Rental prop last call Fed Gov't: 7% cap on rental prop mortgages

[Chris Mason]

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

March 11, 2021

"The letter focuses on thenew 7 percent limitation on acquisitions of loans secured by second homes or investment properties. All limits are measured as 52-week moving averages. As the investor and second home share of acquisitions is already above 7 percent and has been since 2013, this new rule will certainly have an impact."

TLDR: an individual bank or lender that sells to Fannie/Freddie can have, at most, 7% of their mortgages be on rental properties or 2nd homes. Right now, most lenders are above that, by a lot. Moving forward, however, 93% or more must be owner occupant mortgages. That announcement came out earlier this week. If someone selling a good or service needs to cap a certain type of sale to meet some threshold, 7% in this case, what's the most obvious way to do that? JACK UP THE PRICES. If a Bic Mac were to suddenly be 50% more expensive, but the Double Cheeseburger price didn't change, they'd sell a lot more Double Cheeseburgers moving forward, no? 

Lo, and behold, one of the main lenders, specifically one that I did a *lot* of rental property loans with before the pandemic, just came out with this, this morning.

As the image indicates, that 4.125% was 2.125% just yesterday. That's dollar for dollar with discount points, so if X% rate yesterday with that lender was 0.5 discount points, today it just got 2 points higher, so that exact same rate today, with that lender, will be 2.5%. On a $500k mortgages, that's $10,000 in extra fees!

Not all lenders have come out with their new rules for how they are going to cap their rental mortgages at 7% of total volume. Not as of right now, anyways, but it's certainly coming.

A short list of things a bank/lender can do to cap their rental properties at 7%:

- Increase fee/rate to deter business (the above being an example, just about doubling their price overnight!).

- Not allow the use of rental income.

- Require more reserves.

- Automatically deny the loan if short term rental income appears anywhere on tax returns.

- Have a higher minimum FICO score.

- Decrease the number of total financed properties. Fannie says 10, historically we have seen 6 and 4 and 2 be the cap at various points in history and with various lenders.
- Some combination of all of these.

Basically the gist of it is going to be "hey, if only 7% of our loans can be non-owner occupied, let's make sure it's the lowest risk and/or highest profit 7% we can possibly make it."  If you are in that "lowest risk" category -- your W2 job supports all rental properties without consideration of rental income, you have a 780 FICO, and you have a million dollars in liquid reserve -- you can probably ignore all of this. If that's not you... well...

These changes will be rolling out, across banks and lenders, over the next few days, weeks at most. So if that rental property or 2nd home refi was on your "to do" list, I strongly urge you to get it started and the rate locked ASAP.