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Tighter Constraints on the Horizon for Second Homes and Investment Properties

Posted by Anna Deibert on Mar 19, 2021 8:13:11 AM

3.19.21Mortgageblog

On March 11, 2021, Fannie Mae announced in Lender Letter LL-2021-08 that they are implementing a tighter restriction on Second Homes and Investment properties.

 

This restriction came about after a recent agreement between FHFA and the U.S. Department of Treasury jointly deciding not to restructure the government-sponsored enterprises (GSE’s), Fannie Mae and Freddie Mac, and allowing the entities to retain more of their earnings. However, FHFA is stating this still may not be an adequate amount of money to avoid failure if there is another housing crisis. Some see this as a great risk for the market, predicting the GSE’s will focus on raising profit margins rather than helping serve the underserved communities, first-time homebuyers, and properties such as second homes and investments.

 

 

One of the key terms stated in the agreed amendments to the PSPA (Preferred Stock Purchase Agreement) - “limit risk to the GSEs by keeping certain higher-risk single-family mortgage acquisitions at current levels” - may affect how some of our Marksman lenders set their pricing, particularly these bullet points under that key term:

  • The GSEs will limit the acquisition of single-family mortgage loans with multiple higher risk characteristics at their current levels.
  • A maximum of 6% of purchase money mortgages and maximum of 3% of refinancing mortgages over the trailing 52-week period can have two or more higher risk characteristics at origination: combined loan-to-value.
  • (LTV) greater than 90%; debt-to-income ratio greater than 45%; and FICO (or equivalent credit score) less than 680.
  • The GSEs will limit the acquisition of single-family mortgage loans secured by second homes and investment properties to 7% of single-family acquisitions — aligned with their current levels — over the preceding 52-week period.
  • The GSEs will limit the acquisition of single-family mortgage loans to (i) qualified mortgages, (ii) loans exempt from the CFPB’s ability-to-repay requirement, (iii) loans for investment property subject to the restrictions above, (iv) refinancing loans with streamlined underwriting for high loan-to-value ratios, (v) loans originated with temporary underwriting flexibilities due to exigent circumstances, and (vi) loans secured by manufactured housing.

 

Due to the limited acquisitions allowed, Fannie Mae is now requiring second homes and investment properties to be underwritten with Desktop Underwriter and receive an approve/eligible recommendation and be delivered as a DU loan. This policy change will go into effect on April 1, 2021. We are already seeing some lenders increase LLPA adjustments for second homes and investments, making these loans very unappealing to discourage buyers. Additional lenders are restricting second home and investment pricing completely.

 

Freddie Mac has not officially submitted a separate announcement, but the agreement indicates that they will follow Fannie Mae. If you have any questions about these upcoming changes, don't hesitate to reach out to our support team for additional information. 

 

 

Additional sources regarding conservatorship and the amended PSPA can be found at the below links: