PSA: Have you adjusted your strategy? re: FNMA reserve changes

[Chris Mason]

A few months back, Fannie Mae announced that they would be changing how their Reserve requirements are calculated in the near future. I just had my first few come out of underwriting held to the new standard (I'd been qualifying folks under whichever of the two was more conservative while waiting), so now this is in effect and not a hypothetical future thing. 

For some of you, your finances and retirement accounts are so on point and conservative that getting a mortgage is a mere formality. None of the below will matter to you at all if your real estate holdings are on top of very healthy/hefty retirement accounts. For those of you that view your real estate holdings as your primary/only retirement vehicle, this is important.

Before: Reserve requirements were almost always 6 months of PITI reserves for each investment property to make Fannie happy. This meant that even if you had a cash flow positive property in 15 or 20 year fixed financing (according to your tax returns), it would still mean a greater reserve requirement, which meant saving longer for the [ down payment + cash to close + reserves ] on the next one, so mortgage guys/gals kind of nudged REI towards 30 year fixed, and there wasn't really any advantage (in terms of reserve requirements) to paying it off faster unless/until you were/did pay it all the way off. There are certainly other advantages to 30 year fixed, that I am sure will be restated below, but this particular advantage (minimizing reserve requirements for the next purchase) has gone away.

Now: 

• Reserve requirements are based on a combination of the number of financed investment properties you own, and the total outstanding mortgage balances across them. 
• Fannie Mae is now rewarding you for paying mortgages off, and/or paying them off faster, and is no longer penalizing you for using 15 or 20 year fixed financing. Indeed, because 15/20 year mortgages pay off faster, they will also in fact reduce your reserve requirements in many scenarios (again, assuming it is still cash flow positive according to your tax returns, and thus not messing with DTI).
• This will potentially allow you to put your savings/earnings to work faster on the next property. 
• Furthermore, now that the cost of homeowner's insurance isn't a factor in reserve requirements, you can get that super sexy insurance policy you might have wanted that covers more of the stupid things tenants might do ("I have an emotional support baboon..."), without it meaning you are forced to keep more money in a savings account (rather than working for you) just to make mortgage people happy. 
• Again, I am sure someone will restate the other advantages of 30 year fixed financing. If at the end of the day you had weighed all the pros/cons and were still on the fence, this is something to think about.

Nitty gritty details.

1-4 financed properties. 2% of total outstanding investment property mortgage balances is your reserve requirement. 

5-6 financed properties. 4% of total outstanding investment property mortgage balances.

7-10. 6%.

Note that a paid off property now has no reserve requirement (before, we still had to hit you with taxes/insurance when determining reserve requirements). Nor does a mortgaged primary residence.

Overall, I tend to agree with this change. Freddie Mac hasn't changed anything, so if you're scenario means Freddie is more advantageous, great go with Freddie.