It may soon be cheaper to buy an investment property or second home, thanks to a temporary roll-back of policies set by the Federal Housing Finance Agency earlier this year.
The new rule, enacted back in January, limited Fannie Mae and Freddie Mac’s ability to purchase second home and investment property loans. As a result, interest rates and fees on those mortgages went up for borrowers.
Now that the rule has been paused, those rates and fees should come back down — making investment properties and vacation home loans cheaper for buyers, at least in the short term.
FHFA’s announcement — and what it means
According to the FHFA rule put in place a few months ago, investment and second home loans could only make up a mere 7% of Fannie Mae’s and Freddie Mac’s loan portfolio. That means out of all the loans they purchase 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, Fannie and Freddie historically buy many more of these loans than the rule allowed. According to the Urban Institute, in much of 2017 through 2019, second home and investment property loans accounted for over 10% of their portfolios.
Therefore, placing this limit on the GSEs would mean a few things:
- Lenders would take on more risk with investment and second home loans. With Fannie and Freddie limited in their purchases of these mortgages, there was a much bigger chance the lender would have to hold onto the loan — and all the risk it came with. Lenders like to avoid risk at all costs
- Lenders had to pass that risk onto borrowers. This ultimately meant higher fees and rates. According to Mortgage News Daily, Penny Mac actually added a 2.25% upfront fee after the rule went into effect. Others increased their mortgage interest rates instead
- It also led to stricter lending requirements. To reduce their risk and ensure they were lending to the most responsible and qualified borrowers, lenders required bigger down payments or, in some cases, pulled back on investment property and second home loans considerably
This latest FHFA news pauses the 7% rule — and all the changes that came with it.
This should help make investment and second property loans more affordable and easier to come by.
As the U.S. Treasury Department put it, “A principal challenge for the U.S. residential housing market today is inadequate housing supply. The Administration is focused on promoting housing stability, which includes advancing housing policies that can sustainably increase the stock of affordable housing units for rent and ownership.“
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