Fannie Mae update to Rentals and Second homes

[Zach Wain]

Last night we were notified that Fannie Mae is making some changes to their Rental property and Second home purchases.  This morning we are getting more clarity.  There is not going to a standard LLPA (price hit) in addition to the ones already in place, but rather, Fannie Mae will not purchase rental property/second home loans from an individual lender when it makes up over 7% of their delivered loans to Fannie Mae.

Translation: Fannie Mae will warn lenders that excessive loans (more than 7% NOO/2nd) cannot be purchased. The net effect is that lenders who are anywhere close to 7% currently (and especially those over 7%) will be implementing substantial hits for NOO/2nd so as to keep their total delivery proportion to the agencies under 7%. This is brand new, so we are still figuring out which lenders will be impacted, or if this will be a non event and back to business as usual.

The current proportion of mortgage deliveries across all lenders is roughly in line with 7%. That means there may not be a huge impact on pricing by the time all is said and done, but in order to achieve that, there WOULD need to be quite a bit of reallocation from lenders with more NOO/2nds to those with less. Lender-specific pricing adjustments will be elevated in the meantime. Also, we should assume many lenders will want to avoid getting too close to 7%, so we should also expect the end-of-day net effect to be elevated NOO/2nd home LLPAs on average.

[Joe Splitrock]

@Zach Wain here is a link to the Fannie Mae letter:

https://singlefamily.fanniemae...

This is part of changes aimed at pulling Fannie Mae and Freddie Mac out of conservatorship. The goal is to make them more stable and release them from quasi-government control. That being said, investor and second home purchases are considered more stable and lucrative mortgages. There are already more stringent underwriting standards and equity standards, so it seems this could have the opposite effect. Maybe the goal is to slow investors to encourage owner occupied instead?

As it stands today investor and second homes already make up more than 7% of the 12 month moving average. To your point, lenders will need to reduce the number of loans to stay under that average. It seems the best way to limit investor and second home loans, will mean either higher qualification standards or more expensive loans. This is bad news for investors seeking conventional financing. 

This article also points out that half of all rental units are 1-4 unit multifamily, so there is risk to supply or cost of rental housing to low income tenants in particular.

http://www.mortgagenewsdaily.c...

The article also points out that these investor loans are lower risk, therefore they offset riskier loans. That can have the net effect of less risky loans being approved, meaning lower qualified applicants will have more difficulty. This will disproportionately affect minorities. 

It seems like this is bad for investors and will ultimately hurt low income tenants and lower qualified home buyers. Thanks for posting, this is good information for investors to have.