Are one to four unit residential rental properties and second home mortgages more risky? Apparently, that’s what the US Treasury Department says.
Such loans taken out by Fannie Mae and Freddie Mac could end up costing you more due to the restrictions quietly announced earlier this year.
According to a January 14 press release, then-Treasury Secretary Steven Mnuchin and Federal Housing Finance Agency Director Mark Calabria changed Fannie Mae and Freddie Mac preferred stock purchase agreements.
The amendment defeats a system created by the Treasury during the 2008 mortgage crisis that advanced billions of dollars to support the agencies.
Starting April 1, Fannie Mae will impose a 7% limit on investments and second home mortgages it purchases from mortgage shops nationwide. Freddie has yet to announce the change, but the Treasury agreement provides the same 7% limit for Freddie. In a nutshell, the agreement means that next year or 52 weeks of funded second home loans and rental mortgages sold to Fan and Fred by each lender cannot represent more than 7% of the loan volume that each lender recorded in the previous 52 weeks. .
How’s it going on the street? Not good. Many lenders have suddenly lost their appetite for making these loans because they fear that Fannie and Freddie will say “no sale” to you because lenders have exceeded their rental and second home loan allowances. There is no cheaper supply of mortgage finance than F&F. In fact, other sources of mortgage money require more money and charge higher rates and points. There is no point in financing loans that could possibly be sold elsewhere with a loss of interest rates.
I interviewed five lenders about possible price increases. Many have already increased the financing of their second home by an average of 1.45 points. Investment properties suffered an average price drop of 1.65 points.
In other words, the points add $7,250 to a $500,000 second home loan or raise the mortgage rate by almost a quarter of a point. Using the same $500,000 example for the rental property would add $8,250 or increase the rate by more than a quarter point.
Only one lender, a juggernaut, that I interviewed didn’t change their second home and prices for investors. Larger volume lenders have an advantage in this game-changing deal because it’s much easier to stay within a 7% limit on, say, $100 billion in loans from Fannie or Freddie compared to smaller stores delivering $1 billion.
Robert Broeksmit, CEO of the Mortgage Bankers Association, believes that consumers and mortgage lenders who sell closed loans to Fannie and Freddie would be better served if the Treasury and FHFA resolved their risky loan worries themselves instead of spreading this complicated burden on the mortgage lending community. .
“Enforcing these limits at the lender level, rather than managing them at the GSE (Fan and Fred) level, creates the potential for significant market disruption,” Broeksmit said. “We would like to better understand the flexibility that the FHFA and Treasury have and whether other approaches to GSEs would bring them under the PSPA thresholds this year, but in a more efficient and less disruptive way.”
Regardless of investment and second home allowances, Fan and Fred are required to limit the purchase volume of mortgages with less than 10% down payment or equity (as in the case of a refinance), borrowers with debt ratios above 45% and the average FICO scores below 680, although these percentages are below the 7% limit for rentals and second homes.
“We’re also concerned that these same lender-level caps could also be considered for ‘higher-risk’ product limits,” Broeksmit said. “This will be particularly problematic for lenders serving low- and middle-income and first-time buyers. Consumers and lenders need certainty about their loan options and pricing at the outset of the transaction, not when the loan is issued,”
The US Treasury Department did not respond to my question about these consequences for small lenders and by extension mortgage buyers. The Treasury would also not address the issue of whether the Secretary of the Treasury Janet Yellen would rescind or modify the January 14 preferred stock purchase agreement.
Mortgage price disparities for rentals and second homes have already surfaced. I have yet to see any changes for low down payment, high ratio and low credit score borrowers. Buy hard. Ask your mortgage originator if price adjustments have been made if you are seeking financing for a rental or second home.
You can be sure that even giant lenders will eventually charge more for these so-called riskier loans. If the little guys are forced to charge so much more – effectively discouraging or eliminating those items from the mortgage menu – then the big boys can raise the price somewhat and still be cheaper than the small mortgage lenders.
Mortgages are rising again
Freddie Mac rates the news: The 30-year fixed rate averaged 3.09%, 4 basis points higher than last week. The 15-year fixed rate averaged 2.4%, 2 basis points higher than last week.
The Mortgage Bankers Association reported a 2.2% drop in mortgage application volume from the previous week.
At the end of the line : Assuming a borrower gets the average 30-year fixed rate on a conforming loan of $548,250, last year’s payment was $170 more than this week’s payment of $2,338.
What I see: Locally, well-qualified borrowers can obtain the following fixed rate mortgages with a cost of 1 point: A 30-year FHA at 2.5%, a 15-year conventional at 2.125%, a 30-year conventional at 2.875% , a 15-year conventional 30-year high balance ($548,251 to $822,375) at 2.25%, a 30-year conventional high balance at 3.125%, and a 30-year jumbo pegged at 3.25%.
To note: The 30-year FHA-compliant loan is limited to loans of $477,250 in the Inland Empire and $548,250 in LA and Orange counties.
Eye-catching loan program of the week: A 15-year fixed rate at 2.375% without points.