The loans behind Baltimore’s foreclosure crisis are surging in cities across the nation

An easy-to-get, loosely regulated loan used to buy rental property has exploded in popularity across the U.S. in the past five years, with Baltimore and other postindustrial cities at the forefront, a Banner analysis of national mortgage data found.

The private credit industry has poured money into a variety of sectors in recent years, and high-profile busts have roiled Wall Street and stoked fears about opacity and risk. Still, little attention has fallen on private creditors’ quiet expansion into America’s rental housing market, which was made possible in part through debt service coverage ratio, or DSCR, loans.

Baltimore and perhaps Philadelphia are already showing signs that these risky loans have real consequences. Both cities are experiencing waves of foreclosures. In Baltimore, defaults on DSCR-financed homes were so pronounced that last year Wall Street-backed financiers blacklisted some of the buyers and clamped down on lending. The FBI is investigating New York investors who have defaulted on loans for hundreds of Baltimore rental properties.

DSCR loans made up roughly a fifth of new mortgages on single-family rental properties nationwide in 2024, topping $24 billion — a $10 billion increase from three years earlier. The 10 cities that saw the highest proportions of DSCR loan dollars between 2022 and 2024 include Philadelphia, Cleveland and Detroit, in addition to Baltimore.

Those cities are among the poorest of their size in the nation. At least 1 in 5 residents in each live below the poverty line, a Banner analysis of census data shows.

The jury is still out on how the loans will impact the places where they’ve become most popular. Lenders and investors say DSCR loans can be a boon for communities, infusing cash into neighborhoods that are often overlooked by traditional banks. But some real estate researchers expressed concern about the loans’ lax requirements, cautioning that the investments they drive may not benefit cities long-term.

Baltimore seems to have served as a ground zero for DSCR loans — and the potential problems with them.

In 2022, when those loans made up less than $2 in every $10 flowing into the U.S. single-family rental market, they accounted for roughly a third of rental home loans here — more than in any other large city.

Initially, city officials welcomed the flow of private lending into neighborhoods pegged for reinvestment. But last year, a warning sign emerged when a portfolio of more than 700 homes that had been bought and refinanced by a small group of New York investors using more than $100 million in DSCR loans began tumbling into foreclosure.

And in Philadelphia, a neighborhood near Temple University is seeing a burst of foreclosures amid growing concerns about inflated deals like those that set off Baltimore’s crisis.

Private lending offers easier access to cash than traditional banks, which are more regulated and have far stricter requirements for borrowers.

DSCR loan applicants just need a good credit score and projections that show a tenant’s rent would exceed the monthly mortgage payment. Borrowers don’t need to report their income or prove they have a tenant lined up — and there’s no limit to how many loans they can get.

Jack BeVier, a partner at Baltimore-based private mortgage lender Dominion Financial, said he’s seen how much DSCR loans can benefit communities that have historically lacked access to capital. Dominion is among the nation’s major DSCR lenders, The Banner’s analysis found.

But he’s also seen how things can go awry. Although his firm didn’t finance any of the Baltimore deals currently under investigation, the fallout has threatened the city’s private lending ecosystem, he said.

Cities need to meet two “preconditions” for schemes like the one in Baltimore to be possible, BeVier said: They must have plenty of inventory that qualifies for a DSCR loan and housing stock that fluctuates significantly in price and quality from one block to the next.

Drastic changes in home characteristics over small areas might result in home appraisers — professionals trained to assess what a house can reasonably sell for — overestimating a home’s value because it’s located near properties that routinely sell at higher prices.

That can also help hide intentionally inflated appraisals conducted by bad actors, BeVier said.

“The person in LA reviewing that appraisal can’t tell that the comp 10 blocks away is a bad comp,” BeVier said, “because how could they?”

Investors using DSCR loans in a handful of other top cities for that kind of financing — like Miami, Orlando and Irvine, California — are likely wielding the loan as a tool to buy into the sunbelt’s growing markets, where population is climbing and properties are more rapidly increasing in value, real estate experts said.

In Miami and Irvine, a significant share of the loans came from financial institutions with international ties. Vacation rentals also play a part, BeVier said.

In Baltimore, where population has fallen roughly 8% over the last decade, many homes look like good candidates for a DSCR loan at first glance. The city attracts investors who come from areas like New York and California and aren’t accustomed to buying property for as little as $20,000 or $30,000, according to Alan Chantker, a veteran real estate investor in the Baltimore area.

“They just can’t believe the prices here are what they are,” he said. “Your money goes a lot farther.”

Depressed values mean more potential returns for the average real estate investor — at least on paper.

In reality, Chantker says he often receives calls from rookie landlords who find Baltimore’s legal or financial environment so difficult that they take losses rather than stick it out.

Chantker said he advises other investors to increase due diligence of their DSCR loans. He thinks private mortgage companies should share some of the blame for what’s happened in Baltimore.

“A lot of people were enticed to lend money and get that return, but they should know with higher returns is more risk,” he said. “Some of them are going to go bad.”

As financiers caught wind of the foreclosures in Baltimore, they began circulating blacklists with borrower names. DSCR activity in Baltimore stalled as some lenders slowed or stopped lending in the city.

But there’s no evidence indicating lenders are doing the same everywhere else. At a private lending conference last fall in Las Vegas, billed as the industry’s largest-ever gathering, attendees buzzed with enthusiasm for DSCR loans.

Jeffrey Tesch, CEO of private credit firm RCN Capital, stood before dozens of other industry professionals. He was moderating a panel titled “Institutional Capital Blinders?”

In the two years prior, his firm and a subsidiary had lent more than $12 million to LLCs owned by a small group of investors from New York who had big plans for Baltimore. They used the investment to purchase or refinance at least 78 homes in the city.

Many of those had entered the foreclosure pipeline by the time Tesch spoke at the conference.

“The money is clearly flowing,” Tesch told his audience. “It continues to flow, and it doesn’t seem to come to an end.”

Banner reporters Hallie Miller and Giacomo Bologna contributed to this report.