Rate increases for 2nd homes and high balance loans are coming

[Zach Wain]

Second Home and High Balance loan rate increases

FHFA, the Federal Housing Finance Agency (parent of Fannie Mae/Freddie Mac) is implementing new “price adjustments” to all second/vacation homes and High balance loans effective 4/1/22. How does this impact you and your local market?

First, lets talk second homes. One of the key guidelines for a property to be considered a Second/Vacation home as defined by Fannie Mae, the borrower must occupy the home for some portion of the year. There are a few other rules, but that is a big one. Some portion of the year... Second home purchases have been popular for borrowers that want to use a home for vacation purposes, then rent it out on a short term basis when the home is not being used. That is perfectly acceptable for a second home. Once in awhile, the FHFA changes the price hits for certain loan programs or property types. Their planned price increases are going to hit second home rates very hard. The avg second home purchase or refinance will see major price adjustments that could translate into a 0.5%-0.75% interest rate increase when March 31st turns into April 1st.  For a 10% downpayment scenario, the price hit is roughly equivalent to a 1% increase in interest rate.

The later, high balance loans, are designated for high cost counties like Los Angeles, San Francisco, San Diego, etc. They apply to loans above the national conventional loan limit of $647,200 and within the “high balance” loan limit which is county specific, with a max loan size of $970,800 or lower for certain for counties. Over that amount and the loan is considered a “jumbo” loan. FHFA is adding 2 specific price adjustments. Higher pricing in general for all high balance loans that may translate to an increase of 0.125% on average. For cash out refinances, expect another 0.125%-0.15% in higher price adjustments. 

Why is this happening? The thought is that FHFA wants to generate more revenues from these 2 specific product groups to have been better financing for first time buyers or lower income areas. But, we have not seen any plans put in action yet. Mortgage and real estate groups are already lobbying and trying to oppose the new price hits, as it seems like a direct tax on people who purchase second homes and everyone that lives in a high cost area. Many borrowers in high cost areas that apply for a high balance loan are median income households, but as of right now FHFA is moving forward with these added price hits.

Best regards,

Zach Wain
Wain Capital, LLC