Fannie/Freddie 7% Mortgage Bond Limit
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
District Invest Group545 Reviews
Fannie/Freddie 7% Mortgage Bond Limit
Most Popular Reply
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
5y@Russell Brazil the problem is they need to get to a 7% on the 12 month rolling average of all loans. Their approach is constraining each lender to below 7%. Some lenders today are already below 7% and others are well above. The net effect is everyone is going to have to stay below 7% and lenders will keep some margin of error, say 6.5% as their target. You will have some lenders at 3%, 4%, 5%, etc. and caps somewhere in the high 6% numbers. That average is going to drop well below 7% in the end.
The question is how they limit the loans. I mentioned in another thread there are three ways to do it:
1. Stop taking new loan applications from investors at a certain threshold.
2. Increase qualification standards, so less people get approved.
3. Make the loans more expensive, either through higher lending fees or higher interest rates.
The other concern I have seen raised is that investor loans are more profitable and therefore offset riskier loans. Reducing the number of investor loans, could force them to take on less high risk loans.
This article is a great analysis based on an Urban Institute report:
http://www.mortgagenewsdaily.c...
I view it as all the more critical that investors have other funding strategies. Non-conventional loans are a good option. Realistically only smaller investors are using conventional financing due to property limits. It could be harder for new investors to get started, but people always find a way if they want it bad enough.
21 Replies
- Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes5y
@Russell Brazil bigger impact is likely from the 15% down requirement!
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes5y
Originally posted by @Jonathan R McLaughlin:
@Russell Brazil bigger impact is likely from the 15% down requirement!
Investment properties have always had a 15% down requirement.
District Invest Group545 Reviews - Real Estate Investor · Philadephia, PA · Member since 2016 · 214 posts · 36 votes5y
@Russell Brazil The main impact should be some non_QM loans that less than 15% or other kind of low downpayment investor loans?
- Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes5y
@Russell Brazil I read somewhere there was a new wrinkle around 15%...you have a better handle than I though for sure.
- Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes5y
@Russell Brazil am I thinking of a recent freddie change to owner oc rentals? I'm embarrassed but I remember something being more restrictive with that number....
I swear I saw something.... help me @Chris Mason you are my only hope!
- Deland, FL · Member since 2017 · 2k+ posts · 1k+ votes5y
Originally posted by @Russell Brazil:
A lot of people have been talking about this new limit, without much perspective on the issue. The issue is that the GSE's, Fannie/Freddie are going to limit the number of 2nd homes and investor loans that get rolled into mortgage bonds that sell on the secondary market. That limit will now be 7%, with 93% being owner occupied loans in each bond.
This 7% held absolutely no meaning to me. Was it a lot, a little...there was no context.
But, now I have the context. I am on the NAR Conventional Financing Policy Committee, and Im actually on the Zoom call at this very moment discussing the issue.
Over the last 5 years, the general range on these has floated between 7% and 12%, with only 1 month going under 7% at 6.9%. January is the most recent month with data available, and it was between 10% and 11% for that month. So a drop from 11% to 7% is about a 35% drop. Reports have been that the southeastern portion of the country is seeing the most dramatic pricing increases on the loans so far.
How will you change your investing based upon now knowing the relevance of the 7%?
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes5y
Originally posted by @Michael Plante:
Originally posted by @Russell Brazil:
A lot of people have been talking about this new limit, without much perspective on the issue. The issue is that the GSE's, Fannie/Freddie are going to limit the number of 2nd homes and investor loans that get rolled into mortgage bonds that sell on the secondary market. That limit will now be 7%, with 93% being owner occupied loans in each bond.
This 7% held absolutely no meaning to me. Was it a lot, a little...there was no context.
But, now I have the context. I am on the NAR Conventional Financing Policy Committee, and Im actually on the Zoom call at this very moment discussing the issue.
Over the last 5 years, the general range on these has floated between 7% and 12%, with only 1 month going under 7% at 6.9%. January is the most recent month with data available, and it was between 10% and 11% for that month. So a drop from 11% to 7% is about a 35% drop. Reports have been that the southeastern portion of the country is seeing the most dramatic pricing increases on the loans so far.
How will you change your investing based upon now knowing the relevance of the 7%?
It won't really effect me. Ill just be paying likely rhe same rates I got in 2019. Is what it is.
District Invest Group545 Reviews @Russell Brazil
It’s a big deal to me here in Virginia. My lender stops accepting investment mortgage application from today. My loan officer told me we were lucky to lock the rate last Friday otherwise my application would be rejected. He turn down three loans today.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
@Russell Brazil the problem is they need to get to a 7% on the 12 month rolling average of all loans. Their approach is constraining each lender to below 7%. Some lenders today are already below 7% and others are well above. The net effect is everyone is going to have to stay below 7% and lenders will keep some margin of error, say 6.5% as their target. You will have some lenders at 3%, 4%, 5%, etc. and caps somewhere in the high 6% numbers. That average is going to drop well below 7% in the end.
The question is how they limit the loans. I mentioned in another thread there are three ways to do it:
1. Stop taking new loan applications from investors at a certain threshold.
2. Increase qualification standards, so less people get approved.
3. Make the loans more expensive, either through higher lending fees or higher interest rates.
The other concern I have seen raised is that investor loans are more profitable and therefore offset riskier loans. Reducing the number of investor loans, could force them to take on less high risk loans.
This article is a great analysis based on an Urban Institute report:
http://www.mortgagenewsdaily.c...
I view it as all the more critical that investors have other funding strategies. Non-conventional loans are a good option. Realistically only smaller investors are using conventional financing due to property limits. It could be harder for new investors to get started, but people always find a way if they want it bad enough.
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes5y
I made a sticky about this like a week ago, everyone ignored it, so I un-sticky'd it. :P
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
Originally posted by @Allen Wu:
@Russell Brazil
How would this impact 1031 exchanges? Would you still do it on an investment property that you’re selling where you’re locked in a rate of 3.25%?
Investors need to take into consideration their loans on a property, when doing a 1031 exchange. You are not only giving up the property, but also giving up the loan. A loan can have value, just like a property has value.
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes5y
Makes sense that the areas with smaller loan amounts would be most impacted. If a bank is capped at 7%, they will want those 7% to be the MOST profitable ones, not the LEAST profitable. Pricing things out with bay area and California zip codes, a couple of my lenders have not changed anything (who knows what tomorrow will bring). I'm guessing I already know what'll pop up if I put in Montana or North Dakota zip codes.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
Originally posted by @Chris Mason:
Makes sense that the areas with smaller loan amounts would be most impacted. If a bank is capped at 7%, they will want those 7% to be the MOST profitable ones, not the LEAST profitable. Pricing things out with bay area and California zip codes, a couple of my lenders have not changed anything (who knows what tomorrow will bring). I'm guessing I already know what'll pop up if I put in Montana or North Dakota zip codes.
As I understand, the cap is based on percentage of dollar value, not percentage or loans written. Small markets have smaller loan amounts on owner occupied and investor loans, so ratio may not be much different. Limiting higher dollar value investor/second home loans would have a greater impact in reducing percentage than limiting smaller dollar loans.
- Investor · Denver, CO · Member since 2018 · 18 posts · 24 votes5y
@Russell Brazil
One thing that hasn’t been mentioned on this thread is that Freddie and Fannie are also the go to lender for multifamily operators purchasing stabilized assets with long term fixed rate financing, not just single family homes. I read that both have reduced their lending caps to $70B each, down from $80B in 2020. More importantly, 50% of this balance must be committed to mission-driven and/or affordable housing, which is up from 37.5% in 2020. If the agencies continue to see record-setting deal flow, then more conservative loan term loan terms and higher rates will be quoted in order to control volume. This will likely have an impact on cap rates and I am curious to see how it all plays out.
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes5y
Originally posted by @Joe Splitrock:
Originally posted by @Chris Mason:
Makes sense that the areas with smaller loan amounts would be most impacted. If a bank is capped at 7%, they will want those 7% to be the MOST profitable ones, not the LEAST profitable. Pricing things out with bay area and California zip codes, a couple of my lenders have not changed anything (who knows what tomorrow will bring). I'm guessing I already know what'll pop up if I put in Montana or North Dakota zip codes.
As I understand, the cap is based on percentage of dollar value, not percentage or loans written. Small markets have smaller loan amounts on owner occupied and investor loans, so ratio may not be much different. Limiting higher dollar value investor/second home loans would have a greater impact in reducing percentage than limiting smaller dollar loans.
% of dollar value wouldn't really change anything. Revenue comes from the amount lent in total, but costs come from the number of loans.
A single $700,000 loan for an Oakland property. Revenue off of $700k, 1 set of fixed per loan costs.
Seven loans for $100k each for Nebraska real estate. Revenue off of that same $700k, but SEVEN sets of fixed per loan costs.
And both will eat up the exact same portion of that 7% slice. The P&L has the same P, and both eat up the same portion of the 7%, but the latter one has literally 7x the L on the P&L.
Setting aside the pandemic and everything that has changed, you could even spot this effect pre-COVID. Why do most lenders charge a flat fee? Because if you didn't, you'd get a crap ton of applications for $50k to $100k loans, and it would put you out of business. By making the $50k borrower pay 2% ($1,000 flat underwriting fee) just to even have the conversation, you are making sure you do not become the "to-go" for smaller loan amounts.
If I lived in an area where $50k to $100k loans were normal, I would never post this b/c it would drive business away. The fact that I don't get a whole lot of phone calls for $50k mortgages means I've nothing to lose by being transparent about this, heh.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
Originally posted by @Chris Mason:
Originally posted by @Joe Splitrock:
Originally posted by @Chris Mason:
Makes sense that the areas with smaller loan amounts would be most impacted. If a bank is capped at 7%, they will want those 7% to be the MOST profitable ones, not the LEAST profitable. Pricing things out with bay area and California zip codes, a couple of my lenders have not changed anything (who knows what tomorrow will bring). I'm guessing I already know what'll pop up if I put in Montana or North Dakota zip codes.
As I understand, the cap is based on percentage of dollar value, not percentage or loans written. Small markets have smaller loan amounts on owner occupied and investor loans, so ratio may not be much different. Limiting higher dollar value investor/second home loans would have a greater impact in reducing percentage than limiting smaller dollar loans.
% of dollar value wouldn't really change anything. Revenue comes from the amount lent in total, but costs come from the number of loans.
A single $700,000 loan for an Oakland property. Revenue off of $700k, 1 set of fixed per loan costs.
Seven loans for $100k each for Nebraska real estate. Revenue off of that same $700k, but SEVEN sets of fixed per loan costs.
And both will eat up the exact same portion of that 7% slice. The P&L has the same P, and both eat up the same portion of the 7%, but the latter one has literally 7x the L on the P&L.
Setting aside the pandemic and everything that has changed, you could even spot this effect pre-COVID. Why do most lenders charge a flat fee? Because if you didn't, you'd get a crap ton of applications for $50k to $100k loans, and it would put you out of business. By making the $50k borrower pay 2% ($1,000 flat underwriting fee) just to even have the conversation, you are making sure you do not become the "to-go" for smaller loan amounts.
If I lived in an area where $50k to $100k loans were normal, I would never post this b/c it would drive business away. The fact that I don't get a whole lot of phone calls for $50k mortgages means I've nothing to lose by being transparent about this, heh.
I agree there could be 7X fixed costs, but there is also 7X the pass through to the borrower. When I took out a $500K house loan, most the line items were similar to $150K loans I have taken. So it is not a fair comparison to say 7X expenses without considering the 7X fees. Lenders aren't going to make less just to lend in Nebraska.
In some ways it doesn't matter, because the size of CA in loan values is so large that you have to limit loans in that market. Dropping investor loans in Nebraska wouldn't even move the needle to offset CA. Put in perspective, Nebraska has a population under 2M and property values that are maybe a third or quarter of your housing values. City of Oakland combined with San Francisco is well over the entire housing spend in Nebraska. Like it or not this will affect California. - Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes5y
Originally posted by @Joe Splitrock:
Originally posted by @Chris Mason:
Originally posted by @Joe Splitrock:
Originally posted by @Chris Mason:
Makes sense that the areas with smaller loan amounts would be most impacted. If a bank is capped at 7%, they will want those 7% to be the MOST profitable ones, not the LEAST profitable. Pricing things out with bay area and California zip codes, a couple of my lenders have not changed anything (who knows what tomorrow will bring). I'm guessing I already know what'll pop up if I put in Montana or North Dakota zip codes.
As I understand, the cap is based on percentage of dollar value, not percentage or loans written. Small markets have smaller loan amounts on owner occupied and investor loans, so ratio may not be much different. Limiting higher dollar value investor/second home loans would have a greater impact in reducing percentage than limiting smaller dollar loans.
% of dollar value wouldn't really change anything. Revenue comes from the amount lent in total, but costs come from the number of loans.
A single $700,000 loan for an Oakland property. Revenue off of $700k, 1 set of fixed per loan costs.
Seven loans for $100k each for Nebraska real estate. Revenue off of that same $700k, but SEVEN sets of fixed per loan costs.
And both will eat up the exact same portion of that 7% slice. The P&L has the same P, and both eat up the same portion of the 7%, but the latter one has literally 7x the L on the P&L.
Setting aside the pandemic and everything that has changed, you could even spot this effect pre-COVID. Why do most lenders charge a flat fee? Because if you didn't, you'd get a crap ton of applications for $50k to $100k loans, and it would put you out of business. By making the $50k borrower pay 2% ($1,000 flat underwriting fee) just to even have the conversation, you are making sure you do not become the "to-go" for smaller loan amounts.
If I lived in an area where $50k to $100k loans were normal, I would never post this b/c it would drive business away. The fact that I don't get a whole lot of phone calls for $50k mortgages means I've nothing to lose by being transparent about this, heh.
I agree there could be 7X fixed costs, but there is also 7X the pass through to the borrower. When I took out a $500K house loan, most the line items were similar to $150K loans I have taken. So it is not a fair comparison to say 7X expenses without considering the 7X fees. Lenders aren't going to make less just to lend in Nebraska.
That statement in bold is true enough, that's why people in Nebraska get higher rates. heh.
Any ways, it's not really something I'm interesting in debating theoretical reasons, I might as well try to argue with you about how much cashflow you see based on a theory I have. It's my theory versus your actual collected rent checks, and checks out for expenses. Pretty pointless debate, no? :P
- Santee, CA · Member since 2017 · 18 posts · 15 votes5y
Is it possible this is a knee jerk overreaction by the lenders due to doom and gloom speculation and after more definite guidelines are released, the rates will level out? I haven't seen any guidelines posted yet so I assume they still haven't released them. Sure, if you're a first time investor drawing on a HELOC with a subpar credit score, maybe there's reason to be worried and maybe some other criteria is established but I wonder longterm, whether these changes are going to be as bad as everyone is expecting.
- Kailua-Kona, HI · Member since 2018 · 45 posts · 9 votes5y
@Chang Pan Ouch! that hurts, I was about to sign a contract on an REO property using all cash with the intention to get it refinanced after, but this stopped me in my tracks until I assess the situation. The Lender I'm working with on another property (next door) told me she couldn't even get pricing on Friday and Monday due to this news, their system locked them out. So put a hold on this 2nd property :(
- 5yJulee FelsmanPro MemberLender · Portland, OR · Member since 2018 · 163 posts · 136 votes
Some notes from the front line at one of the bigger lenders:
I work for Guaranteed Rate. We're a large (top 5-ish) non-bank mortgage lender. We have not stopped offering loans on second homes and investment properties. We also have not added any pricing adjustors or extra bumps to rate (yet anyway).
Our head of capital markets shared some information this week that I found interesting -- and heartening. For starters he confirmed that we are, indeed, over the 7% threshold -- as are, from his account, nearly all lenders.
Regardless, his plan is to stay the course and not throttle funding loans secured to investment properties and second homes. He'll likely continue to sell all of our second home production to Fannie/Freddie. He'll sell as much of our investment property production to Fannie/Freddie as he can.
When we have excess investment property loan production (over our 7% quota) (which we will), he will take pools of loans to the non-agency securitization market.
Translation: We'll be selling bonds on the secondary market that are secured to mortgages underwritten to Fannie/Freddie guidelines but not sold to Fannie/Freddie. Sounds like he's planning our first securitization of investment property loans in May.
For some context, lots of loans fall into the non-agency category and are securitized this way: Jumbo loans, non-QM loans, loans with non-traditional income documents, etc.
He is trying not to change our pricing, but indicated that eventually we may have to start thinking of pricing for investment property loans as following the demand for non-agency bonds.
Where that gets interesting is that sometimes the pricing for non-agency loans is better than that for Fannie/Freddie loans. A couple of years ago, I was able to get clients a slightly better interest rate on some loan scenarios by having them borrow $1 more than the Fannie/Freddie loan limit.
In fact, I'm currently helping a long-time client refinancing an investment 4plex to a 20 year loan on a non-agency program. The rate was significantly better than what we could get on any Fannie/Freddie product when we locked in her rate -- about a month ago before the FHFA made these changes.
Of course other times the demand dries up and pricing for non-agency loans get much worse/hard to come by. Last March, when COVID hit was an extreme example of this, but the appetite for mortgage bonds as an investment ebbs and flows all the time.
So anyway... it's kind of interesting and definitely not a doom and gloom scenario.
I should add that only a handful of lenders will have the ability to employ this strategy (scale, capital markets know-how, etc). Our capital markets guy feels this will offer us a competitive advantage in the investment financing space. That's a-okay with me... :)
Join the conversationCreate a free account to reply, vote on answers and follow this thread.