What To Know About New Changes To Lending Rules And Its Effect

Dated: May 17 2021

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On March 10, 2021, Freddie Mac and Fannie Mae announced that they will buy fewer second-home and investment mortgages.  Although the news did not set the real estate market into a downward spiral, it is now raising concerns for consumers as well as for real estate professionals. 

Freddie Mac surveys lenders each week on the rates, fees, and points for the most popular mortgage products.  The high demand for second homes and investment properties prompted the Federal Housing Finance Agency (FHFA) to make some changes.  In the March letter sent to mortgage lenders, Fannie Mae said, “Recent amendments to our senior preferred stock purchase agreement with Treasury impose additional risk criteria on the loans we acquire.  One of those restrictions is a 7% limit on our acquisition of single-family mortgage loans secured by the second home and investment properties." 

 What does all this mean for the real estate industry? Even though the long-term consequences of such changes are not yet entirely clear, some real estate markets are seeing a fast shift.  Below are some essential considerations. 

 Challenges In Resort Markets

During the last year, we have witnessed one of the biggest spikes in second-home purchases as well as investment properties.  Such behavior was boosted by all-time-low interest rates on mortgages, which resulted in a surge in home prices. 

 Today, inventory continues to be at a historic low and there is no sign of the trend reversing soon, but chances are that if a home buyer is shopping for a mortgage for a second home in a resort market, they will find an unpleasant surprise.  Buyers who are already pre-qualified by a lender shouldn’t be shocked to find out about a possible “surcharge” or even loan denial after getting their offer accepted and going under contract. 

 Real Estate Professionals Must Work Ahead Of The Curve 

Knowledge is king. Many real estate professionals are not even aware of the changes and how this is affecting the immediate present and near future.  Being informed and knowledgeable sets you apart from the competition while representing both buyers and sellers. 

As the lending options are now more scarce, real estate professionals representing buyers purchasing a second home or investment property with financing will need to be guided and connected with a lender that can process such a loan.  While there will always be a lending product available to purchase a home, the fluctuation of interest rates between lenders could vary greatly and change the affordability.  A couple of local relationships with trusted lenders will not be enough as most financial institutions will be likely to change terms and conditions quickly and often. 

 Sellers interested in accepting an offer contingent on a loan should, via their agent, get involved and make contact with the buyer’s agent and their lender to confirm that everyone is aware of any changes. 

 A Riskier Future For Resort Market Lenders 

 According to Florida Realtors, the new FHFA 7% rule for second homes means lenders might not be able to sell a second home loan to Fannie Mae and Freddie Mac even if they followed all the qualified mortgage rules, which raises lenders’ risks. 

There is no doubt that the changes to lending will not only impact real estate transactions but also the real estate value.  With low-interest rates, buyers have been pushing the limits on affordability but with higher interest rates or without a buffet of lending options available, the demand is bound to drop. 

 Resort real estate markets will level off from an extreme seller’s market to a more balanced one.  All of the factors mentioned above are likely to also plateau or lower property values.  Ultimately, as an action-reaction, real estate agents will also be left with slower business and fewer transactions. The 

Light At The End Of The Tunnel 

With change comes opportunity. Extensive local relationships with lenders and knowledge will set one real estate agent apart from another.  It will be essential to extend relationships with lenders and have weekly calls to ask about updates. 

The current trends show that adjustable-rate mortgage products are making a huge comeback.  Such loans typically are portfolio loans, meaning that they are financed and owned by the financial institution that is offering the product and not sold to third parties.  For example, 10/1 year ARM seems to be one of the most popular as it is likely that a second homeowner will either sell or refinance after 10 years of ownership. Savings of an ARM loan with a low-interest rate today may be a smart decision and fit into the buying strategy. 

Conventional lending is still offered, but it is likely that it will be offered at a high premium.  It is essential to remind clients to fully understand the differences between conventional, ARM, portfolio, and other lending options.  And while being knowledgeable will set you ahead of the competition, it is important to remember that real estate professionals are not financial advisors. 

 Change is not always perceived with excitement, but there are always ways to use creativity and knowledge to succeed in real estate investing.

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Greg Higgins

I am a partner at Cygnus Real Estate with over 11 years experience in home sales, income properties and property management. I am a licensed broker with a GRI designation. ....

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