Back in January, the United States Treasury Department and the Federal Housing Finance Agency (FHFA) amended the terms of the Preferred Stock Purchase Agreements for Fannie Mae and Freddie Mac. The policies implemented by this revision will go into effect as of April 1st, 2021. These amendments will institute eligibility changes and influence loan costs for single-family second home and investment property mortgages.
The Role of GSEs in Real Estate
Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs), federally backed agencies that enhance credit flow to distinct divisions of the nation’s economy.
Federal Home Loan Mortgage Corporation (Freddie Mac) is a mortgage GSE, encouraging middle and working-class homeownership.
The Federal National Mortgage Association (Fannie Mae) is another mortgage GSE. Its purpose is to improve the credit flow in the housing market while also reducing that credit cost.
Though neither lends money directly, Fannie and Freddie facilitate borrowing and the flow of funds in the housing sector, encouraging homeownership. As GSE’s, these agencies guarantee third-party loans and frequently purchase mortgage loans in the secondary market.
Impact of the Amendment
As a result of the Treasury amendment, Fannie Mae is implementing further restrictions on criteria for underwriting second home and investment property loans.
According to a March 10th article in HousingWire, Fannie Mae explained in a letter that “Recent amendments to our senior preferred stock purchase agreement with Treasury impose additional risk criteria on the loans we acquire. One of those restrictions is a 7% limit on our acquisition of single-family mortgage loans secured by second home and investment properties.”
This 7% limitation reduces by half the number of new second home and investment property loans. Historically, that number has been closer to 14%.
Changes in eligibility procedures include:
- Underwriting all second homes with Desktop Underwriter
- Receive an approved/eligible recommendation
- Be delivered as a DU loan
Desktop Underwriting is an automated process that compiles a comprehensive financial snapshot of a borrower. The software reviews each applicant’s information, including credit score and cash reserves. The DU process calculates a borrower’s gross monthly income to determine their housing expense ratio, the amount of their income needed for the mortgage payment, associated property taxes, and insurance.
All Lenders & Loans
Fannie Mae says the new policies apply to all lenders and include loans that have negotiated terms such as variances or special requirements.
“The only exception that will be permitted for second home and investment properties loans is for high LTV refinance loans that are manually underwritten in accordance with the Alternative Qualification Path and delivered with Special Feature Code 840.”
Potential for Loan Pricing Adjustments
Loan level pricing adjustments, the fees borrowers incur for a variety of perceived financial risk factors, will undoubtedly increase for second-home and investment mortgages.
Fannie Mae didn’t tack on any new level pricing adjustments, but on the heels of their announcement, many lenders added or are expected to add significant fees to these loan types.
Mortgage banker Ted Rood explains the potential impact in his recent Mortgage New Daily article. “Penny Mac (who buys large numbers of Fannie/Freddie loans from originating lenders) immediately added a 2.25% cost to new 2nd home mortgages, regardless of equity. The pricing adjustment for a new investment property loan with less than 25% equity rose to a staggering 5% of the loan size ($10,000 on a $200k loan!).”
He goes onto explain that lenders will adjust fees upward “as they seek to avoid closing second home/investment loans they can’t be certain Fannie/Freddie will purchase.”
Who’s Affected, Who’s Not
The good news is that in-process loans that have their rates locked will NOT be affected. Borrowers with floating loans, loans that go through the mortgage process without locking in a rate, most certainly will “pay the price” with increased fees.
Rood summarizes the bottom line: Fannie’s policy will greatly impact demand for second homes and investment properties. “Expect to see far more cash buyers for these situations and (more than likely) far fewer bidding wars as the new pricing adjustments raise rates and costs. Outside investors may eventually purchase more of these loans (which is FHFA’s goal), but for the moment, prepare to pay substantially higher costs or cash for that getaway condo or rental property!”
As with all complex financial decisions, The Dawn Thomas Team encourages you to seek the counsel of your trusted advisors.
The Dawn Thomas Team guides nice people through Silicon Valley and Santa Cruz County real estate matters. Our mission is to help everyone find their place in this world. Contact us today, and we can assist you in selling or buying your home.
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