Lead Story… When home owners take out a mortgages and can’t afford to put down 20% or more of the purchase price, the lender makes them get something called Private Mortgage Insurance or PMI which protects the lender in the event of borrower default in exchange for a monthly premium. It’s a well established insurance product that has been widely used for years. Traditionally, rental landlords have not had a comparable form of insurance to rely on should a tenant default. Typically, a landlord requires that a prospective tenant make an annual income of greater than 40 times the monthly rent with a credit score of no lower than 700. If a prospective tenant can’t meet that requirement, they must find a guarantor who earns 80 times the monthly rent in order to qualify. As you can imagine, this is not easy in markets where rent is high and vacancy is tight, especially for someone who is recently entering the workforce and has neither a substantial credit or income history. Enter a relatively new business plan – payment insurance for apartment hunters from a startup called TheGuarantors. From the Wall Street Journal:
TheGuarantors, launched in New York in 2014, sells payment insurance to tenants, providing landlords with a guarantee they will be made whole if the tenant becomes delinquent.
The offering is a symptom of a pricey market in which rents have risen faster than incomes and landlords can be picky about the qualifications they demand. Rents have climbed about 20% nationwide over the past five years while incomes have only recently started to rise.
The insurance, similar to the private mortgage insurance many lenders require of borrowers who have small down payments, provides a new level of protection for developers putting up new buildings in pricey markets where the applicant pool might be thin.
It could be a boon to landlords in places like San Francisco and New York in particular because rent growth has far outstripped income gains in recent years. Cliff Finn,executive vice president of new development at Douglas Elliman in New York, said 10% to 30% of the tenants in buildings he is leasing are now insured through TheGuarantors.
The premiums work out to somewhere between 2 weeks and 1 month’s worth of pay a year depending on the degree of risk and the program allows for borrowers with as little income as 27 times monthly rent and as low as a 630 credit score. The balance sheet capital that TheGuarantors uses is from Hanover Insurance Group, a $5 billion dollar insurance company based in Massachusetts. Another company, called Insurent is the largest in the industry, having issued over 13,000 guarantors since 2008. A few of thoughts on this:
- If widely adopted, this type of insurance is likely to result in higher rents since it increases demand by creating more eligible renters without increasing unit count.
- Even considering point 1 above and the increase cost of living for a renter through the insurance premium, I would tend to think it’s a net positive for the economy since it allows for more household creation at the margin. In other words, the kid who is living in his or her mom’s basement is likely able to qualify for their own apartment sooner. That being said, the slippery slope here is that landlords make their qualification criteria more difficult and start effectively forcing the product on those who don’t really need it.
- This could be highly lucrative for the insurer assuming that renters are underwritten correctly and they are selective about markets. It’s also not clear if the insurer is able to sublet the unit in the event of default during the period that they are on the hook for the guarantee. If they are, it would be much easier to mitigate risk, especially in a market with low vacancy.
Overall, this seems like a fascinating business plan and definitely something that we will be keeping a close eye on to see how it plays out through the economic cycle.
Dropping Like a Rock: Grocery prices are plunging at rates not seen since 2009. Great news for consumers, not so much for stores and suppliers.
The Haunting: The ghost of the Lehman Brothers failure haunts troubled Deutsche Bank, however the some of the parallels are a bit misleading.
Running on Full: Despite somewhat of a construction boom, America is running out of apartments as occupancy hits a near-record 96.5%.
Reversal: Banks are starting to hold onto loans again and growing loan profitability is the reason why. Data that was published by the Urban Institute last week showed that portfolio loans or loans that portfolio loans, or loans that banks make to keep on their books grew to 34%, the highest level since 2002.
Rise of the Machines: New technologies like self driving cars, ride sharing apps and drones could be a catalyst for suburban growth.
The Prodigy: Theo Epstein became a hero in Boston after he put together the blueprint for the Red Sox to win two World Series championships after 86 years of frustration. He’s now the general manager of the Cubs and has the team poised to end a 107 year World Series drought. If they pull it off, he’ll become a legend.
Assholes: Emirates Air is going to start charging families for the privilege of sitting together on a plane.
Chart of the Day
Banks are actually holding loans on their books again.
Slow News Day: The Washington Post actually published an article last week posing the question of whether or not dog Halloween costumes are sexist. I give up.
Cultured Idiots: Unwitting attendees at the NY Symphony Orchestra gave a rousing standing ovation for a North Korean propaganda song that is an ode to dictator Kim Jong Un because they didn’t know any better.
When Nature Calls: A woman from Memphis came home one day to find her front door open. She walked inside to find that, not had her house been robbed, but the two burglars were having sex on her couch.
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