By Peter Rudegeair
Room-rental services such as Airbnb Inc. are blurring the line
between residential and commercial property. That is causing
problems for some homeowners looking to refinance mortgages.
Big banks including Bank of America Corp. and Wells Fargo &
Co. are subjecting some refinance customers who rent rooms to
additional scrutiny. Some borrowers have been told they were no
longer eligible for certain kinds of loans or would have to pay
higher interest rates.
The issue for lenders is how to classify loans in the Airbnb
age. Historically, that has been pretty easy: a house usually was
either a principal residence or an investment property. Mortgages
on the latter are often viewed as riskier because owners had less
of a personal connection to the house and rental income isn't
always reliable.
Now, the distinction isn't so clear-cut. That is posing
challenges to lenders and frustrating some customers, illustrating
how fast-paced technological change can reverberate in unexpected
ways.
The issue comes up when borrowers report income from services
such as Airbnb when applying for a new loan, often in hope of
improving their credit profile. That, they hope, can lead to a
better interest rate on a loan.
Brad Severtson, a resident of Seattle's Ballard neighborhood,
earned roughly $30,000 last year from renting out a cottage in his
Victorian home's backyard. He thought that would work in his favor
when he applied in early 2016 to refinance a home-equity line of
credit at Bank of America.
The bank turned him down, saying it didn't allow home-equity
lines of credit on properties where the homeowner is operating a
business, including Airbnb. Mr. Severtson, a 61-year-old data
scientist and former Rhodes Scholar, was taken aback.
"Here's a bank I've had a relationship with for 30 years," he
said. "The assumption to me was the more your income is, the less
risk to them. That assumption was wrong."
Mr. Severtson ultimately refinanced with Umpqua Holdings Corp, a
Portland, Oregon-based bank.
A Bank of America spokesman said the bank doesn't provide
home-equity lines of credit on investment properties. He added the
bank would consider a customer's primary residence an investment
property if there was a "material amount of commercial activity,"
but that "incremental renting" wouldn't be an issue.
A spokesman for Airbnb said in an emailed statement that such
incidents "are incredibly rare."
Yet banks are in uncharted territory. "This is kind of novel,"
said Jeffrey Naimon, a consumer-finance attorney and partner at law
firm BuckleySandler LLP. "I don't think the market has gotten its
arms around it."
Mortgage lenders typically apply tougher underwriting standards,
including larger down payments and higher rates, to second homes or
investment properties that owners don't live in for most of the
year.
For mortgages made this past April that went toward the purchase
of a home, lenders on average were willing to finance 84% of a
property's value if the borrower intended to live there, according
to data from real-estate analytics firm CoreLogic Inc. The average
interest rate was 3.76%. For investment properties, lenders only
financed 72% of the home's value, on average, and charged an
average interest rate of 4.29%.
That is because borrowers have shown a greater propensity to
default on investment-property loans. Cumulative losses on
investment-property loans included in private-label mortgage bonds
issued in the four years before the financial crisis reached nearly
20% in early 2016, according to data from Moody's Investors Service
and ABSNet Loan. For owner-occupied mortgages, the loss rate was
around 14%.
An additional worry: Defaults can trigger requests from mortgage
investors and government agencies for a lender to repurchase the
loan. So many lenders proceed with caution when a loan doesn't fit
neatly into a pre-defined category, although that is less true for
"jumbo" mortgages on high-price homes that often stay on bank
balance sheets.
For mainstream lenders in the postcrisis mortgage world, "the
last thing they want is someone coming back to them later" with a
request to repurchase soured loans, said Christopher Mayer, a
professor of real estate at Columbia Business School.
That, though, can cause issues for some borrowers. Stephen
Labovsky this spring applied to Wells Fargo to refinance the
mortgage on his home in San Francisco's Glen Park neighborhood.
Mr. Labovsky, 72, and his wife were active Airbnb hosts and had
registered their property with the city government. That permits
them to rent space for an unlimited number of nights a year while
they reside in the home and for no more than 90 nights when they
aren't on the premises.
But because the couple was operating short-term rentals for much
of the year, Mr. Labovsky said, Wells Fargo recommended he apply
for a mortgage as if his home were an investment property. That
would have increased the interest rate by up to 0.5 percentage
points, he said. Mr. Labovsky, a retired filmmaker, stuck with his
existing mortgage.
Greg Gwizdz, national sales manager for Wells Fargo's mortgage
division, said the bank has no policy of restricting short-term
rentals on its borrowers' properties. He adds that services like
Airbnb haven't caused changes in the bank's position on what
constitutes a primary residence or an investment property.
Still, he acknowledges there may be confusion within the
industry. Similar questions were raised a few years ago about
whether homeowners' traditional insurance policies would also apply
to their Airbnb activity. The startup eventually responded by
offering hosts free, primary liability coverage up to $1 million
per incident.
In the case of mortgage refinancing, though, banks will likely
have to gain more experience with Airbnb hosts.
"Some of the programs that are new that allow people to rent out
their properties short term or in different ways that may not have
existed 10 years ago may not be fully understood by every lender
across America," Mr. Gwizdz said.
Write to Peter Rudegeair at Peter.Rudegeair@wsj.com
(END) Dow Jones Newswires
August 29, 2016 12:43 ET (16:43 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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