Fannie Mae announced that they are limiting new loans secured by second homes or investment properties to 7% of the overall loans they purchase (roughly HALF their historic levels!), effective April 1.

What does this mean to borrowers seeking investment or 2nd home mortgages? Turns out, it means A LOT.

Demand for second homes surged during the pandemic, thanks to the option to work from anywhere — be it a Hamptons cottage, Vermont farmhouse or Malibu beach home — and urban shutdowns. Mortgage applications for second homes were up 84 percent year-over-year in January — more than double the increase for primary homes.

Second homes and investment properties don’t align with Fannie Mae and Freddie Mac’s missions to make homeownership affordable, said officials at the Federal Housing Financing Agency. The agency, which oversees the two corporations, negotiated the changes with the Treasury Department.

While Fannie did not add any new "loan level pricing adjustments" (the fees borrowers pay for various perceived risk factors) in the announcement, many mortgage lenders added (or will soon add) substantial costs to these loans.

For example, Penny Mac (who buys large numbers of Fannie/Freddie loans from originating lenders), immediately added a 2.25% cost to new 2nd home mortgages, regardless of equity. The pricing adjustment for a new investment property loan with less than 25% equity rose to a staggering 5% of the loan size ($10,000 on a $200k loan!).

While not every investor raised their pricing adjustments immediately after Fannie's announcement, most eventually will, as they seek to avoid closing second home/investment loans they can't be certain Fannie/Freddie will purchase due to the 7% cap.

Note, these are just the NEW investor pricing adjustments based on Fannie's announcement and substantial others may still apply based on credit scores, loan purpose, property type, equity, etc. As a reminder, Fannie/Freddie also added a .5% cost to all refinances over $125K last fall as the pandemic increased defaults and forbearances.

The impact for certain housing markets (such as FL condos, which historically have a large percentage of second homes and investment ownership) is significant.

Fortunately, loans in process that are already locked will not be subject to the new adjustments, but floating loans almost certainly will be.

Freddie Mac is already in compliance with the new limits. Fannie Mae has asked lenders to comply by June 1.

Bottom line: Demand for second homes and investment properties will be greatly impacted by Fannie's policy. Expect to see far more cash buyers for these situations, and (more than likely) fewer bidding wars as the new pricing adjustments raise rates and costs.

Outside investors may eventually purchase more of these loans (which is FHFA's goal), but for the moment, prepare to pay substantially higher costs, or cash for that getaway condo or rental property!

Source: Mortgage News