Cash Crop

29 states. 283,000 new jobs. $50 bil­lion in an­nual rev­enue. What will it take for the mort­gage in­dus­try to cap­i­tal­ize on this op­por­tu­nity?

National Mortgage News - - Contents - BY BRAD FINKEL­STEIN

There is an emerg­ing in­dus­try that em­ploys as many as 230,000 work­ers and is ex­pected to cre­ate over 283,000 new jobs in the next three years. Its busi­nesses have a net worth of $7.2 bil­lion, with a pro­jected com­pound an­nual growth rate of 17%. Those kinds of numbers would usu­ally prompt nan­cial in­sti­tu­tions to go out of their way to es­tab­lish a mar­ket foothold, both to ex­tend credit to com­pa­nies and es­tab­lish con­sumer re­la­tion­ships with em­ploy­ees — par­tic­u­larly when the Bureau of La­bor Sta­tis­tics ex­pects tra­di­tional sec­tors like util­i­ties, agri­cul­ture, man­u­fac­tur­ing and even the fed­eral gov­ern­ment to shed jobs through 2024.

But this bud­ding busi­ness is the highly con­tro­ver­sial le­gal cannabis in­dus­try that, so far, mort­gage lenders and other nan­cial in­sti­tu­tions have been re­luc­tant to work with.

Mar­i­juana is le­gal for recre­ational use in eight states and the Dis­trict of Columbia, and for medic­i­nal use in an ad­di­tional 21 states. But the fed­eral gov­ern­ment reg­u­lates it as a Sched­ule I sub­stance (one with a high po­ten­tial for abuse and no cur­rently ac­cepted med­i­cal use), and there is no guar­an­tee that the De­part­ment of Jus­tice won’t seek to pros­e­cute recre­ational or med­i­cal use providers op­er­at­ing le­gally un­der state law.

For mort­gage un­der­writ­ing pur­poses in­come le­gally de­rived from cannabis busi­nesses can­not be used to qual­ify a bor­rower for an FHA-guar­an­teed loan. Fan­nie Mae and Fred­die Mac, cur­rently un­der fed­eral con­ser­va­tor­ship, have sim­i­lar poli­cies in their seller guides.

But even lenders that o er less re­stric­tive loans out­side of the fed­eral Quali ed Mort­gage guide­lines can’t, or won’t, serve these bor­row­ers.

Many cannabis busi­ness work­ers come into the in­dus­try know­ing it’s “a life­style that is non­tra­di­tional. They’re not likely go­ing to be able to get a mort­gage; I think they just ac­cept that,” said Lori Glauser, chief op­er­at­ing o cer of Sig­nal Bay Inc., whose EVO Labs sub­sidiary tests cannabis for safety and e cacy.

It ap­pears that no lender is will­ing to be the rst to try it, out of risk of be­ing made an ex­am­ple by reg­u­la­tors. But as higher in­ter­est rates, plum­met­ing re nance vol­ume and hous­ing in­ven­tory short­ages con­tinue to con­strict orig­i­na­tions — and the cannabis in­dus­try con­tin­ues to grow in size and le­git­i­macy — tak­ing on this new strain of risk may soon be­come a more lu­cra­tive propo­si­tion.

The le­gal cannabis in­dus­try has two sec­tors: hemp, which has a num­ber of in­dus­trial ap­pli­ca­tions like rope and tex­tiles, and mar­i­juana, whose busi­nesses are largely fo­cused on con­sum­able uses. Each sec­tor has cul­ti­va­tion and man­u­fac­tur­ing seg­ments, while the mar­i­juana sec­tor also has a re­tail seg­ment.

Each dol­lar spent on re­tail mar­i­juana re­sulted in $ 2.40 in eco­nomic out­put in Colorado, ac­cord­ing to an anal­y­sis of the state’s le­gal­iza­tion law con­ducted by the Mar­i­juana Pol­icy Group, a Den­ver- based con­sult­ing irm. For the gen­eral re­tail busi­ness, in­clud­ing al­co­hol, the re­port found that eco­nomic out­put was $1.88 for each dol­lar spent.

Mar­i­juana le­gal­iza­tion cre­ated 18,005 full- time equiv­a­lent jobs in Colorado in 2015, of which 12,591 were di­rectly in­volved with the mar­i­juana busi­ness, the re­port also found.

“Ad­di­tional em­ploy­ment is also gen­er­ated when mar­i­juana em­ploy­ees and pro­pri­etors spend their in­come on lo­cal hous­ing, food and en­ter­tain­ment,” ac­cord­ing to the re­port. “This is called an ‘in­duced em­ploy­ment e ect.’”

That cat­e­gory was re­spon­si­ble for 2,518 jobs in 2015.

What’s more, these jobs cover “ev­ery­thing from min­i­mum wage rang­ing up to six gures a year,” Glauser said. “The in­dus­try hires high-level chemists and tech­ni­cal per­son­nel that can op­er­ate so­phis­ti­cated equip­ment such as ex­trac­tion equip­ment to process cer­tain ma­te­ri­als, and they are very highly paid. And, yes, in some cases they are likely get­ting paid in cash.”

As more states are ex­pected to le­gal­ize cannabis for recre­ational and/or med­i­cal use and in­dus­trial uses for hemp prod­ucts ex­pand, “the po­ten­tial op­por­tu­ni­ties for job cre­ation in cannabis-re­lated sec­tors re­mains very strong and will signi - cantly dwarf the numbers that we have here,” said John Ka­gia, ex­ecu- tive vice pres­i­dent of New Fron­tier Data, a data and an­a­lyt­ics rm in Washington, D.C., that spe­cial­izes in the cannabis in­dus­try.

The irm an­a­lyzed the na­tional job and eco­nomic im­pact of the cannabis in­dus­try by ex­trap­o­lat­ing from the Mar­i­juana Pol­icy Group’s Colorado study. In ad­di­tion to the pro­jec­tions of 283,000 new jobs and the in­dus­try’s $ 7.2 bil­lion net worth, New Fron­tier found le­gal mar­i­juana sales will gen­er­ate an es­ti­mated $ 745 mil­lion in state tax rev­enue in 2017.

By 2020, it could grow as high as $ 2.3 bil­lion.


Colorado and Washington were the rst states to le­gal­ize the recre­ational use of cannabis.

Den­ver is one of the na­tion’s hot hous­ing mar­kets. Home prices in the metro area in­creased 8.3% in July over the same month last year, rank­ing eight na­tion­wide ac­cord­ing to CoreLogic. Seat­tle was the lead­ing city with growth of 14.55%.

On a statewide level, Colorado recorded an 8.3% in­crease; the state with the largest in­crease was Washington at 12.9%.

Such growth can’t be strictly at­trib­uted to le­gal­ized canna- bis; Utah, where it is not le­gal, had 10.8% year- over-year price growth, mak­ing it sec­ond, while Idaho was third at 9%.

Den­ver’s econ­omy was do­ing well prior to le­gal­iza­tion, said Ka­gia. But “cannabis has been just one of the con­tribut­ing fac­tors to the very strong state eco­nomic per­for­mance over the past few years. It has cre­ated very high rents, higher mort­gages.”

So hous­ing in gen­eral “has be­come a chal­lenge for lower in­come earn­ers, both in the cannabis in­dus­try and out­side,” said Ka­gia.

Now that cannabis has been le­gal in Colorado for sev­eral years, “we can see that it has ab­so­lutely a ected our mar­ket,” said Kelly Moye, a real es­tate bro­ker at Re­max Al­liance in Bloom eld, Colo. It started on the com­mer­cial side, where cannabis busi­nesses in­creased the de­mand for ware­house and re­tail space.

Now, “tons of di er­ent com­pa­nies who want to take up that space and are will­ing to pay a premium for that,” said Moye, who is also the spokes­woman for the Colorado As­so­ci­a­tion of Re­al­tors.

The dy­namic be­tween com­mer­cial and res­i­den­tial de­mand does not op­er­ate in a vac­uum. When space got rented or pur­chased by le­gal cannabis busi­nesses, it cre­ated many new jobs with peo­ple mov­ing to Colorado who needed places to live.

“Our sup­ply and de­mand has re­ally taken a crazy turn in the last ive years for lots of rea­sons, le­gal mar­i­juana be­ing one of them,” Moye said.

In ad­di­tion to le­gal cannabis creat­ing new jobs, Ama­zon and Google have also added em­ploy­ees in the state and in­creased com­pe­ti­tion for hous­ing. Colorado’s qual­ity of life is par­tic­u­larly ap­peal­ing to a lot of peo­ple look­ing to ll those po­si­tions.

Some of her clients are be­tween 25 and 35 years old are look­ing to buy a con­do­minium or rst home and they might not have been in a po­si­tion to buy if they didn’t have a job in the cannabis busi­ness.

“There are a lot of peo­ple who are mov­ing here to work in that in­dus­try who may not have moved here oth­er­wise. And all of a sud­den, we have a signi cant low sup­ply and high de­mand is­sue, which pushes prices up,” Moye said.

And even if they can’t get credit or lack the cash to pur­chase a home, they are com­pet­ing for rental prop­er­ties. So rents are ris­ing and peo­ple work­ing in more

tra­di­tional busi­nesses are mak­ing the cal­cu­la­tion that it is cheaper to buy.

“So those peo­ple who are rent­ing and work­ing in the mar­i­juana in­dus­try cause the peo­ple who are not to go out and buy, which then fu­els our hous­ing mar­ket,” Moye said.


Med­i­cal mar­i­juana use was ap­proved in New York State in 2014. Soon af­ter, Michael Barone, the man­ag­ing part­ner of Abrams Garfinkel Mar­go­lis Berg­son’s mort­gage com­pli­ance prac­tice, be­gan re­ceiv­ing client in­quiries about what is per­mis­si­ble when it comes to lend­ing to that in­dus­try’s work­ers.

“Now you have em­ploy­ees — the grow­ers, the re­tail­ers, the book­keeper that works there, the pack­ager — who are get­ting W-2s that show [they work in the] mar­i­juana field and some of them are hav­ing trou­ble” ob­tain­ing credit, Barone said.

The in­dus­try’s hy­per-sen­si­tiv­ity to­ward com­pli­ance has lenders con­cerned that try­ing to qual­ify cannabis work­ers for mort­gages would amount to an un­der­writ­ing “heat score” — ac­tiv­ity that draws un­wanted at­ten­tion from reg­u­la­tors.

“These banks are not tak­ing chances; they’re not tak­ing risk on a com­pli­ance level,” he said, adding there is not enough busi­ness in mak­ing loans to these work­ers to take on the ad­di­tional risk.

The re­luc­tance to lend means “these peo­ple are re­ally get­ting hurt. They need that in­come to qual­ify for a loan or to re­fi­nance,” Barone said.

Cannabis em­ploy­ers have prob­lems with ac­cess to bank­ing ser­vices be­cause of the fed­eral pro­hi­bi­tion. Ap­prox­i­mately 70% of busi­nesses that touch the plant can­not es­tab­lish a bank ac­count, ac­cord­ing to a De­cem­ber 2015 survey from Mar­i­juana Busi­ness Daily, a trade pub­li­ca­tion for the cannabis in­dus­try. With­out bank ac­counts, em­ploy­ers are forced to pay their work­ers, along with their busi­ness ex­penses such as rent and taxes, in cash.

But that doesn’t mean em­ploy­ees are get­ting paid un­der the ta­ble. Most of the busi­nesses, even if they are op­er­at­ing in cash, have a pay­roll man­age­ment sys­tem or use an out­sourcer. So the em­ploy­ees are get­ting paystubs with tax- es with­held, along with a W- 2 at the end of the year, that lenders could use to doc­u­ment in­come, said Tay­lor West, the deputy di­rec­tor of the Na­tional Cannabis In­dus­try As­so­ci­a­tion.

But while be­ing paid in cash is not an au­to­matic dis­qual­i­fier for get­ting a mort­gage, it can be a red flag for un­der­writ­ers.

Large sums of cash pass­ing through a bank ac­count worry lenders who have to be mind­ful of anti- money- laun­der­ing laws, in­clud­ing com­pli­ance with the Bank Se­crecy Act. Any cash de­posit or mul­ti­ple de­posits over $10,000 trig­ger a re­port­ing re­quire­ment for banks.

A num­ber of pro­fes­sions in­volve peo­ple who re­ceive much of their in­come in cash, usu­ally from tips, and they don’t have a prob­lem qual­i­fy­ing for a mort­gage. For a cannabis worker who still re­ceives a W- 2, “in its essence, how is it any dif­fer­ent than other in­dus­tries where peo­ple get paid cash,” said Ann Ful­mer, a mort­gage fraud ex­pect and chief strat­egy and in­dus­try re­la­tions of­fi­cer at For­mFree Hold­ings, an as­set data ver­i­fi­ca­tion com­pany.

If the ap­pli­cant is re­ceiv­ing a W-2, that should be good enough for AML and BSA com­pli­ance, she con­tin­ued, be­cause the in­come is be­ing re­ported.

On the other hand, “If I was an un­der­writer and I saw a $25,000 cash de­posit, my an­tenna would go way up,” Ful­mer said. But just be­cause it’s a red flag doesn’t mean an un­der­writer should au­to­mat­i­cally deny an ap­pli­cant. If the in­come is re­ported on a W-2 and taxes are be­ing paid, that could be enough to as­suage con­cerns, she said.

Yet, “it’s still il­le­gal on a fed­eral level. They can’t [use] in­come for un­der­writ­ing pur­poses which is de­rived from what is con­sid­ered an il­le­gal ac­tiv­ity on the fed­eral level,” said Barone.


Two fed­eral guar­an­tee pro­grams have no spe­cific bar on the use of in­come from cannabis busi­nesses.

The reg­u­la­tions for the Veter­ans Af­fairs loan guar­an­tee pro­gram re­quire lenders to en­sure that a bor­rower has a sta­ble and re­li­able source of in­come, said agency spokesman Ran­dal Noller. The U. S. De­part­ment of Agri­cul­ture Ru­ral De­vel­op­ment pro­gram does not have a pol­icy re­gard­ing loans to peo­ple work­ing in the le­gal cannabis busi­ness.

And at least one lender has orig­i­nated loans for cannabis in­dus­try work­ers and sold them to the gov­ern­ment-spon­sored en­ter­prises. Ev­er­green Home Mort­gage has sold loans to both Fan­nie and Fred­die where the bor­row­ers are W-2 em­ploy­ees and don’t have an own­er­ship in­ter­est in the cannabis busi­ness where they work, said Tamra Rieger, ex­ec­u­tive vice pres­i­dent of loan ful­fill­ment at the Belle­vue, Wash., lender. She de­clined to spec­ify whether these bor­row­ers had ad­di­tional in­come sources that were con­sid­ered dur­ing un­der­writ­ing or how many of these loans have been orig­i­nated.

“Now that cannabis has been le­gal in Colorado for sev­eral years, we can see that it has ab­so­lutely af­fected our mar­ket.” — Kelly Moye, Real Es­tate Bro­ker, Re­max Al­liance

When asked specif­i­cally about this, Fred­die Mac spokes­woman Lisa Tib­bitts said in a state­ment, “The De­part­ment of Jus­tice has made it clear that sell­ing mar­i­juana and other re­lated ac­tiv­i­ties vi­o­lates fed­eral law re­gard­less of state law.” Fan­nie Mae de­clined to com­ment.

If the tra­di­tional sec­ondary mar­ket won’t con­sider these work­ers for loans, the non-qual­i­fied mort­gage lenders would be a log­i­cal al­ter­na­tive. But even these com­pa­nies are wor­ried about lend­ing to peo­ple get­ting paid in cash.

There is not one jumbo or non- qual­i­fied mort­gage lender that al­lows Ev­er­green Home Loans to use in­come from a cannabis busi­ness to qual­ify a bor­rower, said Rieger. “That is where we had the worst trou­ble.”

She couldn’t find any­body in the scratch-and-dent mar­ket will­ing to work with these bor­row­ers, ei­ther.

“Jumbo is the most re­stric­tive out of all the types. What we found in Washington is the credit unions have been the only ones that have been able to help jumbo bor­row­ers be­cause of the way they are reg­u­lated by the NCUA.”

The Na­tional Credit Union Ad­min­is­tra­tion has taken a hands-off ap­proach to work­ing with cannabis busi­nesses and their em­ploy­ees.

“The NCUA’s po­si­tion is that the de­ci­sion whether to work with a cannabis-re­lated busi­ness is one for the credit union it­self. We have ad­vised credit unions of FinCEN’s guid­ance and that we ex­am­ine for Bank Se­crecy Act and anti-money laun­der­ing com­pli­ance. We also ex­pect credit unions to an­a­lyze and mit­i­gate risk, as we do with any fi­nan­cial ser­vice prod­uct they pro­vide,” agency spokesman John Fair­banks said in a state­ment.

A num­ber of credit unions known to work with the cannabis in­dus­try de­clined, or did not re­spond, to re­quests for com­ment.

Jumbo lenders are likely con­cerned about the risk of an ex­pen­sive mort­gaged prop­erty be­ing seized by the Drug En­force­ment Ad­min­is­tra­tion or the in­sti­tu­tion be­ing sub­ject to pros­e­cu­tion by the Jus­tice De­part­ment, re­gard­less of the laws in the state of Washington, Rieger said.

FHA and jumbo are “the two prod­ucts we have no abil­ity to pro­vide [peo­ple who work in the le­gal cannabis in­dus­try] with a loan. We’d love to be able to help those bor­row­ers,” she said.

An­gel Oak Mort­gage Ser­vices is an­other lender stay­ing away from the cannabis in­dus­try. De­spite tak­ing ad­di­tional risk for other types of bor­row­ers in its non- Qual­i­fied Mort­gage lend­ing, it can’t ig­nore fed­eral law.

“We still have to is­sue com­pli­ant loans based on fed­eral laws, Con­sumer Fi­nan­cial Pro­tec­tion Bureau guide­lines and Dod­dFrank; those still ap­ply to non- QM loans,” said Tom Hutchens, se­nior vice pres­i­dent of At­lanta- based An­gel Oak.

“The chal­lenge is that there are just so many hur­dles that don’t ap­ply to other em­ploy­ees,” he added.

The prob­lem is that fed­er­ally char­tered banks don’t al­low de­posits from cannabis busi­nesses, and em­ploy­ees must have ver­i­fi­able in­for­ma­tion about in­come and as­sets.

“If [ the in­for­ma­tion] is not ver­i­fi­able be­cause of the type of busi­ness they are in, then that’s not a loan we’re go­ing to be able to trans­act,” Hutchens said. “We have to have a doc­u­mentable abil­ity to re­pay. Any­one in an all- cash busi­ness, do they have a doc­u­mented abil­ity to re­pay? Chances are the an­swer is no, but they could. It’s not an ab­so­lute.”

Eas­ing the pro­hi­bi­tions is up to Congress, with at least 23 bills in­tro­duced in the cur­rent ses­sion that would af­fect the treat­ment of cannabis, ac­cord­ing to The Cannabist web­site.

There is the Se­cure and Fair En­force­ment (SAFE) Bank­ing Act, in­tro­duced in the House by Rep. Ed Perl­mut­ter, D-Colo., and the Se­nate by Sen. Jeff Merkley, D-Ore. The bills seek “to cre­ate pro­tec­tions for de­pos­i­tory in­sti­tu­tions that pro­vide fi­nan­cial ser­vices to cannabis-re­lated busi­nesses.”

On Sept. 8, in the emer­gency aid pack­age for Hur­ri­cane Har­vey, Congress ex­tended the Rohrabacher- Blu­me­nauer amend­ment (first passed in bud­get leg­is­la­tion in 2014 and for­merly known as Rohrabacher-Farr) through Dec. 8. It pro­hibits the Jus­tice De­part­ment from spend­ing funds to in­ter­fere with the im­ple­men­ta­tion of state med­i­cal mar­i­juana laws.

How­ever, At­tor­ney Gen­eral Jeff Ses­sions op­poses any at­tempts to le­gal­ize mar­i­juana for any use. In May, Ses­sions sent a let­ter to con­gres­sional lead­ers ask­ing them not to in­clude the amend­ment in any ap­pro­pri­a­tions leg­is­la­tion.

“I be­lieve it would be un­wise for Congress to re­strict the dis­cre­tion of the De­part­ment to fund par­tic­u­lar pros­e­cu­tions, par­tic­u­larly in the midst of an his­toric drug epi­demic and po­ten­tially long-term uptick in vi­o­lent crime,” the let­ter said. “The De­part­ment must be in a po­si­tion to use all laws avail­able to com­bat the transna­tional drug or­ga­ni­za­tions and dan­ger­ous drug traf­fick­ers who threaten Amer­i­can lives.”

As long as fed­eral and state poli­cies — and ex­ec­u­tive branch and leg­isla­tive branch ob­jec­tives — re­main at odds, there will be no change in the sta­tus quo. Lenders’ abil­ity to serve those in the mar­i­juana busi­ness re­mains lim­ited.

“We still have to is­sue com­pli­ant loans based on fed­eral laws, CFPB guide­lines and Dod­dFrank; those still ap­ply to non-QM loans.” — Tom Hutchens, Se­nior Vice Pres­i­dent, An­gel Oak

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