How do the changes in the investment property lending rules affect local investors?

The demand for housing in Utah is high, thanks to a strong economy and job market that attract people to, and keep people in, the Beehive State. Economic forecasters foresee the demand continuing to grow as the population continues to swell, making investment properties, such as apartment complexes and rentals, a promising venture. However, a tightened federal lending rule could present challenges for investors, in that it could make getting mortgage loans for these types of properties more difficult and, in many instances, more expensive.

Real estate professionals can prepare to help their clients navigate the changes brought on by the rule by being informed about the newer, more stringent lending regulations, having a clear understanding of available mortgage products and being connected to a trusted lender.

For background, in January, the U.S. Department of the Treasury and the Federal Housing Finance Agency (FHFA) announced an agreement to amend the Preferred Stock Purchase Agreements between the Treasury and both Fannie Mae and Freddie Mac, which the FHFA oversees.

To clarify, Fannie Mae and Freddie Mac are government-sponsored entities, also known as GSEs. Their role in the housing finance system is to buy mortgages from banks and other lenders on the secondary mortgage market. Lenders can then use the funds they make on the sale of mortgages to provide more loans to more borrowers. Ultimately, this ensures stability and affordability in the mortgage market.

The amendment to the Preferred Stock Purchase Agreements imposes a 7 percent cap on the number of investment property mortgages (and also second-home mortgages) Fannie Mae and Freddie Mac can purchase from the nation’s mortgage lenders. Essentially, that means that mortgage loans secured by investment properties and second homes cannot exceed 7 percent of the total volume that is sold to the GSEs by any one lender. Previously, there had been no limit.

According to the FHFA, the amendment ensures that Fannie Mae and Freddie Mac’s business activities are “consistent with their mission” to support homeownership.

But what does this mean for real estate investors and borrowers in Utah, where ever-expanding numbers of renters make investment properties appealing?

With the institution of the 7 percent cap, lenders can’t be certain they’ll be able to sell their investment property and second-home loans to Fannie Mae or Freddie Mac. If they aren’t able to sell, many lenders will be forced to reduce the number of loans they originate and begin shifting the cost onto borrowers. Loans for investment properties have always been more expensive than owner-occupied homes, but due to this rule, they could potentially be even more costly, with higher interest rates and additional fees.

If investors hear that costs have increased, they might be tempted to back away from a purchase. However, they should know that other options are available and that higher interest rates shouldn’t be the end of the conversation. Real estate professionals can encourage buyers to connect with local lenders who have access to portfolio funds and capital, and can keep these types of loans in-house rather than sell them on the secondary market.

Some local community banks have created investment portfolios in response to this rule change. The new loans will help keep customers from encountering higher rates and fees when borrowing for investment properties.

In the coming months, a number of new mortgage products will more than likely become available.

Some advice for real estate professionals and investors alike: Stay ahead of the curve. Stay on top of the different type of mortgage products, like portfolio mortgage loans. Study how such a loan could fit into an investment strategy. Find a lender who is willing to explain the rules of the market, mortgage products and all the available options. Ask questions. A good lender will be an expert on regulations and available products and will have the borrower’s interest top of mind.

John Serfustini is an assistant vice president and secondary marketing manager for Bank of Utah.