The fallout from the subprime mortgage disaster not only putting a squeeze on the for-sale housing market, it also is having an impact on rental apartments.

According to a national study, borrowers who are in the process of defaulting on their subprime mortgages and soon may be apartment hunting typically have credit scores that are 24 percent lower than a qualified apartment renter.

“Subprime borrowers are financially stressed and have more derogatory information in their credit files than typical renters,” said Jay Harris, vice president of business services for First Advantage SafeRent, a research firm that completed the study for the National Multi-Housing Council earlier this year.

Harris said the new survey findings shatters the following common apartment manager misconceptions about rental applicants who recently defaulted on a subprime mortgage:

• It is a myth that they will become good apartment renters after defaulting on their mortgages. Actually, Harris said applicants who defaulted on a subprime mortgage are financially stressed and have credit scores that are 24 percent lower than average renters.

• It also is a myth that apartment managers need to adjust their screening procedures to ignore or account for the mortgage default.

“Hundreds of variables must be included and analyzed simultaneously to best predict an applicant’s future lease performance,” Harris warned.

Members of the Chicagoland Apartment Association (CAA) are dealing with the subprime borrower situation in a number of ways, according to Judy Roettig, executive director of the 300-member organization that represents more than 6,000 apartment professionals who own or manage more than 600 properties and more than 118,000 apartments in the greater six-county Chicago area.

Many CAA members expected the housing downturn to spark a boom in new rental business, which is typical when there is a slow down in the for sale residential market. However, the opposite may be true this year.

“This autumn the apartment rental market is not doing better due to a lot of job losses,” said Diana Pittro, executive vice president of RMK Management Corp.

“First-time buyers also are still choosing to purchase homes, so there is less traffic. And, fewer people are looking to rent,” Pittro said. “Those experiencing a job loss are doubling up or moving home. So, the rental market this autumn generally has gotten slower.”

Pittro noted that many people are moving closer to work, seeking to commute less, many still uncertain on job growth.

“And, many renters are not choosing to move up to a Class A apartment, but choosing Class B or C unit,” she said.

Ron Devries, vice president of Appraisal Research Counselors, a real estate appraisal and consulting firm, agreed that the rental market softened in the third quarter of 2008.

“It’s just a weaker market,” DeVries said “The job market has weakened. There are less people employed.”

DeVries also reported the return of concessions to the apartment market, which had seen them dissipated.

“A lot of buildings are offering concessions,” DeVries said. “That’s going to remain out there. They had disappeared. In the fourth quarter of last year and first quarter of this year, they started coming back. They’re back in full force.”

However, with thousands of foreclosed subprime borrowers now applying for rental apartments, rental managers must decide how best to qualify these tenants.

Some are choosing to use normal apartment renting strategies that require good credit and FICO Scores. Other manages are bending the rules a bit to absorb some of the individuals and families priced out of their homes by elevated interest on subprime mortgage loans.

Pittro said that RMK Management is treating these new renters as they would any other applicants.

“As a company, we are holding firm because we think the problem is temporary,” Pittro said. “It’s the time of year when our occupancies are higher anyway and we have less turnover. We prefer to wait and see how this shakes out before we make an overall corporate change.”

Though RMK Management is holding firm with its renter screening process, the company feels the subprime mortgage debacle impact in other ways, Pittro said.

“You have a lot more denials than you did last year, which means that your leasing staff and your advertising dollars are working double,” she said.

Stuart Handler, president of TLC Management Co., said that he hasn’t yet noticed a surge in former homeowners in the pool of rental applicants at TLC properties.

“I haven’t heard anything about it from our on-site people,” Handler said. “If they’re coming in, they’re coming in as part of the general traffic pool of people who apply for apartments. We’re not offering them anything special.”

In his business of screening potential applicants for apartment management companies with a minimum of 1,000 units in their portfolio, Tim Fortner, president of Screening Reports, is seeing evidence that landlords are contemplating ways to absorb these new renters.

Screening Reports does manual verification, which means that they call old landlords, for one, to check out rental applicants as opposed to relying solely on credit reports and scoring systems.

“We are experiencing clients being a little looser on their credit [requirements] because they’re relying on us to verify rental histories more aggressively,” Fortner said.

Based in Chicago, Screening Reports also has offices in Philadelphia, Minneapolis, and St. Louis. “We focus on the Midwest, but we service all around the country,” Fortner said. The scenario’s the same everywhere he goes, he said.

“Everyone’s trying to figure out what to do and how they can take advantage of the fact that there are good families out there that got caught up in the subprime loan problem,” he said.

Fortner said some of his clients who previously used credit reports and scores as the primary determinant for screening renters are now requesting the extra measure of manual verification. He believes it’s an effort to go beyond their credit requirements “to make sure that [the applicants] have not had any problems with landlords,” he said.

Also, some rental apartment management clients are asking about foreclosures in particular, he said.

“Clients are asking for foreclosure data to find out how many people that they’re screening have actually experienced foreclosure,” Fortner said.

Even the so-called shadow rental market is grappling with the subprime mortgage product fallout. Condominium owners seeking to rent their units often are doubly affected, with some themselves struggling to make higher payments on adjustable-rate mortgages, be they subprime or not. These condo owners have to screen and qualify renters for their properties, including tenants who may have had subprime loans go bad.

“We’re getting a lot of condo owners who, because of the very slow sales market and having second, third or more mortgages, they are calling us because they are facing the possibility of foreclosure,” said Maurice Ortiz, marketing director for Apartment People.

“They may be owners that had their units on the market and are about to go under. They are forced to rent them out quickly so as to not get into any financial trouble,” Ortiz said.

For some renters, the situation is dire because sometimes the apartment owners are the ones in trouble. Some small apartment owners, in particular, with subprime mortgages themselves also are tangled in the foreclosure vortex. In some case, their renters are being forced out of their apartments when banks seize properties.

“I was at a meeting with a tenants rights group an they were saying that they’re concerned about small property owners who utilized subprime loans and now tenants are being put out,” said Roettig. “Some small property owners are losing their properties and the banks are putting people out on the street.”

The Chicagoland Apartment Association was founded in 1990 to represent the interests and professional development needs of property management owners and managers in the Chicago area and suburbs. Contractors and suppliers who service the multifamily housing industry can also join as associate members.

For more information on the Chicagoland Apartment Association, please call 847-678-5717. Or visit the Web site at www.caapts.org.