Fannie Mae/Freddie Mac Put the Noose Around Investors’ Necks with New Lending & Underwriting Policy Changes

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There comes a point at which reasonable folk take a step back, survey the latest nonsensical trend in lending, and conclude their own rational thought has been the problem all along. We don’t need a rehash of why we’re sittin’ in the economic rubble of a woefully failed economy. Allow me to sum it up in a few concise sentences.

Wall Street figured how to get in on the real estate bubble.

Lenders were very hospitable to Wall Street.

Regulators took nearly a decade long holiday.

The crazies ran the asylum with predictable consequences.

We’re now payin’ the price.

Fast forward to the present

Real estate investors have been hit from all sides with ever tightening underwriting policies — increased down payment requirements, and the like. As far as increased credit worthiness is concerned, most of us would probably lead that charge. When it comes to lending to an investor, it’s important they are not only relatively bullet proof credit wise, but that they have sufficient skin in the game.

Having been originally licensed during Nixon’s first year in office, I’ve surely not seen everything, but I have seen what has happened — almost always live and in person. Fannie and Freddie have increased the down payments to a minimum of 20% — fine with me. Add in closing costs and an investor has $50-60,000 in a purchase of a $250,000 duplex. That’s plenty of skin — risk capital if you prefer. This ignores the likelihood that the loan wouldn’t have been made but for a decent cash on cash return as perceived by the lender.

Better credit, more skin required, enlarged cash reserves, and must cash flow. Again, works for me.

Then they began to drink their own Kool-Aid. They’ve been consistent though, as the new rules are just as clueless and, unfortunately, destructive as the old stealth underwriting used to be.

Under what system of rational thought do you limit the number of properties a well healed investor can buy? Four? Really? Ya said that out loud? Gimme a break. That’s when it became clear to many of us that the same Einsteins who brought us the great real estate bubble/crash, are now makin’ it far worse. At least they’re consistent.

Let us count the Dumb & Dumber, um, I mean Fannie/Freddie policy changes of late.

  1. Four property limit.
  2. Increased down payment, FICO score, and reserves for properties 5-10.Those two alone plugged up the pipeline leading to recovery pretty effectively — but apparently not enough. They then turned up the heat, and right at the point when cooler heads were sorely needed. This of course conveniently ignores how those buyers of loans have, for the most part, studiously avoided buying ‘5th-10th’ loans. This has begun to change, but most lenders simply won’t or don’t wish to be in that market. Again, it defies logic.
  3. If an investor’s portfolio includes income properties owned less than two years, underwriters ambush them with the following newly invoked policy.They take the year’s loan payments of each of those ‘bad’ properties and count them against the investor’s qualification. Now, reasonable people might opine that was harsh enough. Not for these guys. They then disallow the sinful property’s income. Imagine what this does to the buyer’s ‘back end ratios’. It destroys them. What’s worse? It’s completely artificial, a mirage if you will.

    Still, they weren’t done.

  4. Freddie has now decreed that first time investors, regardless of all the aforementioned underwriting improvements, must prove they have two years of management experience. What? Huh? Freddie already defines them as ‘first time’ investors. Are we missin’ something?Dumb and Dumber helped get us into this mess. Now they’re seemingly on a mission to ensure the road to real estate recovery is strewn with potholes, nails, and the odd couch.

    Imagine all the experienced investors with more than adequate investment capital, great credit, and more than sufficient cash reserves. Add the wannabe newbies who are just as well qualified financially. Now imagine all the properties those two groups would be buying today if not for some combination of the four mindless changes above.

NOTE: #2 seems reasonable, but increasing the down payment is, IMHO, overkill. 20% plus closing costs add up to sufficient risk capital to maintain the attention of the investor. Yeah, I know, Captain Obvious lives.

Literally thousands of properties are going unsold as a direct result of these fantasy underwriting policies. Properties sporting 4-10% cash on cash, 60-80% LTV’s, massive cash reserves, and maintained by folks with enough risk capital in the game to care big time. Does that sound like a bad thing to you? To anyone with a three digit IQ?

Allow me a real life example.

An experienced investor. Makes close to $100,000 a year. FICO over 770. Real estate portfolio generates another $30-40,000/yr cash flow — all of which is tax sheltered. He was turned down for the loan. He was gonna put down 25% plus closing costs. The property would cash flow, according to the lender, not me, at a 1.25 Debt Coverage Ratio. (DCR) For Heaven’s sake, even lenders makin’ loans to self-directed IRA’s only require 1.2 DCR’s most of the time — and they’re non-recourse. But I digress.

Since a minority of his portfolio was acquired less than two years ago, their combined annual debt service was counted against him, while the income was ignored. This resulted in a back end ratio of 70%! With that number he couldn’t finance a Snickers Bar. What really galls? It’s completely artificial — made up outa whole cloth. In real life, this guy lives far below his means, has completely sheltered cash flow of roughly $3,000 monthly, not to mention almost $200,000 in cash reserves.

What’s wrong with this picture?

Photo: Hryck.

About Author

Jeff Brown

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.


  1. It’s frustrating reading these posts, not because of how they were written, but because you lay it out when even myself am trying to ignore the ignorance of people who are ‘supposed’ to be smarter than me, you and apparently everyone else.

  2. I wanted to thank Jeff for this fantastic guest article. We try to expose our readers to the most important news, legislation, etc. that affects real estate investors and professionals, and this commentary exposes four policy changes from Fannie/Freddie that you all MUST know about.

  3. Hmmm… I am not sure that I could have used stronger words… but IDIOTS is one that comes to mind.

    Well… there goes any chance of being underwritten by Fannie and probably Freddie… they don’t want our money.

    Investors better learn how to speak to small local banks.

    Great job Jeff and thanx Josh for inviting a great guest to participate.

  4. I love this post! I’ve had a lot of these dirt kicking observations through random times when thinking about things and it’s great to see them altogether, one after the other.

    I’m having trouble imagining how these rules even came into consideration much less approved and put into effect… “Hey everyone! I have a terrible idea to really make things worse!”

    Depressing… but again, I loved this post 😀 keep them coming!

  5. Jeff,
    Very good and accurate post. Many foreclosures on investment properties are driving these changes; but the majority of those foreclosures were likely high LTV, often stated income, and with mortgage products such as option ARM’s – all products which were created on wall street. Foreclosures absorbed by FNMA and Freddie were primarily high LTV deals. Historically lenders have recovered just above 80% on foreclosures. That number is probably high in this market, BUT the 20% down with higher credit requirements and ONLY full documentation loans sure seems like a safe risk. It is obnoxious and ridiculous to disallow rental income for properties owned less than two years. We all understand both agencies have suffered significant losses, BUT well qualified Full Documentation investors are a source to absorb overflowing inventory. Anyone who has the ear of a congresssman or senator should firmly bend those ears, letting them know that these changes are serious over reactions and are impeding the housing recovery by removing legitimate qualified buyers. STUPID

  6. Jeff,

    Great post ! Freddie and Fannie have almost destroyed the residential housing market with their HVCC, AMC’s fiasco and now apparently they want to strangle the Income and investment market as well ! It is truly the fox guarding the henhouse – but in all fairness they didn’t have anything to do with the housing bubble bursting – or did they ?

  7. Answer me this if you can….who picks the real estate agents that Fannie Mae gives their homes to?? Who decides the pricing of said houses? While trying to negotiate a second home in AZ recently the agent had the house listed on MLS for $160,000. Same house on the HomePath website showed $149,900. We originally offered 153,000 with 20% down on the house and they countered with 156,000. The agent hardly ever returned phone calls or emails to our agent. Now the house is under contract with another buyer. I’d love to know what he got for the house.

    Can the agaents ask whatever they like even though Fannie Mae is listing for $11,000 less?

  8. Bill "Financexaminer" on

    Hi, I think that if you look at the majority of defaulted investor loans you’ll find that they will fall within the guidelines that are used to exclude new applicants. Having experience, I assume, will be viewed in the same light as those who apply for conventional financing and have recently changed jobs or professions. Being in a job for less than three years is acceptable when the applicant has experience in that line of work. If an investor applicant has had experience in real estate management and has recently begun investing for their own portfolio, they may be blessed. As to who get’s the listings, I’d venture to say that it is political as much as it is based on professional abilities, no….That it’s based more political connections than the ability to move a property! Bill

  9. Bill — You make some excellent points. But tell me, when investors put almost $60K skin in the game on a $250K property, and the rest of their credit history passes muster, don’t you think they’ll ‘figure’ a way to protect all that ‘skin’?

    Also, an experienced investor with some props less than a couple years in their portfolio makes them a bad risk? I think that’s where the pendulum appears to have swung too far. If I’m a lender, and an investor with a dozen cash flowing properties is puttin’ 25-30% down + closing, with a score of over 720 with abundant reserves, he gets the dang loan. 🙂

  10. Bawld Guy is spot on. Both agencies took huge losses on investor deals, but I would love to see their detailed breakdown of those portfolio losses. Good credit used to get up to 100% financing on N/O/O, and for awhile even with Stated Income. So, my estimate is that the majority of the defaults were deals with little to no skin in the game and from new investors that purchased multiple properties and many based on Stated Income loans. If one or two of those went vacant the Stated Income qualifier was in trouble and without skin in the game it became easy to walk. The pendulum has swung too far now. Not allowing rental income to qualify without a two year history even with higher credit requirements, higher down payments, and full documentation loans only is way out there in left field – I say upper left deck out of bounds.

  11. Since we all read this post you forgot to mention,investers like me . Ive owned 4 rental property’s and my arms are up in about 9months and i’ve been applying to refinance and am denied because i have 4 with freddie mac and the homes are slightly under water and when i bought them , i put down 20%, so they made some good rules at the end of 08’Sad thing there rented and i have good credit. So 4 more houses on there way, the banks will be owning more and more property’s . I have a lot more to say, but we all know the bottom is not anywhere in sight……

  12. Can anyone tell me a way around this 15 day first look on freddie mac properties for investors? It seems as though the more the government gets there hands involved in the free enterprise system, the longer it takes for the system to work its way out of this mess.

  13. John — Not without committing fraud. They even bar you if the purchase is for a second home or so-called ‘vacation’ home. I understand their reasoning though. Owner occupants historically are more ‘invested’ in keeping the property, etc.

    There are simply not enough buyer-users to take care of their inventory, so the 15 day look will not be that big of a deal. Of course, from your viewpoint, the best deals in the best locations are probably most at risk for those allowed to buy them before you get a chance. What a pain.

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