Rental Reserve and Refinance

It seems to me that lately the real estate lenders at large are being ever more short sided when it comes to refinancing Investment Properties. A case in point in MA, is the recent requirement I have come up against which stipulates a six month rental cash reserve for all rental units, as part of a cash out on refinance. I am not stating that it is a stupid requirement, but if you are performing the refinance in order to establish or re-establish a cash reserve, well your out of luck with most lenders I have talked to. In my case a few non-payment rentals and a few major repair costs have chipped away at a once decent cash reserve. My easy fix, or so I thought, was to refinance one of the investment properties. I have a good amount of equity on a few rental properties I own.

While completing the refinance paper work, (oh what fun it is) I came across this new requirement more than a few lenders were stipulating. In my case I was able to resolve the issue but for those who are starting out or struggling to keep their investments properties going, I estimated they would need thousands of dollars in reserve to even qualify for a cash out refinance. In some cases an owner that had six units, charging $1,000.00 a month would then need $36,000.00 in rental reserve capital to even qualify for the refinance.

I hope this figure is a slight exaggeration, but it seemed to be what lenders were implying. Since the days of handing out mortgage loans like candy are in the past, ( the 2007 real estate crash/slump adjusted this practice) and its subsequent effect on refinance terms, it seems to me that the pendulum has swung to far in the other direction. Being ultra conservative across the board and making sweeping lending policy decisions without looking at the real estate investors finance history or investment history in general, seems a bit short sided. If you are an investor with years of experience, own several investment properties and have positive cash flow from the investments, these lenders should take that into account.

I have had several conversations with brokers or reps of the lenders and they all express a level of frustration with these new policies. They all admit they have been turning down way more loan applications than they ever have in the past. I blame most of the less then realistic new policies on the decision to treat mortgage loans in general as a bundled package that is then actively traded on wall street. Investment property owners chose to invest in this far less volatile market because they did not want to deal with the shell games typical of stocks, bonds and wall street in general.

I guess it will probably come down to government eventually stepping in and performing some type of magical mortgage/lending reforms which will probably do little to help us property investment folks out anyway. I am still getting letters in the mail from lenders heralding the Obama mortgage relief act, of which I am not qualified to partake, as I have not monumentally screwed up my mortgage finances to begin with:-) I will save the wall street rants and government ineptitude for future posts, I think I will watch the Big Short this evening, that should cheer me up!

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