The FHFA's tariff increase guidelines have been repealed
Buying an investment property or a second home could soon be cheaper thanks to a temporary rollback to the Federal Housing Finance Agency's guidelines earlier this year.
The new rule, enacted back in January, restricted Fannie Mae and Freddie Mac's ability to purchase loans for second homes and investment properties. As a result, the interest rates and fees on these mortgages for borrowers increased.
Now that the rule has been paused, those rates and fees should go down again – making investment properties and vacation home loans cheaper for buyers, at least in the short term.
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The FHFA's announcement – and what it means
Under the FHFA rule that went into effect a few months ago, investment and second home loans could represent only 7% of Fannie Mae and Freddie Mac's loan portfolio. That is, of all the loans they buy from lenders, only a very small fraction could come from this sector.
The rule posed a problem for mortgage lenders and borrowers alike.
For one thing, historically, Fannie and Freddie are buying a lot more of these loans than the rule allows. According to the Urban Institute, from 2017 to 2019, loans for second homes and investment properties made up over 10% of their portfolio.
Therefore, setting this limit for the GSEs would mean a few things:
Lenders would take more risks with investment and second home loans. With Fannie and Freddie limited in purchasing these mortgages, there was a much greater chance the lender would have to keep the loan – and all of the risk involved. Lenders want to avoid risk at all costsLenders have had to pass this risk on to borrowers. This ultimately meant higher fees and rates. According to Mortgage News Daily, Penny Mac added a 2.25% upfront fee after the rule went into effect. Others have instead increased their mortgage ratesThis also led to stricter lending requirements. To reduce their risk and ensure they are lending to the most responsible and skilled borrowers, lenders have asked for higher down payments or, in some cases, have withdrawn significantly from investment property and second home loans
This latest FHFA message pauses the 7% rule – and any changes associated with it.
This is to help make investment and second home loans more affordable and easier to come by.
As the US Treasury Department put it, “A major challenge facing the US housing market today is insufficient housing supply. The administration concentrates on promoting housing stability, which also includes the further development of housing policy, which can sustainably increase the stock of affordable rental and owner-occupied apartments. "
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How much will mortgage interest rates for investment properties decrease?
Removing this 7% limit will almost certainly result in lower interest rates and fees for borrowers, but it is unclear how much lower.
It is up to lenders to determine how to act in this lower risk environment, whether through reduced interest rates, the elimination of upfront fees, or both.
If lenders withdraw the associated fees entirely, it could be significant. In the case of Penny Mac, which charged a 2.25% fee, that would save $ 4,500 on a $ 200,000 loan.
When do price changes take effect?
The 7% limit was paused immediately, but that doesn't mean lenders need to take immediate action.
While you can certainly start by lending more second homes and investment properties – and incentivizing investors with lower rates and fees – that doesn't mean they will. It could take several weeks or months for lenders to come back up and take advantage of the benefits.
Remember, however, that the FHFA's newest move is just a break. The 7% rule will be suspended while the agency reviews it more closely, so any savings currently being made can be temporary.
If you're a long-term investor or are looking at second homes or investment properties for the next year, this can be a whole different ball game.
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