Last night we were notified that Fannie Mae is making some changes to their Rental property and Second home purchases. This morning we are getting more clarity. There is not going to a standard LLPA (price hit) in addition to the ones already in place, but rather, Fannie Mae will not purchase rental property/second home loans from an individual lender when it makes up over 7% of their delivered loans to Fannie Mae.
Translation: Fannie Mae will warn lenders that excessive loans (more than 7% NOO/2nd) cannot be purchased. The net effect is that lenders who are anywhere close to 7% currently (and especially those over 7%) will be implementing substantial hits for NOO/2nd so as to keep their total delivery proportion to the agencies under 7%. This is brand new, so we are still figuring out which lenders will be impacted, or if this will be a non event and back to business as usual.
The current proportion of mortgage deliveries across all lenders is roughly in line with 7%. That means there may not be a huge impact on pricing by the time all is said and done, but in order to achieve that, there WOULD need to be quite a bit of reallocation from lenders with more NOO/2nds to those with less. Lender-specific pricing adjustments will be elevated in the meantime. Also, we should assume many lenders will want to avoid getting too close to 7%, so we should also expect the end-of-day net effect to be elevated NOO/2nd home LLPAs on average.
@Zach Wain here is a link to the Fannie Mae letter:
This is part of changes aimed at pulling Fannie Mae and Freddie Mac out of conservatorship. The goal is to make them more stable and release them from quasi-government control. That being said, investor and second home purchases are considered more stable and lucrative mortgages. There are already more stringent underwriting standards and equity standards, so it seems this could have the opposite effect. Maybe the goal is to slow investors to encourage owner occupied instead?
As it stands today investor and second homes already make up more than 7% of the 12 month moving average. To your point, lenders will need to reduce the number of loans to stay under that average. It seems the best way to limit investor and second home loans, will mean either higher qualification standards or more expensive loans. This is bad news for investors seeking conventional financing.
This article also points out that half of all rental units are 1-4 unit multifamily, so there is risk to supply or cost of rental housing to low income tenants in particular.
The article also points out that these investor loans are lower risk, therefore they offset riskier loans. That can have the net effect of less risky loans being approved, meaning lower qualified applicants will have more difficulty. This will disproportionately affect minorities.
It seems like this is bad for investors and will ultimately hurt low income tenants and lower qualified home buyers. Thanks for posting, this is good information for investors to have.
@Zach Wain and @Joe Splitrock , I am wondering if this change actually causes reductions in underwriting, so that instead of lowering the number of Rental/2nd home mortgages, the lenders start pushing through lower quality owner-occupant loans to raise total mortgage volume, thereby allowing for continued processing of 2nd home/Rental mortgages
@Joe Splitrock - This is a popular assumption, and it makes sense to me "Maybe the goal is to slow investors to encourage owner occupied instead?" I think so...
The info I received from MBS live, which is the same editor as mortgagenewsdaily, was that the current loan percentage of rentals/2nd homes is roughly 7%, I did not hear the avg is above 7%. The chart in that article goes as far as 8/2020 so the current numbers are likely different.
The metrics for what a high risk loan are "A high risk loan has at least two of the following characteristics: a loan-to-value (LTV) ratio higher than 90 percent, a borrower debt-to-income (DTI) ratio above 45 percent, and a borrower credit score below 680."
Since the min downpayment for a 2nd home is 10% and rentals are 20%, that eliminates 1 of the metric already for all 2nd homes/NOO's. If 1 out of the 3 metrics are automatically gone, than it makes sense (by this formula) that most non primary homes are less risk. If there is a downturn in home values, people tend to foreclose on a rental home much quicker than their primary home, so I think there should be other considerations besides that "high risk" metric. But that is just my 2 cents.
mortgagenewsdaily is a great site, awesome content! Matt Graham also runs MBS Live which is where I get my live MBS trading information so we know what the mortgage rate market is doing. I highly recommend for any mortgage professionals
@Evan Polaski - I do not think there will be a large increase in conventional primary loans that are lower quality. There are more FNMA/FHMLC updates coming and rumor is they will more stringent on high DTI loans. Maybe 1%-2% increase in loan denials and/or AUS denials. Less of the 50% DTI loans, etc.
FHA volume may increase especially if Biden cuts the PMI factor by 0.25% which would be nice for that group of borrowers
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