New FHFA Rules Could Reduce Loans for Investment Property
In early March of 2021, the Federal Housing Finance Agency (FHFA) announced that Fannie Mae and Freddie Mac would limit their buying of second-homes and investment-property mortgages to roughly 7% of their overall portfolio.
This means that the two organizations will be supporting about half as many second homes and investment property purchases as before. This change will likely have a significant impact on the availability of these mortgages, and could have a profound impact on investors, especially those who rely on Fannie Mae and Freddie Mac to support for their purchases.
The Role of Fannie Mae and Freddie Mac on Loans for Investment Property
In the market as a whole, Fannie Mae and Freddie Mac serve an important function. While lenders “originate” a loan, they rarely hold these loans in their own portfolio. Instead, these loans are sold to various entities who then “service” the mortgage, which means they collect payments and manage the escrow account. This purchasing of mortgages from lenders is called the “secondary market.”
There are various groups, organizations, and entities that serve the secondary market, but Fannie Mae and Freddie Mac are easily the biggest. These two groups are what’s known as “government-sponsored entities,” and the loans they buy are guaranteed by the federal government. As long as a loan meets a specific criteria, both Fannie Mae and Freddie Mac are instructed to buy the loan.
Creating loans that are purchasable by Fannie Mae and Freddie Mac is in the best interest of lenders, and they are often (but not always) able to offer better rates and terms on these loans.
It may sound like a lot of complex financial runarounds, but the bottom line is simple: by purchasing loans, Fannie Mae and Freddie Mac, under the support and instruction of the U.S. government, make mortgages more affordable and more available for consumer. This includes primary homebuyers, people seeking a second property, and (of course!) investors.
But now, loans supported by Fannie Mae and Freddie Mac, with all of their advantages, could be less available.
Penny Mac Tightening Too
Penny Mac, who also buys loans, has made changes. They have added roughly 2.25% to their cost of a new second home mortgage, regardless of equity. However, it’s their changes to investment-property loans that really have an impact. Their pricing adjustment for a new investment property loan with less than 25% equity rose to 5% of the loan size. This means for a $400,000 property, investors are looking at roughly $20,000. This creates a significant barrier for investors of all types.
Loans in Progress Not Impacted
Many loans for investment properties are already in progress, but likely won’t close before these changes go into effect. However, loans already in progress that are already locked into the terms and rates will not face adjustments. This means that if you have already secured your loan terms, even if the purchase and the loan have not been finalized, you likely won’t be impacted by this change.
However, loans in the future certainly will be impacted. Floating loans will also see changes, so borrowers should keep this in mind when seeking financing for an investment.
What Will Be the Result of the Reduction?
Investors will still be seeking properties; that’s certainly won’t change. And they will still need some form of lending to enhance their portfolio. The result may be that many investors will have to settle for loans that have higher interest rates or general terms that are less ideal to their income-management strategy. It’s also possible that invest-property purchases could dip, as investors decide that the added cost isn’t worth the effort.
While higher fees and rates will likely be one of the immediate results of these changes, it’s also possible that the move could impact housing prices in communities where a large percentage of the properties are either second homes or owned by investors. This could happen because if mortgages are more expensive, a likely scenario, there will be negative pressure on property prices.
Another result is that there could be more cash buyers for investment properties and second homes. When rates are low and terms are reasonable, people often choose to use financing for investment-property purchases, even if they have the cash; the idea, among others, being that they can invest the money at a higher rate of return instead of locking it into a property. However, if using loans become more expensive, it may outweigh the benefits, leading more people to choose cash purchases instead.
People often use loans for second homes, such as a condo near a beach or a cabin on a lake. Even if they can afford the purchase outright, they may use a loan in order to maintain a large savings of liquid cash. Because secondary homes will be impacted by these changes, vacation properties or homes closer to work could be impacted as well.
Finally, you can expect to see investors fill the void left by Fannie Mae and Freddie Mac. There will be a large reduction in the amount of investment loans that they purchase, but demand for investment loans is not expected to decline. Someone will likely purchase these loans and fill the gap left after FHFA’s decision. But for the immediate future, higher costs for an investment property or getaway home should be expected.
Work with a Lending Team That Understands Your Property-Investment Needs
If you are an investor, you need to reexamine your loans and find out what will be the appropriate form of financing for your next purchase. Whether you choose an investment-property loan that will be purchased by Fannie Mae and Freddie Mac, or whether you select a different option entirely, it helps to be fully informed on all the major details.
If you need help choosing the right loan, contact the helpful team at San Diego Purchase Loans today. We are not investment experts, but we do understand the details of property financing and can deliver the right advice so you can make a sound decision.
Give us a call and let us help with your next investment purchase today!