FHFA rate increase policies have been rescinded
It may soon be cheaper to buy an investment property or a second home, thanks to a temporary rollback of policies put in place by the Federal Housing Finance Agency earlier this year.
The new law, which was enacted 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 for those mortgages have gone up for borrowers.
Now that the rule is paused, those rates and fees should come back down — making investment properties and vacation home loans cheaper for buyers, in the short term at least.
Check your investment mortgage rates today (December 28, 2021)
FHFA Declaration – What does it mean
According to the FHFA rule that was put in place a few months ago, investment loans and second home loans can only make up 7% of Fannie Mae and Freddie Mac’s loan portfolio. This means that of all the loans they buy from lenders, a very small portion can come from this sector.
The rule has been a problem for mortgage lenders and borrowers alike.
First, Fannie and Freddie have historically bought more of these loans than the norm would allow. According to the Urban Institute, for a large part of 2017 through 2019, real estate and investment loans for second estates made up more than 10% of their investment portfolios.
So, putting this limit on GSEs means a few things:
- Lenders will take on more risk with investing and second home loans. With Fannie and Freddy limited in their purchases of these mortgages, there was a much higher chance that the lender would have to hold on to the loan—and all the risk involved. Lenders like to avoid risk at all costs
- Lenders had to pass that risk on to borrowers. This ultimately means higher fees and rates. According to Mortgage News Daily, Penny Mac added a 2.25% upfront fee after the rule went into effect. Others raised mortgage interest rates instead
- It also led to stricter lending requirements. To reduce their risk and ensure that they are lending to the most responsible and qualified borrowers, lenders have required larger down payments or, in some cases, fallen back on investment properties and second home loans significantly.
Latest FHFA news pauses the 7% rule – and all the changes that came with it.
This would help make investment and second home loans affordable and easy to obtain.
As expressed by the US Treasury, “The main challenge for the US housing market today is a housing shortage. The administration is focused on promoting housing stability, which includes developing housing policies that can sustainably increase the stock of affordable housing units for rent and ownership. “.
Check eligibility for investment property or second home loan (December 28, 2021)
How low will investment mortgage rates go?
Removing this 7% limit will almost certainly result in lower interest rates and fees for borrowers, but it is unclear exactly how much.
It will be up to lenders to decide how they will conduct themselves in this low-risk environment, whether that is through reduced rates, removal of upfront fees, or both.
If lenders roll back the related fees entirely, that could be significant. In the case of Penny Mac, which charged a fee of 2.25%, that means $4,500 saved on the top $200,000 loan.
When will the price changes take effect?
The 7% threshold rule is paused immediately, but that doesn’t mean lenders have to take action right away.
While they can certainly start issuing more home and investment property loans – and incentivize investors with lower rates and fees – that doesn’t mean they will. It may take a number of weeks or months for lenders to build up and utilize their reserves.
Keep in mind, however, that the FHFA’s final move is only a pause. The 7% rule is pending while the agency reviews it fully, so any savings you have now may be temporary.
If you’re a long-term investor or looking for a second home or investment properties for the next year, it could be a very different ball game.
Show me today’s rates (December 28, 2021)
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