One of the main determinants of the interest rate you’ll be charged on a loan for the purchase of a primary residence or an investment property is the strength of your FICO Score.  FICO Scores range from a potential low of 400 to a high of 850.  Your score generally rises as the length of your total credit history increases and as you demonstrate your dependability as a bill payer to make your scheduled payments on time.  When the length of your credit history is short or when you begin missing payments to creditors, your credit score decreases, thereby warning lenders of the additional risk they’ll likely be taking on by lending to you.  Many lenders will gladly lend to higher-risk borrowers provided the borrower is willing to pay dearly for the loan.

Though the formulas the Fair Isaac Company use to calculate the FICO score, which they invented, are extremely complex and secretive, many investors have discovered at least a few loopholes in the system, which they can exploit when needed to quickly raise their credit scores in advance of major purchases.  One such loophole has been to copy someone else’s very positive credit history on certain trade lines on to their report by being added as an additional user for the account.  For example, if an 18-year-old had a very poor credit score simply because they were establishing their credit for the first time and lacked a history of borrowing and repaying, they could request that their parents add them as an additional user on some of the accounts they’ve had perfect payment history on for many years.  If the parents agreed and added their child as an additional user, their full payment history for the account would be reported on the child’s credit report, most likely giving their score an enormous boost!  By using this technique, this 18-year-old could go from having no credit history to having many years of timely payments on their report, which would make potential lenders much more comfortable in offering their best rates to them.

Many investors have used similar practices to improve their scores, and in some cases, lenders have been left holding the bag when they offer their lowest rates to some people who didn’t truly deserve them based on their own true credit history.  These complaints have now found their way back to the Fair Isaac Company, who now plans to release a new score calculation model in September of 2007 that will ignore trade-lines where you are simply an additional user when calculating scores.

This change is happening to stop a potential problem before it balloons into something much larger and more dangerous.  While I’m sure they’d rather not have a parent boost their kids’ scores by allowing them to borrow their credit history, their larger concern is with for-profit companies that are starting to facilitate the renting of people’s credit.  Online companies have been popping up which will pay people with very established trade-lines that are reporting favorably to add their client to their accounts as additional users in an effort to artificially boost their credit scores and their borrowing power.  The cost of such a service is reportedly between $400 to $2,000.  Some of those that accept payments in exchange for adding users on their accounts are said to make as much as $10,000 a month for their trouble.  With no shortage of supply or demand in this new business, Fair Isaac felt that they had to act quickly to stop the spread of the practice and to protect the lenders that depend on the data they provide.

 The commercial real estate market is quickly becomming an international market with large tenants, commercial real estate agents and developers expanding to other countries.  The expansion is not just from the U.S. outward to other countries but also from other countries here.  For example one of the major shopping center developers in the U.S. is Westfield Group, an Australian firm.  We expect the internationalization of commercial real estate to grow substantially in comming years.  The following article should be interesting to those who follow these events.
Global Real Estate Markets See Boom
Article by Anita Howarth Via GlobeSt

Commercial real estate markets in key cities around the world are booming as globalization pushes the economies of large international cities to converge.
All 10 global business centers now have vacancy rates below 10%, a milestone in the ongoing worldwide recovery of commercial real estate.  Globalization of trade and borderless movement of money have allowed key cities to rebound in tandem relatively quickly from the real estate decline that followed the technology bust in 2000.
Hong Kong, which was hit by the dotcom collapse and suffered another blow after the SARS outbreak in 2003, has rebounded quickly and strongly. The city saw asking rents shoot up 37% in the past 12 months to an average of $69.12 per sf as the vacancy rate fell to 4.1%. And by mid-year Tokyo’s vacancy rate of 0.6% was down from 2.2% and spurred a 12% jump in average asking rent to $148.17 per sf.
London’s asking rent rose 17% to an average of $163.23, and Madrid also logged a 17% increase, to a $43.18 average. London and Madrid vacancy stood at 5.7% and 8.2% respectively, at mid-year 2006. And in Paris, asking rents rose to $80 per sf, up 5.1%, while vacancy stood at 4.8%, down 0.7%.
In North America, Toronto asking rents rose 9% to an average of $24.58 at mid-year, as vacancy rates slid to 5.2% from 8.4% at mid-year 2005. New York registered a 7% increase in asking rent to an average of $47.30, and vacancy fell 1.8% to 6.3%. Washington, DC which was the only major US city to thrive after the dotcom bust, saw asking rents rise $45.50, up 0.6%. Despite a tremendous rise in development, vacancy continued to fall, down 0.6% to 7.3%.
For more information on emerging markets, contact Pacific Security Capital at www.pacificsecuritycapital.com or call 1-800-844-6085.

Often when an investor is seeking debt or equity financing for a type of commercial property with which he has little or no experience he finds investors/lenders reluctant to consider new financing because of his lack of experience.  In a recent article (“Strengthening the Property Sponsor�) in the March 2007 issue of National Real Estate Investor W. Joseph Caton writes about how an investor can strengthen his position with a potential lender. 

 

As he states, after the location and potential cash flow from a project the strength of the borrowing entity (particularly its or his creditworthiness and property management experience in the specific type of property and activity) is paramount in the underwriting of the loan or equity investment.  He suggests that an investor who is weak in one or more areas that are important to the project’s success and therefore to the lender’s or investor’s underwriting can significantly strengthen his position with the lender by partnering with a property management firm or a contractor with specific experience in the location and type of property.

 

It is important to lenders – particularly in high ration loans that the borrower be willing to bring the appropriate talent to the project and often the hiring of the right property manager or leasing agent can provide the assurances that the lender is looking for.  If a borrower fails to provide this necessary ingredient he may find funding difficult to obtain at reasonable terms – while there is plenty of mortgage and equity capital in the market lenders do refuse to make deals that they consider too risky.

 

Mr. Caton closes by saying “adding strength to one’s deal sponsorship may also include hiring internal personnel or naming business partners who bring a broader scope of experience to the table. Real estate investing is a business operation, and successful developers, investors and building owners are rarely lone rangers. Instead, they are forward-thinking planners who understand and take advantage of other people’s professional strengths.â€? 

We think this is excellent advice for commercial real estate investors.

The Mortgage Bankers Association of America recently reported information gathered using FBI and private industry data indicating that mortgage fraud of all types is on the rise in across the country.  Currently California and Florida have leap-frogged to the top of the list of the states most mired in the fraud. 

This fraudulent activity consists of lying about income, assets, employment details, taxes, etc.  It’s anticipated that loan fraud will continue to rise steadily in the wake of the sub-prime melt down.  Mortgage payments for many Americans are rising as their ARM loans begin to adjust.  At the same time that payments are going up, lenders are making it harder and harder to borrow their money.  The combination of these events is likely to encourage many would-be borrowers and loan officers to falsify information in order to push tough loans through.  Because of the projected rise in mortgage fraud, the FBI is planning to make this area of investigation and prosecution a major priority in coming months.

The Federal Trade Commission (FTC) is on a major offensive against predatory lending practices, which it gets complaints about all too often.  One major concern that they’re pressing currently is with the present mortgage disclosures.  The standard disclosures used in closings today were designed more than 30 years ago and have proven confusing for even experienced home purchasers and investors to understand at times.

FTC chair Deborah Platt Majoras recently made comments indicating that she’s aware that today’s loan products are much more complicated than those in use some 30 years ago, which adds to the importance of overhauling the documents.

Broderick Perkins cited a study in a recent Realty Times article in which 800 recent mortgage customers where polled, and among them he noted that:

“Approximately 20 percent could not identify the annual percentage rate (APR), the amount of cash due at closing, or the monthly payment and whether it included escrow (holding account) for taxes and insurance.

“About 33 percent could not identify the interest rate or which of two loans was less expensive.

“One-third also did not recognize that the loan included a large balloon payment or that the loan amount included money borrowed to pay for settlement charges.

“Half could not correctly identify the loan amount.

“Two-thirds did not recognize that they would be charged a prepayment penalty if in two years they refinanced with another lender.

“Nearly 75 percent did not recognize that substantial charges for optional credit insurance were included in the loan.

“Almost 80 percent did not know why the interest rate and APR of a loan sometimes differ.

“Approximately 90 percent could not identify the total amount of up-front charges in the loan.�

With results like those listed above, it’s clear that an overhaul is in deed badly needed, and new mortgage disclosure forms will benefit us all and help keep lenders honest.