a low-carbon economy, supporting social inclusion, and reducing inequities.

“However, the current challenges associated with ESG ratings may be leading to market distortions and difficulty in distinguishing bad ESG actors from good,” the KBRA white paper states. “There is no universally agreed upon standard by which E, S, and G factors are weighted, or, in many cases, even measured.

“Given the myriad risks and challenges, it is hard to imagine a single ESG score that encapsulates an issuer’s E, S, and G profile, because those things mean different things to different people.”

The post Nation’s credit rating agencies are put under the SEC’s microscope appeared first on HousingWire.

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What’s The BEST Vacation Rental Loan?

This week’s question comes from Xavier through Ashley’s Instagram direct messages. Xavier is asking: Can I use an FHA loan for a vacation rental? What’s the best way to scale without paying high down payments?

Xavier brings up a great question that many rookies have been asking. We all know we can get a conventional loan with very low down payment requirements for an owner-occupied investment like a house hack, but what about a vacation rental? Before you bombard your mortgage lender with questions, listen to what Tony (short-term rental expert) has been using for his vacation rental financing.

If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).

Ashley Kehr:
This is Real Estate Rookie, episode 156. My name is Ashley Kehr and I am here with my co-host Tony Robinson for another rookie reply.

Tony Robinson:
And welcome to the Real Estate Rookie podcast, where every week, twice a week, we bring you the motivation, the inspiration and we answer your questions about getting started in the world of real estate investing. So, whether you’re a rookie, whether you’re seasoned, we hope you get some value from today’s show and every show that we put out.

Ashley Kehr:
So Tony, what’s new with you today?

Tony Robinson:
Things are actually going pretty good. We’re off to a pretty good start for the new year. We’ve got two different rehabs that are in progress right now. Well, technically three, one’s down, but we’re waiting to sell. Anyway, we’ve got two that are like in the middle of being rehabbed, and I’m super excited for how those ones are going to turn out. One of them is so nice that we’re almost contemplating not selling it because we’re so emotionally now invested into this property. So, that’s going well. And then I actually just submitted an LOI today on a 33 unit motel. So, we’ll see how that one turns out.

Ashley Kehr:
I’m so excited for you on that one. I know you’ve been looking for a motel for a while to kind of turn into a little Airbnb for the different rooms. So, I can’t wait to hear what happens with that.

Tony Robinson:
Yeah, hopefully it comes back. The seller’s kind of being a, yeah, he’s being a tough negotiator, I’ll say. So, we’ll see what it comes back to be. But what’s new on your side?

Ashley Kehr:
Well, I finally closed on a property yesterday.

Tony Robinson:
Oh man. Has it been five years already?

Ashley Kehr:
I know. I have so much stuff under contract and nothing’s closing. So, finally closed on, it’s a little eight frame cabin, with three acres. And we’re just going to turn it into a short term rental. So, we have a lot of rehab to do it, but it’s only like 700 square feet. So, should be a pretty quick turnaround hopefully. But we went and did the final walkthrough yesterday and we got there with our agent in the lockbox, code wouldn’t work. So, we call the seller’s agent and she was just really fed up with this property. She’s like, “I don’t don’t know, just try and break in.” So, we end up leaving to go get some tools and coming back and having to bust open the door. And finally with couple smashes to the lockbox, we got that open.
But I guess in our contract, our real estate contract, it states that the driveway has to be plowed for the final inspection, for us to come and do that. Well, this is a kind of a steep, windy driveway and it wasn’t plowed super great. But we’ve learned that a couple days ago when they did have it plowed, the plow driver got stuck, the tow truck that came to pull the plow driver out got stuck. And they had to have a third towing company come or a second tow come. So, there was three trucks there and two were stuck and I guess it was a huge mess. But the owner, he wouldn’t even pay to have somebody plow it. So, the seller’s agent decided to pay for it, to get it done, to just make this deal close and get it over with. But then she ended up having to call these other tow companies and so it was a 1000 dollar bill that she’s having to foot now because the seller won’t pay it.
Well, when we were there yesterday, we were leaving all excited, we checked out the property, everything’s good, we’re about to close, we got stuck in the driveway. So, we call a tow company and they’re like, “Oh, I was just there a couple days ago.” Well, he comes to pull us out, a wire snaps on his truck and it’s just like a whole mess. So, we definitely need to figure out something with the driveway, that’s for sure.

Tony Robinson:
So if you’re watching this on YouTube, you’ll notice that Ashley’s actually still on that driveway. So, it’s been 24 hours and counting and she still hasn’t gotten off of that driveway.

Ashley Kehr:
It was actually funny though. While we were waiting for the tow truck, I actually made an Instagram reel. So, I probably never would’ve made it if I wouldn’t have gotten stuck in the driveway. So, if you like watching Instagram reels, you can go check it out @wealthfromrentals, because that’s what I did while we were stuck.

Tony Robinson:
Oh wait, really quick. So, you’re stuck, like, did you slide off to the side of the road and your tires couldn’t get up?

Ashley Kehr:
Yeah. Sucked off the driveway a little bit and then we’re rubbing up against trees almost. And we were in a truck, so the tow driver actually had to kind of wrench us out and pull us to the side and then we could get out, but yeah.

Tony Robinson:
Wow. Wild. So let me ask you this, what is your plan when you have guests coming? Is it still an issue if it’s plowed correctly or was it just an issue because it wasn’t plowed well enough?

Ashley Kehr:
Well, the worst part is having to back down it. It’s just such an awkward angle. And if you get off the driveway a little bit, you get kind of sucked down. It’s a little bit of a ravine, but there’s trees there. So, it’s not like you’re going to fall down the ravine if you’re going slow. But the plan is to actually… And this is how the driveway actually is. Just the plow driver that came that Saturday, I mean, we have two feet of snow almost, he didn’t know where the well was, different things like that. So, he just plowed enough to get somebody up there. But there actually is like a turnaround. So, we would have the driveway staked out, so that when somebody does come and plow that, they know exactly where they have to go to plow and what they need to stay in the lines of. And then that way a person can drive up and just turn around and not have to worry about backing up the driveway.

Tony Robinson:
Yeah. So, we just bought two new short term rentals. We just closed not too long ago. Actually, when you’re with me in Tennessee, the properties we were checking on, the one that you were on, right? The one like that driveway.

Ashley Kehr:
Oh yeah. That driveway.

Tony Robinson:
Yeah. It was a pretty steep driveway. And we had a guest the week afterwards who had a difficult time getting up. Our cleaner actually couldn’t get up because it had snowed and no one came to plow the road. So, she tried to go up and she kept sliding back down that road. So, this is our first time having to deal with snow plow, right? I live in California. I don’t know what snow looks like. So, we’re trying to develop a process, so that when it does snow, we can quickly get that road cleared. So, nice to hear what your plan is.

Ashley Kehr:
Yeah, definitely stake it out. I mean, in Tennessee, you probably won’t get that much snow, but-

Tony Robinson:
That much snow. Yeah.

Ashley Kehr:
Yeah. Makes it easier for the plow driver.

Tony Robinson:
Yeah. Cool. Well, what do we got for today, Ash?

Ashley Kehr:
So, I actually pulled the question for my DMs. So, today’s question is from Xavier Kelly. Hello, Ashley. I’m Xavier Kelly, rookie for the Baltimore Ravens. Go Bills! I was looking into buying my first investment property to Airbnb. Could I use an FHA loan without living in the property for a year? What’s the best way to scale with paying 20% to 25% down payment. So Tony, I actually know the answer to this question because of you. So, I am going to let you give the answer, since this is something you taught me.

Tony Robinson:
Yeah. So Xavier, great question. And this is something that comes up a lot. And this is actually one of the reasons why I love short term rentals, because the lending options that you have are a little bit better than what you can get for a traditional long term rental in the single family space. So, the way that we financed all of our short-term rentals is using a second home loan or a vacation home loan. This is a federally approved loan type for folks that want to go out and buy a property in a city that is not their primary city, where they live for their primary residence, you’re able to go out, buy a property. And the beauty of it is that you only have to put 10% down, 10% down, right? So our first Airbnb, we paid, it was a purchase price of $590,000, our down payment was 10% or $59,000, right? So, you’re literally putting down half, sometimes more than half of, or less than half I should say of what a traditional 20% down payment is.
So Xavier, I would encourage you to go out and find a lender that is familiar with second home loans or vacation home loans, something that they specialize in and you’ll make your money stretch a little bit further.

Ashley Kehr:
So Tony, what are the exact rules on that? So, if he’s purchasing in a town that he already lives in, possibly. Can he still get it, a vacation home mortgage on that property?

Tony Robinson:
Yeah. Great question, Ashley. So there are some limitations with the vacation home loan. The first limitation is that you cannot have one that’s in the same city as your primary residence, and you cannot have two second homes that are too close to one another. Okay? Now, depending on which lender you talk to, different people will give different answers. I’m not sure what the actual federal guideline is, but typically it’s somewhere outside of 50 miles from your personal residence. So, your second home has to be 50 miles away, at least, from your personal residence.
The second thing they kind of look for is use and functionality. So, say that you own one property that’s in like a mountainous area, right? And you go up there for the snow. But say maybe 30 miles away, there’s a big lake, right? So you could, in theory, buy the mountain house, right? That you go up there for the snow. And then 30 miles away, you go to your lake house because that’s where the water that. So, there is a use and functionality component to buying a short term rental or buying a vacation home loan. But the basic rule of thumb is that you can’t have four properties all in the same street that you’re going to use a second home loan for it, because there’s no person in their right mind that would buy four vacation homes right next to each other.

Ashley Kehr:
Unless they were renting them out, which kind of defeats the purpose of the vacation home, because they want it to be as part of your personal use. So, the regulations on that is that there’s no specific amount of time you have to actually stay at the property. You just have to occupy the property for a certain amount of time over the year, which is a great area because it’s not like for 30 days over the course of a year or anything like that, right?

Tony Robinson:
Yeah. And you’ll have some lenders that put a hard number to it. Some will say 14 days, some will say 21 days, but yeah, you do have to use the property for personal use. Now, it doesn’t necessarily mean that you yourself have to stay there. So Xavier, say that you stay for a couple of nights out of the year and then you let your parents, or your friends or whoever else you want to use the property, that qualifies as personal use as well.

Ashley Kehr:
So Xavier, to kind of answer your question there, you cannot use your primary residence, the FHA loan to rent out. I guess you could rent out a room or rent it out sometimes of the year, but that has to remain your primary residence. But I mean, there is no reason he couldn’t rent it out, correct? Just he couldn’t rent it out all the time, he has to keep that as his primary residence. Yeah. But I definitely think doing the 10% down compared to 20 to 25% down with doing a vacation home would be a much better route for you. And then you don’t have to worry about it being considered your primary residence either. Okay. Well I think that wraps up today’s rookie reply. Anything else you needed to add Tony?

Tony Robinson:
No, I don’t think so. So like look, just one last word of caution. You get some people that aren’t familiar with vacation home loans or second home loans. And they’ll start screaming at you, telling you that you’re crazy or that you don’t know what’s going on or this doesn’t exist or that you can’t do that. So again, when you’re shopping for a lender, try and talk to someone that actually does second home loans as a big part of their business. We actually recently interviewed our lender on our YouTube channel. So, if you look up The Real Estate Robinsons, we often have a short term rental specific YouTube channel, and we actually brought in our lender, we interviewed her in person, so she could go into the nitty gritty details about how to use the second home loan, all the ends now. So just look up The Real Estate Robinsons so you can get some more detail there.

Ashley Kehr:
Okay. Or you guys can go to BiggerPockets, our Facebook group at Real Estate Rookie and ask in there if anyone has any recommendations for, in your area. Well, Tony, we’re all set for today and we will be back on Wednesday with another Real Estate Rookie podcast episode. I’m Ashley @wealthfromrentals and he’s Tony @tonyjrobinson on Instagram. And let’s find out something new that you can check out at biggerpockets.com.

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Mortgage rates blow past industry predictions

Some mortgage rate indices topped 4% on Thursday, blowing past predictions that rates might reach those levels by the end of 2022.

Economists had predicted rates would rise as the overall economy stabilized. The latest mortgage rate survey from Freddie Mac puts rates for the 30-year fixed-rate mortgage at 3.69%, while the average rate in the latest mortgage application survey from the Mortgage Bankers Association was 3.83%.

Other indices put mortgage rates even higher. Black Knight‘s Optimal Blue, which provides data for the secondary market, reported the average rate for 30-year conforming mortgages was 4.071% on Friday morning. It reported the 30-year rate for FHA-insured mortgages was even higher, at 4.122%.

Joel Kan, associate vice president of economic and industry forecasting, at the Mortgage Bankers Association said rates could head even higher in 2022.

“If conditions stay in the current state, we’ll certainly see higher rates,” said Kan. “But it’s also useful to know that we’ve seen rates drop pretty quickly if there is some other kind of economic news that’s unexpected.”

Rates could quickly head in the other direction, Kan said, “if something abroad rocks the boat,” such as an armed conflict with Russia and Ukraine, an emergent Covid variant, or a sudden change in certain commodity prices. Mortgage rates declined at the onset of the Delta variant, although the effect on mortgage rates was less pronounced with the Omicron variant.

“Bad news for the general economy is paradoxically good for the housing market in so far as rates would decline,” said Len Kiefer, deputy chief economist of Freddie Mac.

Few industries are as impacted by market fluctuations as housing. The current higher rates — an increase of nearly 50 basis points over the past month — will lead to “an enormous contraction of refinance activity,” Kiefer said.

On the ground, that means that lenders’ gain on sale margins will contract, as originating purchase mortgages is more costly than refinances. Margins have already fallen in the case of Wells Fargo and loanDepot.

And it means that lenders, many of whom ramped up hiring in the past two years to keep up with demand for refinances, are now shedding loan officers.

Randy Howell, president of Mortgage Power Inc., expects the layoffs trend to intensify in light of higher rates. He also pointed out that originators, who may feel “desperate” in the current environment, might cut corners.

LOs are “going to lower their standards of ethics and try to get things past underwriters,” he said.

And while overall, the share of refinances will drop, they will not disappear completely. Gary Hughes, LO at RPM Mortgage Inc., said there may even be a rush of borrowers who refinance before rates go even higher, to “try and cap the ‘hurt’ from missing out on lower rates.”

Higher rates are seen as bad news for many parts of the mortgage market. But two categories are not as susceptible to higher interest rates: cash-out refis and home equity lines of credit.

“Those are two business channels right now that will probably flourish for the rest of the year, because there’s a lot of equity-rich homeowners out there,” Hughes said. “They may want to leverage that money and realize that 4% or 4.5% is still better than what they might get elsewhere.”

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First American reports record breaking year

Just like other “Big Four” member Old Republic last week, First American Financial announced record breaking earnings during its fourth quarter earnings call on Thursday.

The company’s total revenue for 2021 was up 30% from 2020 to a record of $9.2 billion, with $2.4 billion earned during the fourth quarter. However, the firm’s net income dropped to $260 million during Q4 compared to $280 million a year ago, which can be attributed to an uptick in operating costs.

During the fourth quarter of 2021, First American saw personnel costs rise 19% year-over-year to $612 million, which the company attributed to higher salary expenses due to an increase in the number of employees, higher incentive compensation driven by growth in revenues and profitability, and higher employee benefit costs. Non-payroll related expenses were also up during the fourth quarter, rising 12% year over year to $337 million, due to increase software expenses, production-related costs, and professional services.

Despite this increase, First American’s newly appointed CEO, Ken DeGiorgio, said on an earnings call with investors that everyone at the company is proud of these achievements.

“Our focus continues to be on the things that will drive future growth,” DeGiorgio said during the call. “At the beginning of 2021, we announced our intention to expand our title plant footprint from 500 counties to 1500 by the end of that year. Leveraging our proprietary data extraction technology, we are currently maintaining more than 1,600 title plants covering nearly 80% of the U.S. population. This data is critical as it fuels our operational efficiency initiatives are title automation efforts and our ongoing efforts to digitize the real estate closing experience. You can’t automate unless you have data and we are the industry undisputed leader in title data.”

During the fourth quarter, First American generated a total of $2.3 billion in revenue from its title insurance and services segments, a 13% year-over-year increase. Most notably, commercial title revenue was up 66% to $377 million, contributing to a record of $1 billion in commercial title revenue for all of 2021.

The average revenue generated per direct title order rose to $3,339, primarily due to an increase in the average deal size in the firm’s commercial business and the impact of strong home price appreciation on residential purchase transactions. The shift in the order type from lower-premium residential refinance transactions to higher-premium commercial and purchase transactions also played a role in the increase in the average revenue per order.

Just as with Stewart’s earnings call earlier in the day, these record breaking numbers were somewhat overshadowed by discussions of the impact rising mortgage rates will have on the volume of title insurance premiums written.

First American reported that its purchase revenue was up 2% during the fourth quarter due to a 7% increase in the average revenue per order partially offset by a 3% decline in the number of orders closed. Meanwhile refinance revenue decline 46% relative to the previous.

“In January 2021, we opened 2,000 purchase orders per day, a 9% increase relative to January of 2020,” DeGiorgio said during the call. “Our refinance orders were 1200 per day steady with what we experienced in December. Mortgage rates are still relatively low and we’ve got some demographic benefits, millennials, for example, coming into the market. But of course, there is low inventory, but I think we remain hopeful and expect to see some inventory coming on to the market which is good for our purchase business. Refinances have a strong correlation with rates. So, we expect it to wane as rates go up, but we are in a great position to offset that with investment income.”

In the third quarter, First American generated headlines for its investments in proptech companies, most notable Offerpad, Orchard and Pacaso. During Q4, First American’s investment in come was $49 million, down 8% from a year prior. The company attributed this decrease to lower interest income from its warehouse lending business and escrow and other cash balances, significantly offset by an increase in interest income from higher balances in the company’s investment portfolio.

According to DeGiorgio, a positive outlook on the commercial market is another source of optimism for the firm as we enter into 2022.

“2022 will be a year of transition we are well positioned for,” DeGiorgio said during the call. “We expect market conditions in our purchase and commercial businesses, which account for approximately 80% of our direct revenue, to remain favorable. Refinance volumes will continue to wane as mortgage rates pick up, but we believe increased investment income due to a rise in short-term rates will help offset the decline.”

In early January, First American announced that it had acquired California-based title insurance, underwriting and escrow services provider Mother Lode Holding Company. During the call, company executives said that the deal was still subject to regulatory approval.

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Investor accuses Rocket’s Dan Gilbert of insider trading

Dan Gilbert is the target of a new insider trading lawsuit.

A Rocket Companies’ investor filed a stockholder derivative complaint on Monday that accuses the company’s chairman of using non-public information to sell stocks and avoid material losses.

In total, the lawsuit claims that Gilbert pocketed $500 million by selling company stock before reporting poor earnings and guidance. The lawsuit, first reported by Reuters, was filed in the Delaware Chancery Court by an investor, Christopher Vargoshe.

Aaron Emerson, a spokesperson for Rocket Companies, said the claim is “absolutely preposterous” and “completely frivolous and without merit.” He added that Vargoshe holds three shares, invested no more than $130, and it is a “shame that the legal system allows this type of pointless litigation.”

The plaintiff claims that on March 29 – six days after a board meeting and two days before the end of Rocket’s Q1 2021 – Gilbert sold $500 million in Rocket stock, “despite having actual or constructive knowledge of material, non-public information about Rocket.”

He sold 20.2 million Rocket shares at $24.75 per share, according to U.S. Securities and Exchange Commission (SEC) files.

On May 5, Rocket issued its Q1 2021 earnings and guidance for the second quarter. It reported that the company was on track to achieve a loan volume between $82.5 billion and $87.5 billion and gain-on-sale margins within a range between 2.65% and 2.95%.

“At the midpoint, this gain-on-sale margin estimate equated to a 239 basis points decline year-over-year and a 94 basis points decline sequentially, which represented the Company’s lowest quarterly gain on sale margin in two years,” the lawsuit said.

On this news, the company’s stock fell to $19.01 per share on May 6.

According to the lawsuit, Rocket Corporation is controlled by Gilbert through his investment vehicle Rock Holdings Inc. (RHI).

The investor raised concerns about Rocket’s board of directors, saying there is no majority of independent directors with respect to the claims. He alleges that four of the seven directors are affiliated with RHI, including Gilbert; his wife Jennifer; RHI’s CEO Jay Farner; and Matthew Rizik, who provides consulting services for the company and serves as an officer at RHI.

Vargoshe said that Gilbert should compensate the company for any damage brought by the alleged misconduct and should also pay back any profits made by alleged insider trading.

This is the second lawsuit alleging that Gilbert engaged in insider trading. The first was filed in December in the Delaware Court of Chancery by the Police & Fire Retirement System City of Detroit and the Doris Shenwick Trust.

However, the pension fund in Detroit withdrew the lawsuit after two weeks, alleging that it was filed due to a “miscommunication” with a third-party law firm.

“The firm was authorized to review the case and do fact-finding but not authorized to file a lawsuit,” the pension fund said in a statement.

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Freddie Mac posts $12.1B income in 2021

Freddie Mac reported a net income of $12.1 billion for 2021, a 65% increase from 2020.

The government-sponsored enterprise saw a 20% growth in its single-family mortgage portfolio from 2020 to 2021, driven by soaring home prices and an increase in the average size of loans it acquired. Freddie Mac’s net worth is now $28 billion, more than three times what it was pre-pandemic.

It reported $2.7 billion in net income in the fourth quarter, a 6% decrease year-over-year, which the GSE attributed to an increase in credit-related expenses.

Overall, Freddie Mac purchased $1.22 trillion in single-family loans in 2021, about two-thirds of which were refinances. Freddie Mac also reported that its serious delinquency rate, which has been consistently lower than the rest of the market, is now 1.12%. That figure includes loans in forbearance, if they are past-due based on the loan’s original terms.

The average credit score for loans Freddie Mac purchased also fell slightly, from 759 in 2020 to 753 in 2021.

The Federal Housing Finance Agency has prioritized expanding access to credit while prioritizing safety and soundness. Part of that effort has centered on including rental payments in underwriting at both of its regulated entities.

Freddie Mac CEO Michael DeVito gave an update on progress for Freddie Mac’s on-time rental payment initiative.

In November, Freddie Mac announced it would encourage landlords to provide access to rental payment data, by recouping a portion of closing costs for properties it finances. In exchange, the landlord would use a platform to report on-time rent payments to the credit bureaus.

By year end, he said, 73,000 tenant households across 284 properties had been offered the program, DeVito said. As a result of the program, 10,000 people established credit scores, and improved their scores by an average of 43 points.

During the balance of 2022, DeVito said, Freddie Mac would “continue to emphasize strategic priorities and a renewed focus on mission.”

How it fulfills that mission will be determined, in part, by changes to its Duty to Serve plan for 2022 to 2024, which the Federal Housing Finance Agency asked Freddie Mac and Fannie Mae to revise. In its filings, Freddie Mac did not provide any timeframe for when it would have a new plan, or any details on the revisions its conservator requested.

Freddie Mac also announced the election of two new members to its 13-member Board of Directors, on February 7. Kevin Chavers and Luke Hayden will assume their roles effective February 15.

Chavers, who will serve on Freddie’s audit committee and nominating and governance committee, retired as managing director, global fixed income investment team, at BlackRock in 2021. Previously, Chavers held positions at Morgan Stanley and Goldman Sachs & Company. Prior to that, from 1995 to 1998, Chavers was the president of Ginnie Mae.

Hayden, who will serve on the GSE’s committees for operations and technology, as well as the committee on risk, started his career as a loan officer and loan purchaser. He was most recently CEO of Hayden Consulting, which advises mortgage banks, commercial banks, thrifts, REITs, and private equity firms. He was also vice chairman of Residential Mortgage Services Holdings from 2013 to 2021.

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Is it really the worst time ever to buy a house in the U.S.?

During 2021 and into 2022, the surveys on whether it’s a good time to buy a house have simply collapsed. This did ring some alarm bells last year as many housing crash addicts used the results of Fannie Mae’s Home Purchase Sentiment Index to call for an epic crash in the second half of 2021. That didn’t end well, but let’s take a deeper look at what is happening here.

One thing is certain: potential buyers of all ages are not happy about the current market conditions. From Fannie Mae:

Recently, the percentage of people who said it was a good time to sell fell as well. So what is going on here? How can we drop buying and selling conditions in the same report?

Last year, many of the second half 2021 housing crash bears were using the collapse of this index to say housing was done; nobody wants to buy a home. This was never the case, as purchase application data never once showed a noticeable decline in the data once you made COVID-19 adjustments.

Another interesting fact about 2021 was that certain people put a lot of weight on housing being held up by investors or iBuyers, reflecting that buying conditions had deteriorated so much in the survey in 2021. That same group of individuals was also shocked to see that mortgage demand picked up very noticeably toward the end of the year in 2021; even I labeled the existing home sales market as outperforming due to mortgage demand, which makes the survey look incorrect.

So what is the issue here? It’s simple: inventory levels were at all-time lows in 2021 and they just got worse in 2022, don’t make it any more complicated than that.

Nobody likes competition when buying a home. It can be stressful enough when the markets are regular, like they were from 2014-to 2019. Now we’re in years 2020-2024 and not only has inventory dropped to all-time lows, but we’re also dealing with the most significant housing demographic patch ever recorded in U.S. history: move-up buyers, move-down buyers with a lot of cash, investors and all-cash buyers. This survey was never about people saying they never want to buy a home; just that the conditions for buying a home are terrible — and I agree with them.

By the summer of 2020, I started to worry about inventory levels getting dangerously low. What happens when you have the best housing demographics ever, the lowest mortgage rates ever, and all-time lows in inventory? Unhealthy home-price growth, and it got worse and worse as the year went on.

As someone who never believed in the forbearance crash bros and their premise of collapsing demand, which would require a massive number of Americans walking away from their homes, the real fear was realized when total inventory levels never reached above my critical 1.52 million during the spring and summer of 2021. I knew the fall and winter fade of inventory was coming. To make matters worse, mortgage demand picked up in the second half of 2021. The entire housing crash 2021/FOMO premise fell flat on its face, and now we enter 2022 with fresh new all-time lows in inventory.

To make matters worse, home-price growth in 2020 and 2021 was so high that it surpassed the five-year price-growth model of 23% I had set for 2020-2024, and that was just to be in an OK position going into 2025. So, I agree with the consumer survey and keep saying this is the unhealthiest housing market post-2010. When prices are rising so quickly, you can understand why homebuyers are stressed.

Buying a home isn’t like buying an iPhone or an Xbox; you need somewhere to live every day, and with so much price inflation and meager inventory, you would be stressed too, especially if you keep losing bids. We always talk about the stress of home buying, but we should also include sellers in that discussion. Unless they choose to rent after the sale or sell their investment home, a seller becomes the next natural homebuyer. I know some people can get an extended lease and live in the house after the sale. However, with inventory so low and high competition, there is no guarantee they will get the home they want either.

On the surface, the survey looks correct; demand for housing is at pre-cycle highs, and total inventory is at all-time lows with unhealthy home-price growth in the last two years.

Also, unlike stocks, the chances of the home you want to buy falling 20% after a bad earnings report are zero. So, it’s a much different sector of our economy because housing is the cost of shelter to your capacity to own the debt; it’s not an investment.

Currently, the only solution to create more days on the market is for mortgage rates to rise high enough to facilitate that, and so far, this hasn’t been the case. However, if the 10-year yield can create a range between 1.94% – 2.42% with duration, this should do the trick. If 4% – 4.5% mortgage rates can’t generate more days on the market from this very meager level, then I don’t see anything else in 2022 that will do this.

Eventually, prices will get too high, and natural inflation demand destruction will occur; we are just not at that point currently.

To wrap it up, I believe the survey is an accurate reflection of the sentiment of homebuyers in America; it’s brutal out there. I disagree with people who said this survey was calling for a crash in demand in 2021 and 2022. We have accurate models to track when housing and the economy are getting weaker; we just don’t have flashing signs of that now.

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Redwood Trust puts red ink in the rearview mirror

Mill Valley, California-based Redwood Trust Inc. (NYSE: RWT) on Wednesday reported fourth-quarter 2021 net income of $44 million, or $0.34 per diluted share, matching the Zacks consensus E PS estimate for the quarter.

The earnings were off the company’s fourth-quarter 2020 mark of $54.3 million and down from third-quarter 2021 earnings of $88.3 million. Still, the Mill Valley-California real estate investment trust reported net income for the full year of $319.6 million, a major boost compared to a net loss of $582 million recorded in the pandemic-onset year of 2020. The REIT recorded a profit of $169 million i n 2019.

“The fourth quarter of 2021 rounded out a transformative year for our Company where we grew our operating businesses, built out our product and technology offerings, and expanded our strategic investments, while delivering 25% full-year return on equity,” said Chris Abate, CEO of Redwood. “… As we look ahead in 2022, we expect the diversity and composition of our revenue streams to provide us with a notable advantage in a rising rate environment.”

Among the results highlighted in the Redwood’s earnings release for its fourth quarter ended December 31, 2021, are the following:

The REIT funded $733 million in business-purpose mortgage loans, including bridge loans and single-family rental (SFR) property loans, up 15% from the prior quarter.
For the full year, Redwood funded $2.3 billion in business-purpose loans, up 60% from year over year.

In the fourth quarter, the company sold $202 million of SFR loans to a large institutional investor and completed one SFR-loan securitization valued at $304 million.

On the residential mortgage side for the fourth quarter of 2021, Redwood purchased $3.2 billion worth of jumbo loans and distributed $2.8 billion in jumbo — $1.5 billion through whole-loan sales and $1.3 billion through three securitization deals.

In a l etter to sh areholders, Redwood indicated it had distributed four regular quarterly dividends in 2021 —Q1, $0.16; Q2, $0.18; Q3, $0.21 and Q4, $0.23 — “for a total of $0.78 per share of common stock dividend distributions.”

“Our focus remains on delivering for our shareholders and executing the long-term strategic growth plans we outlined at our September 2021 Investor Day,” Abated said.

Among those growth plans is a focus on technology investments.

“Since inception, [Redwood has] completed 15 technology venture investments, including five in the fourth quarter of 2021, that reflect the diversity of our operations and include firms that align with opportunities across our businesses,” the company’s Q4 earnings release n otes.

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Real Estate-Related Jobs for High Schoolers and College Students

As Coronavirus restrictions begin to ease and our world gradually gets back to normal, it can be complicated (and intimidating) for young people to get started in real estate investing. During the pandemic, the investing world experienced trends and adjustments that had never been seen before – many of which may be shifting yet again as the pandemic lets up, interest rates rise, and inflation continues to climb.

As members of BiggerPockets, we understand and respect the passive income generating and wealth-building aspects of real estate investing. And we may have some young people in our lives who we would like to see begin their real estate investing careers. So how should an aspiring young investor get started?

It’s common knowledge that the best way to get into real estate investing is to surround yourself with people, opportunities, and wisdom related to the industry. So why not get the student in your life started by encouraging them to get a job that will introduce them to the real estate world?

By working a job related to real estate, they will be doing what Robert Kiyosaki calls “working to learn, not to earn.” That is, they will be learning things that can help them in their future endeavors while earning a paycheck at the same time. But the main benefit is what they will learn, not the money they will earn.

In most cases, your student could start by searching for the types of businesses listed below in their neighborhood. Parents and mentors can also ask people they know in the real estate industry if they might be hiring. You never know if that agent who helped you buy a house two years ago might need some office help or if your property manager is looking for an intern.

Here are five strategic jobs young people can use to help them get their feet wet in the real estate investing world.

group of young adults outside looking at a sunset

1. Real estate agent/broker assistant

Real estate agents could always use more help. Offices that house several agents need even more help. And in today’s real estate market, where the demand for properties is far great than the supply in most areas, agents definitively need help finding sellers. As a real estate broker assistant, your student may be following up on leads, posting on social media, creating and editing promotional videos, posting property listings, filing documents, greeting clients, answering the phone, and assisting with property closings.

2. Office assistant for an escrow agent

Escrow agents guide real estate clients through the escrow process. As an office assistant, your student may provide clerical support, create and edit correspondence and documents, maintain files and records, and provide services to clients.

3. Property manager assistant

Property management companies house several property managers who usually have more work than they can handle. Property managers need help showing properties to prospective tenants, handling marketing campaigns, fulfilling maintenance requests, addressing tenant complaints, and often dealing with stressful situations.

A Mother And Teenage Daughter Looking At Laptop Together

4. Work for a contractor

There currently is an extremely high demand for quality contractors, so much so that contractors are turning down jobs and projects they would love to take on. That’s why contractors around the country are looking for quality help, even if it’s just a part-time beginner who is motivated and willing to learn. If your student is handy, this could be an excellent fit for them.

Are you ready to invest?

One of the most frequently asked questions in the BiggerPockets forums is “How can I start investing in real estate with no money and bad credit?” The answer? You shouldn’t. You need to fix your situation and invest from a position of financial strength.

5. Work for a mentor

There is no better way for your student to learn the ropes than to work for someone who does exactly what your student would like to do someday. If your student wants to invest in real estate, maybe your family knows a real estate investor looking for an intern, apprentice, or mentee. Or maybe your student wants to work in banking or finance. Do you know a local lender who might need some extra help?

ThesThese five jobs have a wide range of duties and skillsets. Hopefully, there is one that will pique your student’s interest so they can gain some valuable knowledge while also making some extra money.