MBA Asks FHFA for Clarity on GSE Short-Term Rental Policies
(Vacation rental property photo courtesy Airbnb.)
The Mortgage Bankers Association, in a July 6 letter to the Federal Housing Finance Agency, asked FHFA for more definitive guidance on the government-sponsored enterprises’ policies on mortgages for properties that include short-term rental units.
MBA Senior Vice President for Residential Policy and Member Engagement Pete Mills said there is confusion in the mortgage industry regarding the existing Enterprise policies for such properties, which leads to differing approaches taken by various lenders based on differing interpretations of the language in the Enterprises’ selling guidelines.
“This portion of the market would function more smoothly and efficiently if lenders could rely on more definitive guidance regarding the eligibility of particular projects,” Mills wrote.
The MBA letter comes in response to a May 5 FHFA Request for Information for mortgages in condominium, cooperative and planned unit development projects where a large portion of units are offered for short-term rental (30 days or less) or are used primarily for the purpose of vacation or recreational lodging—projects often informally referred to as “condotels” or resort condominiums.
MBA recommends several areas in which the Enterprises’ policies could be clarified; these recommendations cover issues such as the prohibition on “transient” projects, due diligence based on occupancy type, the presence of “hotel-type services,” project naming conventions and consideration of rental income in the underwriting process.
“When there is confusion regarding a particular set of Enterprise policies – such as those related to projects that include short-term rentals – lenders will come to differing conclusions as to whether they are able to engage in Enterprise-supported lending for units in those projects,” MBA said. “While it is natural and appropriate for lenders to come to different lending decisions with respect to a particular property, these differences should be determined by lender business strategies, risk tolerances and other related factors. It is unhealthy for these differences to stem from differing interpretations as to whether a property is eligible for an Enterprise-backed mortgage. The Enterprises’ eligibility guidelines should be sufficiently clear that lenders consistently arrive at the same conclusions when presented with basic facts about a particular project.”
MBA noted this uncertainty may also lead to situations in which there is unnecessarily tight access to credit for condominiums, cooperatives or homes in planned unit developments. “In many cases, these types of properties represent entry-level homeownership opportunities for low- to moderate-income borrowers,” MBA said. “Projects that feature high proportions of short-term rentals often may be perceived as luxury, high-cost projects that cater to affluent borrowers, and while such projects certainly do exist, they do not represent the full range of condominiums, cooperatives or planned unit developments that serve a diverse set of borrowers across the income and wealth distributions.
MBA said many areas that are popular vacation destinations, for example, projects with high proportions of short-term rentals also feature owner-occupied units that serve as affordable housing – often for individuals working in service or hospitality jobs that support tourism.
Mills said the current Enterprise guidelines include significant “gray areas” that cause different well-intentioned lenders to come to different conclusions about the eligibility of the same projects. As such, he wrote, lender “risk tolerance” has become an exercise in tolerance for the risk that a project is later deemed ineligible by an Enterprise – “an unwelcome and unproductive substitute for true risk analysis based on credit risks or other borrower or property factors.”
To resolve this inconsistency and provide greater clarity to lenders, MBA said the Enterprises can adopt one of two potential approaches: They could make public determinations about the eligibility of particular projects, which would remove all uncertainty and place all lenders on equal footing; the second option would be for them to implement changes to their guidelines that remove many of the “gray areas.”
“It is…important that the Enterprise requirements be clear and well understood across the lender community,” MBA said. And while some lenders report that Enterprise representatives have proven helpful in clarifying lender uncertainty in individual situations, direct communications with Enterprise staff are not scalable and introduce the risk of lenders receiving differing guidance from different Enterprise staff – and therefore are not a suitable replacement for clear, written guidance.”