Fannie/Freddie 7% Mortgage Bond Limit

[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.

@Chris Mason

[Joe Splitrock]

@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.