Big blow for second homes and investment mortgages
Fannie Mae announced on March 10 that she was limiting new loans secured by second homes or investment property to 7% of the total loans they buy (roughly HALF of their historical levels!), Starting on the 1st. April. What does this mean for borrowers looking for investments / 2 home loans? Turns out it means A LOT.
While Fannie didn’t add any new “loan-level pricing adjustments” (the fees borrowers pay for various perceived risk factors) to the ad, many mortgage lenders added (or will soon add) substantial costs to these loans. For example, Penny Mac (who buys a lot of Fannie / Freddie loans from original lenders) immediately added a 2.25% cost to new second mortgages regardless of equity. The price adjustment for a new investment home loan with less than 25% equity has increased to 5% of the loan amount ($ 10,000 on a $ 200,000 loan!).
While not all investors increased their price adjustments immediately after Fannie’s announcement, most will end up, because they are looking to avoid closing second home / investment loans, they cannot be sure that Fannie / Freddie will buy (due to the 7% cap mentioned above)
Note that these are only NEW price adjustments for investors based on Fannie’s announcement and still others apply based on credit scores, purpose of loan, type of property, equity, etc. As a reminder, Fannie / Freddie also added a 0.5% cost to all refinancings over $ 125,000 last fall as the pandemic increased defaults and abstentions.
The impact for some housing markets (such as FL condos, which historically have a high percentage of second homes / investment property) cannot be overstated. If you are considering purchasing a second home, it is essential that you immediately contact your lender to discuss how this announcement will affect your loan rates and costs.
Fortunately, outstanding loans that are already blocked will be do not be subject to the new adjustments, but floating loans almost certainly will.
At the end of the line, the demand for second homes and investment properties will be strongly impacted by Fannie’s policy. Expect to see a lot more cash buyers for these situations, and (more than likely) a lot less bidding wars as the new price adjustments drive up rates and costs. Outside investors can potentially buy more of these loans (which is the goal of the FHFA), but for now, be prepared to pay significantly higher costs, or cash for that leaky condo or rental property. !