Brits Get Disney Fix as U.S. Banks Lend to Foreigners

Adele and Mark Lee, who live in England with their three children, said they got approved for a U.S. mortgage without setting foot on American soil. The vacation home they’re buying near Florida’s Disney World would have been out of reach if they had to pay all cash.
“It would have been a stretch,” said Adele, a 35-year-old nursery school teacher, speaking from the family’s home near Birmingham. “We wanted to keep some money here just to fall back on.”
The Lees are using a foreign-national mortgage, a loan for overseas buyers that required a 40 percent down payment, to purchase the five-bedroom house later this month for $423,000. Adele and her husband, a construction worker, plan to rent the Orlando property when they’re not living in it.
Lenders are providing greater access to credit for non-U.S. residents to finance vacation houses and investment properties. Foreign buyers, who are helping to fill a void left by Americans facing high borrowing hurdles, spent about $35 billion on U.S. homes using mortgages in the 12 months through March, a 46 percent increase from a year earlier, according to the National Association of Realtors.
“The American pool of borrowers is drying up,” said Anthony B. Sanders, an economics professor at George Mason University in Fairfax, Virginia. “Middle-class borrowers have flatlined due to low income growth, and domestic investors are finding it less appetizing because the foreclosure inventory has dried up. So who do you go to? Foreign investors.”

Growing Share

At HSBC Holdings Plc, foreign-national mortgages, available to banking clients who deposit at least $15,000, account for about 30 percent of its U.S. home-lending business, according to Peter Alongi, a mortgage sales manager. That’s up from a share in the “teens” in 2008.
FBC Mortgage LLC, an Orlando-based lender, has increased mortgages to international buyers by 65 percent this year compared with 2013. Calabasas, California-based Mega Capital Funding Inc. started lending to non-residents in June after seeing rising demand from Chinese buyers.
“Instead of buying two houses in cash they can buy four houses with loans,” said Brian Na, chief executive officer of Mega Capital, which is now issuing about $10 million of the mortgages a month. “At the same time, buyers can build a credit history in the U.S.”
While many Americans struggle to qualify for mortgages, lenders are chasing wealthy buyers, including foreigners, whose loans typically require a 30 percent to 40 percent down payment compared with 20 percent for U.S. residents. Banks and smaller firms are offering more loan products to buyers based overseas, most of whom have paid cash for homes in the last few years.

Cash Sales

Cash sales have been falling and in June made up the lowest share of total home purchases, at 33 percent, since September 2008, according to CoreLogic Inc., an Irvine, California-based property-data firm.
In Florida, the state with the largest share of cash sales, smaller community banks have gotten increasingly comfortable lending to foreign buyers, said Rob Nunziata, CEO of FBC.
His firm typically offers nonresident borrowers adjustable-rate loans of as much as $750,000 that are fixed for three to five years. The mortgages require at least a 30 percent down payment and six months of cash reserves. Borrowing costs are generally one or two percentage points higher than conventional loans.

Credit Profiles

The biggest challenges for lenders are verifying incomes and building credit profiles for non-U.S. residents. Their home countries have tax systems that differ from America’s and lenders have to rely on third parties, along with documentation from employers or accountants, said Nunziata.
One of FBC’s borrowers, Yoram Yahav, said he purchased a few houses in cash before deciding to get a $100,000 loan for a Florida property. He’s seeking to build his U.S. credit profile because he plans to bring more foreign capital to America with other global investors.
“You may have $2 million in your bank account in England, but if you want to borrow $80,000 in the U.S. you can’t because of this issue with credit,” said Yahav, whose Tel Aviv, Israel-based firm works with management teams in scenario planning for future events. “This way I can also increase my cash portion and have more money to put into new businesses.”
While home loans were available to foreign nationals during the U.S. housing boom, financing dried up as banks tightened credit after the crash. Applications from international homebuyers are now at about the same level they reached during the peak in about 2006, when foreigners needed just a passport and an application to get a mortgage, according to Andy Scott, president of International Mortgages.Net in Orlando, which caters to mostly British clients, including the Lees.

‘Convoluted’ Process

“The process is more convoluted,” Scott said. “It takes longer to get applications through. And there are a lot more checks and balances.”
The company, which has worked with international buyers in the U.S. and elsewhere for about 13 years, now uses seven lenders, up from only two after the housing bust. The firm moved from Scotland to Orlando a year ago because so many clients were purchasing there, Scott said.
Buyers from the U.K., Canada, China, Mexico and India accounted for 54 percent of foreign sales in the year through March, data from NAR show. While Canada was the top source of international buyers, China accounted for the largest sales dollar volume because Chinese purchased more expensive properties on average, the Realtors report said. The top five states for international buying are Florida, California, Arizona, Texas and New York, according to the association.

Disney World

The Lees have only seen their vacation house in videos taken by their Realtor. They chose it for its swimming pool and proximity to Disney World, which they usually visit annually. The couple plans to rent it for the next five years and may eventually live there year-round.
“It’s amazing what you can get over there for the money,” Adele said. “I also like that we could do everything over the Internet. We have noticed that Americans love paperwork. But the process was fairly straight forward.”
Rising prices and competition from cash-rich investors have kept many American homebuyers on the sidelines. Renters have also been blocked from homeownership by down payment requirements and “very strict underwriting standards,” said Stuart Miller, CEO of Lennar Corp., the largest U.S. homebuilder by market value.
“The process itself has become fairly invasive,” Miller said last week on a call with investors. It’s “almost designed to scare people away.”

Loan Dropoff

Mortgage applications for house purchases are 10 percent below the level a year earlier, according to data from the Mortgage Bankers Association. Banks this year are also struggling to replace a falloff in lending dominated by refinancing, which plunged last year when borrowing costs spiked.
While more financing for foreigners will boost property purchases in the U.S., smaller lenders who can’t hold as much debt are constrained by a limited secondary market for selling their loans, said Na of Mega Capital.
Foreclosure of delinquent borrowers could also be a complicated process for some foreigners, such as those with diplomatic immunity, according to Joseph Pisa, CEO of Northstar Funding Inc., a Hoboken, New Jersey-based lender which focuses on the New York City area. While the borrowers can still get financing, rates are higher because of the additional risk, he said.
Jerry Barker, a real estate agent in Celebration, Florida, said half of his clients, which are mostly European, now get foreign national loans. That compares with about five percent three years ago.
“Our business has increased because we are able to sell to people we couldn’t sell to before,” said Barker. “Not everybody has a shoe box under their bedsprings with cash.”
To contact the reporters on this story: Heather Perlberg in Washington at hperlberg@bloomberg.net; Prashant Gopal in Boston at pgopal2@bloomberg.net
To contact the editors responsible for this story: Kara Wetzel at kwetzel@bloomberg.net Vincent Bielski