Analysis: Hochatown real estate is a bit like inside baseball

While we wait on the courts to decide Hochatown's fate — the fate, at least, of residents' push to incorporate the tiny permanent community so it can properly deal with hordes of temporary tourists — the rental cabin building boom in the Ouachitas north of Broken Bow is waiting for no one but the next guests and investors.

Creative financing is an answer to rising interest rates that might otherwise slow things down in Hochatown. The court system sure seems slow to those who've been trying for years now to incorporate Hochatown.

Residents say the boom that keeps on booming requires incorporation, for police and fire protection and other services. In March, they presented a petition for incorporation to McCurtain County commissioners, who have not dealt with it. The commissioners have to decide whether to call a special election on incorporation.

Petitioners took their case — a request for a writ of mandamus requiring the commissioners to make a decision — to the Oklahoma Supreme Court on July 19, only to find out the court probably won't rule until September. A week later, on July 26, they took it to district court in Idabel, where it sits. The commissioners had not filed an answer by Thursday.

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Creative financing? OK, this is "inside baseball," and although one reader recently claimed in an email that "we folks in Oklahoma City are probably more interested in what happens in Dallas and Kansas City than Hochatown," our audience metrics tell us otherwise.

People who like baseball like inside baseball, and it looks like people who like a good story are fascinated by the Hochatown saga.

Here are some baseball stats, I mean Hochatown stats.

Let's say you want to build a $1 million "cabin" (they're more like small, upscale lodges). You can expect a monthly loan payment of about $7,000 and monthly income of about $12,000, said Scott Senner, senior loan officer with InterLinc Mortgage in Edmond, who has made cabin loans a specialty.

The difference between monthly loan payment and monthly income opens a door for financing that rising loan rates could have closed, he said this week in a Facebook video.

"We are able now to do what we call a rental projection loan whereby we take the projected rental income for a cabin and we use that to offset the projected payment on that cabin," Senner said. "Let that sink in for a minute.

"Let's say you would like to buy another cabin, but you're concerned your debt-to-income ratio (used by lenders in determine creditworthiness) might be too high because adding a cabin payment to your current liabilities would bump you up over 50% and you don't think you can do this anymore. That's what this program is designed to offset, because we all know that the rental income for a cabin is more than enough to cover any projected cabin payment, even with high interest rates right now. We're now able to use that projected rental income to offset that payment."

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"Creative financing" sounds fishy to some people. (Free Hochatown pun, thanks to the importance of the Mountain Fork River, Broken Bow Lake and Beavers Bend State Park).

But it's not fishy, Senner said, because it's a hybrid loan, a cross between a straight mortgage and a commercial loan using a Debt-Service Coverage Ratio, which measures the cash flow a borrower has available to pay debt obligations.

"So if you have a current debt-to-income ratio that's fine — you're below 50% — and your credit scores are high, 720 or above, we can now help you buy that next cabin and not worry about what that payment is going to do to your debt-to-income ratio. This is a big, big deal. This is not a DSCR loan. We call this sort of a hybrid because the borrower in this case still has to have income and still has to have good credit. We do check that."

It did make me think of a couple of things the late economist-historian John Kenneth Galbraith said was required for a bubble — not that I've heard a peep about a cabin bubble at Hochatown, but one has to wonder.

Galbraith said a bubble requires speculation, a financial mechanism that creates leverage, and a kind of investment frenzy because people believe there is something "new under the sun."

This hybrid loan is a financial mechanism, and it creates leverage. But the Hochatown frenzy was well underway without it.

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Senner himself said he thought lending solely based on projected income, relying on a Debt-Service Coverage Ratio, would be sketchy. But combining it with standard mortgage underwriting, for a hybrid loan, he said, is sound, with higher, volatile interest rates.

It lets lenders keep lending and investors keep borrowing in Hochatown — already a hybrid situation because the cabins are treated both as second homes for the owners and income-producing rental properties.

Inside baseball, for sure.

"If you know somebody who's looking to get in the game but is worried about his DTI (debt-to-income ratio), this is something that could help out a lot of people," Senner said.

Senior Business Writer Richard Mize has covered housing, construction, commercial real estate, and related topics for the newspaper and Oklahoman.com since 1999. Contact him at rmize@oklahoman.com.