Determining Rental Leniency in the Wake of a Foreclosure Boom
- May 03, 2011
Over the past few years, many property management companies relaxed their screening standards. Their thinking was that thousands of long-time renters were victims of the last decade’s home mortgage mania. They had taken mortgages that would not have been granted in any other era, and then defaulted on those mortgages. That didn’t, however, keep them from still being desirable renters. Thus, standards that didn’t punish them for foreclosures were justified.
Mike Lapsley, general manager of RentGrow, which provides screening tools to property management firms nationwide, isn’t buying it. “When people go bad on a mortgage, their credit profile gets messy,” he says. “They start to fall behind on their credit cards, and on their auto loans. Their credit profile goes from limited and conservative to very messy.”
In theory, it makes sense for a property manager intent on keeping occupancies high to approve those former renters for a return to renting in the wake of their foreclosures. In practice, it’s not that easy, Lapsley says.
Of course, some companies did lower their criteria in order to increase occupancy, points out Jay Harris, vice president of business services for Rockville, Md.-based CoreLogic SafeRent, which brings risk mitigation solutions to the multifamily industry. While his customers take a holistic approach to screening, looking at all factors of an applicant’s background, Harris notes that some customers may choose to “adjust their risk tolerance based on occupancy and other operating conditions.”
What is often overlooked is the extent of the market represented by return renters who had suffered a foreclosure, Lapsley adds. He recalls that three or four years ago, when the first signs of a meltdown were discernible, he began hearing that a wave of homeowners would soon return to renting. The industry needed to be prepared to evaluate these folks, many said at the time.
Lapsley tracked the percentages of those would-be renters who had gone through a foreclosure and found that it came to less than 2 percent. Checking the years before the crisis, the lowest corresponding number was 1.5 percent—not an appreciable difference for companies screening 25,000 potential applicants for a like number of apartments each year.
“These foreclosed homeowners didn’t flood back into the rental market we see,” Lapsley observes. “Some rented a house, and others stayed in their foreclosed homes. It wasn’t the watershed everyone thought it would be.”
During the downturn, SafeRent, which weighs holistically all factors in applicants’ histories, including evictions, experience with subprime or alternative credit markets, and credit reports, saw some incremental changes in the scoring criteria its clients use to accept or decline applications.
“SafeRent customers using the score were able to qualify a vast majority of applicants with derogatory mortgage histories, looking at all factors,” Harris says, adding there was no need to spend time and attention trying to separate prospects with both poor mortgage histories and bad eviction and credit histories from applicants with unfortunate mortgage experiences but also very good credit histories.
Dan Kosciak, director of sales and client services for RentGrow, however, observes that many of his clients simply chose to exclude the foreclosure from scoring. He notes, though, that “what they ended up finding was people would have so much collateral damage, they would get declined anyway. But if you were considering someone with a foreclosure, but acceptable credit files otherwise, that person would be an acceptable risk.”
Keith Corriveau, regional property manager with Woburn, Mass.-based Dolben Company, notes that his company has, in fact, been somewhat more lenient on foreclosures and bankruptcies. “Before the crisis, those were more automatic denials. Now they require a second look.”
The logical next question concerns what direction applicant screening will take in this rebounding economy. Will standards continue to be more lenient, or will an improved economic outlook usher in a return to more stringent screening?
Harris says SafeRent clients will continue to examine all factors in applicants’ backgrounds and adjust their score criteria based on occupancy needs.
“There’s always a trade-off between needing more occupancy and going further down the risk curve of applicants based on our scoring model,” he acknowledges. “The criteria they will use are the same, no matter what the market environment. …The method of evaluating is unchanged throughout market cycles.”
Kosciak believes an economy on the mend will allow property management companies to adopt stricter credit criteria, but they will do so in a granular manner. “It will be about fine-tuning the credit criteria, as opposed to drastically raising the standards,” he predicts.
“One area where I would expect to see changes is how companies evaluate income. If the growth in the rental rates outperforms growth of income, I would expect to see companies soften their stance on income,” notes Patrick Hennessey, RentGrow client services manager. “A lot of companies in markets where concessions skyrocketed took a more aggressive approach to income evaluation. I would expect to see that relax as rent amounts in some markets increase by hundreds of dollars a month.”
Dolben Company’s Corriveau, however, doesn’t believe the leniency is going to go away anytime soon. “You’ll still see for the next couple years where someone who held on a little longer and wound up in foreclosure will become a renter—and a good renter.”
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