Loan costs for second homes, rentals to spike under new Fan-Freddie rule

Low, moderate-income borrowers and first-time buyers will also get squeezed.

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | March 21, 2021

Do residential rental properties with one to four units and second-home mortgages carry more risk? Apparently so says the U.S. Treasury Department.

Such loans underwritten by Fannie Mae and Freddie Mac could end up costing you more under restrictions quietly announced earlier this year.

According to a Jan. 14 press release, then-Treasury Secretary Steven Mnuchin and Mark Calabria, director of the Federal Housing Finance Agency, amended Fannie Mae and Freddie Mac’s preferred stock purchase agreements.

The amendment puts in check a system created by the Treasury during the 2008 mortgage meltdown that advanced billions of dollars to support the agencies.

Starting April 1, Fannie Mae will put a 7% limit on investment and second-home mortgages it purchases from the nation’s mortgage shops. Freddie has not yet announced the change, but the Treasury agreement has the same 7% limitation for Freddie. In a nutshell, the agreement means the next year or 52 weeks of funded second-home loans and rental mortgages business sold to Fan and Fred from each lender can be no more than 7% of the loan volume each lender recorded in the previous 52 weeks.

How are things looking on the streets? Not good. Many lenders have suddenly lost their appetites to make these loans because they worry Fannie and Freddie will say ‘no sale’ for you because the lenders are over their allowable rental and second home loan allowances. There is no cheaper mortgage financing sourcing out there than F & F. In fact, other mortgage money sourcing requires more money down and charges higher rates and points. There is no point in funding loans that might eventually be sold at an interest rate loss elsewhere.

I polled five lenders about possible price hikes. Many have already increased second-home financing by an average of 1.45 points. Investment properties took an average 1.65 points price hit.

Said another way, the points add $7,250 to a $500,000 second home loan or increase the mortgage rate by almost one-quarter point. Using the same $500,000 example for the rental property would add $8,250 or increase the rate by more than one-quarter point.

Just one lender, a behemoth, that I polled has not changed its second home and investor pricing. Larger volume lenders have an advantage in this game-changing agreement as it’s a lot easier to stay within a 7% limit on say $100 billion of Fannie or Freddie delivered loans compared with smaller shops delivering $1 billion.

Robert Broeksmit, CEO of the Mortgage Bankers Association, believes consumers and mortgage lenders that sell closed loans to Fannie and Freddie would be best served if Treasury and FHFA solve their risky loan worries on their own instead of spreading this complicated burden on the mortgage lending community.

“Applying these limits at the lender level, rather than managing them at the GSE level (Fan and Fred), creates potential for significant market disruption,” Broeksmit said. “We’d like to better understand what flexibility FHFA and Treasury have and whether other approaches from the GSEs would get them below the PSPA thresholds this year, but in a more efficient and less disruptive manner.”

Separate from investment and second-home allocations, Fan and Fred are required to limit purchase volume mortgages with less than 10% down or equity (such as the case of a refinance), borrowers with debt-to-income ratios over 45% and middle FICO scores less than 680, although these percentages are lower than the 7% limitation for rentals and second homes.

“We are also concerned that these same lender-level caps may also be contemplated for the ‘higher risk’ product limits as well,” said Broeksmit. “This will be particularly problematic for lenders serving low- and moderate-income and first-time buyers. Consumers and lenders need certainty about their loan options and pricing at the outset of the transaction, not when the loan is being delivered,”

The U.S. Department of the Treasury did not respond my query about such consequence for smaller lenders and by extension-mortgage shoppers. Nor would Treasury address whether Treasury Secretary Janet Yellen would reverse or amend the Jan. 14 preferred stock purchase agreement.

Mortgage pricing disparities for rentals and second homes have already hit the streets. I have yet to see changes for the low-down payment, high ratio and low credit-scored borrowers. Shop hard. Ask your mortgage loan originator what, if any pricing adjustments have been made should you be seeking financing for a rental or second home.

You can be sure that even the behemoth lenders will eventually charge more for these so-called riskier loans. If the little guys are forced to charge so much more — effectively discouraging or eliminating those mortgage menu items — then the big boys can mark-up the price somewhat and still be less expensive than smaller mortgage lenders.

Mortgage rise again

Freddie Mac rate news: The 30-year fixed-rate averaged 3.09%, 4 basis points higher than last week. The 15-year fixed-rate averaged 2.4%, 2 basis points higher than last week.

The Mortgage Bankers Association reported a 2.2% decrease in mortgage application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $548,250 loan, last year’s payment was $170 more than this week’s payment of $2,338.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with 1-point cost: A 30-year FHA at 2.5%, a 15-year conventional at 2.125%, a 30-year conventional at 2.875%, a 15-year conventional high balance ($548,251 to $822,375) at 2.25%, a 30-year high balance conventional at 3.125% and a jumbo 30-year fixed at 3.25%.

Note: The 30-year FHA conforming loan is limited to loans of $477,250 in the Inland Empire and $548,250 in LA and Orange counties.

Eye catcher loan program of the week: A 15-year fixed rate at 2.375% without points.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is mortgagegrader.com.