Single-family rental owners at lower default risk, but smaller landlords still face challenges

The default risk for single-family rental owners has decreased since the onset of the pandemic, but much remains up in the air for those landlords.

RealtyTrac Inc.’s recent Default Risk Score for single-family-rental homeowners declined by almost 16% in six months, dropping from 43.6 to 36.7 in the nation’s 100 largest counties, based on property count. The score looks at the single-family rental market that, while becoming more attractive to investors, still remains 90% owned by mom-and-pop landlords that have 10 or fewer properties, many of which carry a mortgage.

Rick Sharga, executive vice president of RealtyTrac, said the company considers unemployment rate, concentration of single-family rental properties in a metro area and loan-to-value ratio for its Default Risk Score.

“We’ve had an unprecedented economic recovery and jobs have come back much quicker than analysts expected,” Sharga said “That’s driven the unemployment rate down and, as that goes down, the risk score would go down with it.”

RealtyTrac did identify the 10 highest-risk metropolitan statistical areas across the U.S. They include:

  • New York
  • Myrtle Beach-Conway-North Myrtle Beach, South Carolina
  • Bakersfield-Delano, California
  • Dayton, Ohio
  • Cape Coral–Fort Myers, Florida
  • Riverside-San Bernardino-Ontario, California
  • Ocala, Florida
  • Seattle-Tacoma-Bellevue, Washington
  • McAllen-Edinburg-Mission, Texas

Sharga said the identified higher-risk markets tend to have higher unemployment rates than the U.S. average. Some, although not all, have a disproportionate number of jobs in industries most adversely impacted by the pandemic, such as retail, restaurants, tourism, hospitality and entertainment.

Of course, like much else with the pandemic, the national decrease in default risk for single-family rental owners doesn’t mean those landlords are out of the woods yet.

The evictions moratorium, which expired July 31 but was reinstated earlier this month, has resulted in some renters to fall way behind on rent payments, and federal rent-relief programs have been slow to roll out. Sharga said there are mom-and-pop landlords who have tenants that haven’t paid rent in a long time.

“There’s a limit to how much the landlords can handle,” he continued. “(Many) are paying their mortgages by using the rent they’re getting from tenants. If rent doesn’t get paid, it puts them in danger of defaulting on their loans, and those loans don’t have the government protections afforded to owner-occupants.”

Investors who buy single-family rental properties tend to acquire those properties with cash or have financing options available to them that a small-scale landlord doesn’t.

Sharga said it’s hard to know yet how the Delta variant or other continued impacts from the pandemic may ultimately affect smaller-scale landlords in the long run. But there will, at some point, be an increase in foreclosure activity or sales by rental property owners who can no longer make ends meet. The federal moratorium on foreclosures expired at the end of July.

A lot will come down to lenders and their willingness to work with property owners, Sharga added.

Greg McBride, chief financial analyst at consumer financial services company Bankrate LLC, said a little more than 3% of mortgages are in forbearance right now, and the majority of those are owner-occupied and not landlords. About 1 in 6 of loans that come out of forbearance do not have a payment plan in place, according to the Mortgage Bankers Association.

The national delinquency rate saw a 5% reduction in July and, at 4.14%, is down by nearly half since May of last year, according to recent data from analytics company Black Knight Inc. Foreclosure starts in July were down 58% from the same time last year.

Still, more than 1.4 million borrowers were 90 or more days past due — but not yet in foreclosure — entering August, Black Knight found. That’s more than 1 million more than at the start of the pandemic. Most of those borrowers are in forbearance.

McBride said borrowers who don’t have federally-backed loans, which are protected under Covid-19 legislation, have had to negotiate directly with their lenders. The outcomes of that are very much a case-by-case basis but, McBride said, because of the ongoing nature of the pandemic and its broad impact, he thinks there’s a bias toward working with the borrower.

There will be a burst of foreclosure activity at some point, though, he continued.

“It’s a little like stopping the water behind a dam and then opening the floodgates,” McBride said. “(But) it’s coming from a 40-year low.”

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