E-Loan Inc. of Pleasanton, Calif., plans to bring its trademarked "Radically Simple" lending approach to something complicated: tenancy-in-common mortgages.
With TIC mortgages, two or more tenants in a building join together and hold the title on a property. Though TICs are typically paid as a single loan, E-Loan will break it down so tenants can get their own mortgages.
The company plans to roll out a pilot TIC program in the San Francisco Bay area within the next three months, said Mark Lefanowicz, its president and chief executive, in an interview last week.
The pilot program will focus exclusively on small residential buildings with two to three apartments. E-Loan is looking at a handful of other major urban areas where the structure is legal, including Chicago, Los Angeles, and New York, Mr. Lefanowicz said.
David R. Gellman, managing partner of the San Francisco law firm Goldstein, Gellman, Melbostad, Gibson & Harris LLP, said three things contributed to the rise of TIC agreements in the Bay area: city restrictions on converting existing multi-unit properties to condos; sky-high prices of entry-level residential housing; and rent control rules that made it difficult to own multi-unit buildings.
These factors "pushed people to share a mortgage," he said.
He also said that E-Loan is sure to meet resistance from San Francisco tenants' rights groups who fear the product will remove more rental properties from the market.
Mr. Lefanowicz said that E-Loan will focus on small homes to further differentiate the product from condos.
"It's often difficult to put together a condo for just two units," he said.
In a condo, an individual only owns the portions of the property within his unit. The condo association, or homeowners' association, owns everything else. With TIC, the TIC group owns the entire property in percentage shares, as spelled out in a written agreement.
Another advantage is that "a lot of people don't like the feel of condos," Mr. Lefanowicz said. "They like the feel of one flat on top of another. It's much more the feel of a home."
He said that currently people who want to carve two units out of a single home "have to go out and get a commercial loan from a bank or almost like a personal loan where the bank has them jointly and separately liable."
"This product would allow each consumer to go get a loan that would look like and act like a home loan would," he said.
E-Loan's underwriting guidelines allow it to make loans "up to the million-dollar range," he said. "I can't imagine [the loan size] would be more than that."
The company's average mortgage loan is around $220,000, and its goal with this product is to make more loans of about that size.
"In all the areas we're talking about, a lot of condo conversions could result in loans that obviously could be higher than that," Mr. Lefanowicz said. "But I think that there is a good opportunity for these things to fall into our sweet spot."
E-Loan would sell the TIC loans in the capital markets, just as it sells all its other loans. Though E-Loan is still "working out all the details," there's "definitely an appetite" for the TIC loans among investors, Mr. Lefanowicz said.
"There's a lot of interest because … many of these same parties that we work with buy loans secured by condominiums," he said. "These are actually easier to deal with than condominium loans because of the fact that you don't have to deal with the condo association" in the event of foreclosure.
Because the product is new, financing options will be limited, and, at least early on, only fixed rates will be available.
