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On March 11, 2021, Fannie Mae and Freddie Mac (two largest sources of conventional mortgages) gave lenders notice of pending changes for Investment Property and Second Home mortgage loans. This letter gave lenders notice of an initial tightening of requirements for investment property and second home mortgages.

All loans are now required to have an automated underwriting approval in order to be eligible.  While it is likely few lenders would approve these loans without this approval, what was more interesting in this notice was the last paragraph.

The last paragraph warned of “Future Changes”.  In my nearly 30 years of lending and reading these notices, it is rare for the agencies to telegraph future changes to come.  Almost immediately, a number of lenders have started to view these loans less favorably. With many changing rates, terms and product offerings for these loans.

Why limit second homes and investment properties?  The answer is they have no choice. Fannie and Freddie are both under the conservatorship of the Federal Housing Finance Agency.  Under the direction of the US Treasury, the FHFA was directed to limit Fannie and Freddie’s portfolio of second home and investment property loans to no more than 7% of its portfolio. 

Loans for investment property and second homes are viewed to have greater risk as borrowers are more likely to default on these properties in the event of a financial hardship.  By limiting exposure to these types of loans, the risk to Fannie and Freddie is reduced. This reduced risk would strengthen the agencies financial position, ideally allowing them to come out of conservatorship sooner.

Many lenders have changed pricing negatively already. Some are expecting that down payment requirements may also be increased, giving would be borrowers, a potential one, two punch. 

These changes are in addition to a recent expansion of condominium requirements which make financing condominiums in resort areas more difficult, as more projects are now deemed ineligible for financing. See my post about financing condominiums for more information.

Clients looking to purchase investment property or a second home should be ready for potentially higher rates and less favorable terms.  The good news is Northpointe offers a number of additional options for clients who are financing second homes and investment properties.  

If you are in the market to purchase or refinance an investment property, now is a great time to reach out to us to explore options.

Sources:

Fannie Mae LL 2021-08
https://singlefamily.fanniemae.com/media/25286/display?fbclid=IwAR3bocCruDwV3tkrewdG00ioXfBwJIACY4eOiHCfwruL8bBRxqjChZrN6L4

United States Treasury (page 9)
https://home.treasury.gov/system/files/136/Executed-Letter-Agreement-for-Fannie-Mae.pdf?fbclid=IwAR1bOoEuGqeZwuOsyqAYIHCt6se_cbzSNTNVE8v0FTNneg8RcBLM_viObtU