Such deals are alarming longtime observers of the real estate market. In a weak economy, borrowers who qualified based on rental income are likely to default at as much as three times the rate of those with conventional mortgages, according to Court Lake, an analyst with Fitch Ratings. Patricia McCoy, a former assistant director at the US Consumer Financial Protection Bureau, sees a parallel with the mid-2000s boom in subprime mortgages made with little income documentation; Wall Street also repackaged those loans and sold them to investors. In 2008 the mortgages’ collapse helped spur the global financial crisis, though they represented a far bigger share of the market than today’s rental loans.
Inexperienced landlords may not be accounting for volatile rents or the cushion they’ll need for unexpected repairs, says McCoy, who oversaw mortgages at the federal agency and now teaches law at Boston College. “The influx of the starry-eyed inexperienced investors is artificially boosting demand and causing the rental market to be overheated,” she says. “This whole class of loan and, in particular, some of these underwriting practices are a sign of market euphoria. That rarely turns out well.”
Industry executives say these loans, which require high credit scores, are quite different from the subprime mortgages that were made to borrowers with a poor history of repaying their bills. The US housing shortage ensures demand for rentals, and these are loans to businesses, not homeowners, they note; lenders can more easily foreclose on companies than consumers, making it easier to recoup losses from defaults
Lenders say they underwrite these loans with great care. HomeXpress generally requires borrowers to have a one-year history of per-night rentals, though buyers with some short-term rental experience can qualify with appraisals that consider comparable properties, says David Grider, a senior vice president. TheLender will only approve borrowers for loans based on per-day rentals if they have either a one-year track record as Airbnb-style hosts or two years renting out a property long-term, and they must be in strong real estate markets, according to Chris Ledwidge, president of the company’s retail division.
Like executives at other companies, Jeff Ball, co-founder of Visio Lending, notes that borrowers must make down payments—at his company, often 30%; they are also required to have the equivalent of six months’ worth of mortgage bills in reserve at the bank, as was the case with Jones, the former grocery manager in Ohio. “The loans perform extremely well, flawlessly,” Ball says. “People with good credit have good credit because they have a history of paying their obligations in good times and bad times.”
What happens if, as is typical, families cut back on travel during a recession? Could there be trouble? Perhaps, he acknowledges. “It’s an interesting question,” he says.
Long before Carles set up her mortgage business in the Smokies, she had deep affinities for the region. Her maiden name is Maples, so common here that she remembers a woman running up to her after a concert to announce she was kin. She grew up in a small Southern town, the child of a truck driver and a hairstylist in rural Farmville, Va. She waited tables and tried her hand as a Nashville singer-songwriter. She sang backup for East Tennessee’s favorite daughter, Dolly Parton. Carles is even the same height as the entertainer: 5 feet, “if I stand real straight,” she tells me in her soft drawl, as she lifts up her chin.
When I visit her in May, we meet over plates of eggs and bacon at a restaurant that looks like a 1920s general store. She tells me why she sees more potential in country homes than country music. It’s largely because the region has been popular with travelers for generations. About 14 million people last year visited Great Smoky Mountains National Park, more than the Grand Canyon, Yellowstone, or any other federal nature preserve. The 800 square miles of Appalachian wilderness is famed for sweeping vistas and streams teeming with trout. Straddling eastern Tennessee and western North Carolina, it’s an easy drive for much of the South, making it an ideal locale for vacation rentals.
Kitschy attractions are magnets for families. Pigeon Forge has the Hollywood Wax Museum with its giant King Kong; the Hatfield & McCoy Dinner Feud, an auditorium that reenacts the famed Appalachian family conflict (also the site of Carles’s best-paying singing gig); and, of course, Dollywood, with its old-time coal-fired steam engine, Amazing Flying Elephants Ride, and the Chasing Rainbows Museum of Parton memorabilia.
Near Sevierville, Tenn., where a statue of Parton holding a guitar stands before the courthouse, Carles rents a small brick house on a mountainside with her husband, Drew, a forest firefighter. They share a dimly lit, closetlike office, which has a shelf packed with how-to books: Who Not How: The Formula to Achieve Bigger Goals Through Accelerating Teamwork and The Definitive Guide to Ranking #1 in Airbnb Search.
Carles opened her company, the Mortgage Shop, in August after working for four years as a top-performing loan officer for U.S. Bancorp. At U.S. Bank, she says, it could take three weeks to review a conventional loan, because of all the paperwork and stringent standards. That process can get done in just several days for a vacation-property loan. Borrowers typically pay about 2 percentage points more than they would for a conventional home loan on a primary residence with similar terms.
So far this year, Carles says, her company has done 90 loans, worth a total of $60 million, for investor-owned vacation property. With a commission of 2%, her business has generated $1.65 million in profit since its founding, she says. She used to make loans herself but now relies on 10 loan officers operating in kitchens and spare rooms in Tennessee and across the US.
Late one Wednesday morning in May, Carles leads a Zoom question-and-answer session for about 30 prospective clients and employees. Dressed in jeans and a flowered blouse tied at the bottom, she leans into the microphone, a ring light brightening her straight brown hair, a green screen transforming her drab background into a beach with palm trees and a rising sun.
One prospect asks, If I can borrow $1 million, should I buy a bunch of properties or concentrate my bets?