The interest of foreign nationals in the American housing market, it can be argued, is essential to the continued economic recovery. However, lenders may be unaware of the nuanced level of risk carried along with lending to this population.
Private equity investors tend to remain focused on single and multifamily properties in gateway cities. To a degree, these properties need to attract a higher volume of people, a higher density of living, in order to provide the vital rental demand necessary to push the rate of return in the rental market.
Foreign nationals provide a supplement to these sales by showing a heavy preference to the suburbs. In short, their buying runs parallel to other investors.
However, there is a larger risk of lending to foreign nationals. And financing may be provided without the high degree of underwriting typically reserved to American citizens.
According to the National Association of Realtors 2013 Profile of International Home Buying Activity report, total international sales were $68.2 billion, down approximately $14 billion from the previous year.
As a sidebar to that result, foreign buyers continue to have a substantial interest in U.S. properties. Over a five-year time frame, more than 70% of Realtors reported a constant or increasing level in the number of international clients contacting them.
Are foreign buyers worse? Yes and no.
"While historically loans made to foreign national borrowers did not necessarily perform worse than comparable loans made to U.S. citizens, foreign nationals generally have thin or no credit history in the United States and often purchase second homes or investment properties," write analysts at DBRS. "As such, these loans may experience higher performance volatility."
Foreign nationals are those who are not U.S. permanent residents or employees on non-immigrant working visas. Conversations with sources at VantageScore and FICO, the two largest consumer credit score providers, both show a confidence in measuring the credit risk of these nationals effectively.
However, a research report from DBRS appears to question the strength of these measurements. In assessing the credit risk of foreign buyers in pools of residential mortgage backed securities, DBRS outlines several risks mortgage lenders face in this space.
What is clear, underwriting remains varied across mortgage lending.
DBRS, for its part, looks to establish the amount of assets a potential homeowner living abroad holds. A minimum of 12 months of the mortgage, held in a U.S. financial institution is expected. It can be a challenge to accurately measure income expectations.
Going one step further, DBRS raises concerns on foreclosing on foreign nationals. As part of the foreclosure process, DBRS asks whether the servicer utilizes any third-party service located within the borrower’s country of residence to give notice to overseas borrowers.
DBRS asks: "If, through this process, the borrower cannot be reached, how long is the public notification process? What kind of delays in foreclosure can be expected?"
If these questions remained unanswered, the volatility, and risk of default, will remain elevated for foreign nationals buying into the American dream.