Mar 29, 2021
In mid-January, the US Department of the Treasury and the Federal Housing Finance Agency (FHFA) announced some new practices that Fannie Mae and Freddie Mac must follow. These changes are designed to help Fannie and Freddie take steps to retain some of their earnings, rebuild their capital reserves, and ultimately get them out of conservatorship. We've talked about what has to happen for Fannie & Freddie to exit conservatorship before.
In exchange for Fannie & Freddie being allowed to hold onto their profits, there are a few new rules they're expected to follow. And the bulk of these rules center around lowering their exposure to liability in the form of "risky" loan products. The products currently considered risky: mortgage loans for second homes and investment properties.
Beginning April 1st, no more than 7% of the total volume of loans a particular mortgage lender sells to Fannie or Freddie over a 52-week period can be for second homes or investment properties.
As a result, mortgage companies are hastening to examine their active pipelines and their funding history to see how many loans actually fall into this category. Lenders actually don't want too many of these transactions or they'll be left with loans that aren't saleable. So how do they avoid being stuck with these loans on their books? They either quit originating the loans entirely. Or they discourage consumers from obtaining these loans by increasing the cost.
I've heard of a few lenders who are not accepting any new locks for second homes or investment properties, but I think that's the exception rather than the rule. Most are implementing "price adds" or loan level price adjustments (LLPAs). A consumer buying or refinancing a second home might pay as much as 2.5% (of their loan amount) more for the same interest rate than a person purchasing a primary residence. And I've heard of price adds as high as 6% for investment properties!
What does that mean for buyers?
I think the effect for most people will be very, very small. The company that I work for, New American Funding, has not officially announced changes to these properties, but by the time you read this that will likely have changed! We're hearing rumors of a small price add on transactions with less than 25% down. Not the end of the world.
It's also going to mean that buyers of second homes and investment properties are going to have to shop around more. Options for these types of mortgages aren't going to completely disappear. But consumers will need to be strategic in selecting a lender.
And anything could happen moving forward! This announcement was made by Steve Mnuchin under the previous administration. It's possible that the current administration could decide to change the rules. In the meantime, we'll continue to provide the best mortgage products at the best price for every household we encounter.