Lenders will need to adequately mitigate the unique risks associated with mortgage loans made to foreign nationals in the United States as exposure to these loans in residential mortgage-backed securities increases, according to Moody’s Investor Service.
What are the unique risks presented by mortgage loans made to foreign nationals in the U.S.?
“The main risks in lending to foreign nationals relate to a lack of credit history and verifiable income,” Moody’s Analyst Padma Rajagopal said. “Others include flight risk, foreign-exchange risk and the possibility of deportation and other consequences of immigration policy.”
Lenders can mitigate the risk associated with these loans in a variety of ways, including charging higher interest rates, requiring down payments, or requiring higher reserves.
Larger down payments mean a larger investment in the property for the owner, which makes it less likely that they will default on the loan and walk away. Lenders’ LTV requirements for foreign nationals outside the U.S. is typically between 50 and 70 percent; by comparison, some lenders require an LTV of up to 97 percent for U.S. citizens and permanent residents, according to Moody’s.
Borrowers are more likely to make consistent and timely repayments with higher reserve requirements in place, Moody’s reported. Currently, the reserve requirements for jumbo prime loans kick in at three months into the life of the loan; they typically start at 12 months for loans made to foreign nationals to whom the property will not be their primary residence.
“To further protect their interests, lenders can require a portion of reserves to be held in a U.S. bank account or, if they are a depository, in an account at their own institution,” Moody’s said.
Other ways for lenders to mitigate risk associated with loans made to foreign nationals include requiring a co-signer, requiring automatic payments, or requiring 12 months of credit card statements. Other lenders mitigate risk by financing only certain types of properties, according to Moody’s. For example, they might finance only single- or two-family homes, since multifamily properties often create a landlord-tenant situation where the property owner must collect rent from a tenant in order to make their mortgage payments—which may be challenging if the property owner (borrower) lives outside the U.S. or has not lived in the U.S. very long, Moody’s reported.