Former President Obama once said “elections have consequences”. President Biden’s team that oversees the two mortgage clearing houses Fannie Mae and Freddie Mac put in place new directives that change the focus of who these two giant Government Service Enterprises (that’s what Fannie and Freddie technically are) serve.
Before we dive into today’s topic, I want to let you know that I have a solution to all this, but it’s at the end of the article. I had to come back and put this note in, before someone were to start reading and freak out!
Fannie and Freddie were established to provide liquidity to the housing market. Specifically, they were created to allow more Americans to fulfil the dream of homeownership. Without going too deep into how the entire system works, Fannie and Freddie buy mortgages from lenders, replenishing their capital so they can lend again. Fannie and Freddie convert these millions of mortgages into bonds which are sold to investors on the open market. When the bonds are sold, Fannie and Freddie get their money back to once again buy more mortgages from lenders. And to round out this brief tutorial, the people that buy all these bonds are generally large institutional investors such as insurance companies and both government and private employee retirement systems. Basically, any investment group that needs to balance the risk of stocks with stable bonds for their portfolio – that’s who is buying all the mortgages.
Fannie and Freddie buy all sorts of mortgages. During the period leading up to the financial collapse of 2008, they were even buying the stated income and no-doc loans. Rules were put in place after the crash that requires loans purchased by Fannie and Freddie to meet rigid guidelines. That’s why we will not see another incident like 2008 happen again.
Fannie and Freddie today not only buy loans for those fulfilling their dream of homeownership, they also buy loans for those purchasing second homes and investment properties. And that’s where the big change has been made. Fannie and Freddie have been mandated to focus primarily on owner-occupant mortgages.
That may sound like a great goal, but here is how they will achieve it. Instead of focusing on ways to better serve the owner-occupant segment, they instead will penalize everyone else! If you are wanting financing for a second home or investment property, they’ll still buy the loan from your lender – except they will assess huge fees on your lender to buy that loan. In plain speak, they’re jacking up the rates on second home and investor loans.
An argument can be raised as to why the government should help people that already own a home buy a second home. Or for that matter, why help people buy investment properties? Except that the system isn’t broken. Those wishing to get financing for an owner-occupant property don’t face issues of obtaining financing due to liquidity issues. There’s plenty of money available to that segment.
The reason for this change is how I started this article. Fannie and Freddie are changing their focus because of a difference in philosophy from those appointed by the current President to govern Fannie and Freddie.
Prior to this change, rates for second homes were the same for an owner-occupant rate. Afterall, a second home is in theory, an extension of where you live for a portion of the year. The new assessment for second homes has made rates skyrocket. Let’s do a quick comparison:
The current 30-Year Fixed rate for and owner-occupant putting 20% down is roughly 4.000% without paying any points. The assessment for an 80% loan on a second home is now 3.375 points! To try and compare that to a zero-point loan, the rate would be around 5.375%.
This is the point where I had to go back to the beginning of the article and let you know there’s a solution.
In this article we’ve addressed the changes happening with loans sold to Fannie Mae and Freddie Mac. While these two giants currently represent about 70% of all mortgages originated, that still leaves 30% they don’t touch. Many banks still offer reasonable rates for second homes and investors. The way they do it is simple. They don’t sell those loans to Fannie and Freddie. Instead, they fund the loans through their depository assets and retain the loans in their own portfolios. Which ironically is what Fannie and Freddie hoped would happen. They want the marketplace to service the need for second home and investor financing and leave them out of it.
So how do portfolio rates compare to the new Fannie and Freddie rates? Using the same scenario as above, 20% down on a second home purchase, the current 30-Year Fixed rate is 4.250% with zero points.
How will you know if the lender you are talking to will offers a portfolio borrowing option? Even without asking, you’ll know just by seeing the huge spread between the owner-occupant and second home rates.
Not every bank offers portfolio products. Not every broker has a broker agreement with banks offering portfolio products. If financing for a second home or investment property is in your future, it is even more critical today to compare rates than ever before. And to avoid the need for you to email me, yes, our company provides portfolio financing from the most competitive banks, both here and on the mainland.