Issues refinancing investment property

[Eric Bailey]

I have a single-family residence as an investement property that I have been trying to refinance for a while now. The lenders I've visited with have not wanted to do the loan because of Regulation Z. Last quote I received today was 4.125% interest on a 75% LTV on a single-family residence with 3.18 points. They would not do less than 3.18 points and are telling me that they cannot charge more than 3% of the total loan in points AND fees. The quote on fees was $3,100 and the points was $3,816. I don't see how anyone ever refinances a home under circumstances like this. Its getting hard to see how the little guy ever gets started in this business if the greedy banks are going to keep their foot on our throat.

$120,000 loan, property worth ~$160,000, located in NM.  Talked to a local bank and two national banks about refinancing in the last 60 days.  Owe less than $60k on the mortgage currently.  My credit score is right around 700.  

What am I missing?

[Chris Mason]

You can thank our fearless policy makers. As of March 2021, each lender is capped at a maximum of 7% of their business being 2nd homes and investment properties. That number was traditionally at 10% to 14%, so in many cases banks have had to reduce that type of lending by a full 50%.

Pile on top of that the fact that in the mortgage biz, revenue comes from the loan sizes, while expenses come from the number of loans. That means if a lender does a single $500k loan, that lender is wildly more profitable than if they did 5 loans for $100k each. Same revenue comes in, since it's $500k of biz in either case, but the 5 loans for $100k comes with 5 times the expenses! Imagine a tenant that calls you 5x as frequently to fix dumb little things as another tenant, both paying the same in rent... which tenant are you going to offer lease renewal to, if you had to pick between the two? You would of course keep the more profitable tenant. 

For the time being, independent mortgage brokers have a pretty staggering advantage for 2nd homes and rental properties, just by virtue of the wholesale mortgage channel having far more market efficiency. That's not a "call me" plug or a "call my company plug," it's true of ANY independent mortgage broker ANYWHERE in the country right now, the entire mortgage distribution channel has an advantage. The whole "work with multiple lenders" thing means that as a lender dips below 7%, they lower rates/fees for 2nd homes and rentals, mortgage brokers see that, plug the gap. Another lender does a bunch of owner occupant biz and not a lot of rental properties, they lower their rates/fees, brokers fill the gap. Rinse and repeat. A direct lender has a 'do not compete' cause with their bank that is also their employer, they can't go doing that, they have to send their business to the place they work for, and if they're at 9% trying to taper to 7%, tough cookies for both the loan officer and the consumer/investor.