New Limits on Investment Financing — What Does this Mean for FIG?Apr 06, 2021
"About a month ago, Fannie Mae came out and said they are reassessing their portfolio and the number of loans that they are going to allow. They also stated that they do not want their portfolio of second homes and investment properties to exceed 7% of all loan volume that's originated through these conventional loan channels..."
It's April of 2021 and we're already getting a lot of calls on something that's happened in the lending world over the last month or so. If you are an investor who's constantly looking at industry news or financing news, you may have already come across this at one point or another. We'll go through all the details here, below.
To give a little bit of background, Fannie Mae and Freddie Mac are the two institutions that essentially create the guidelines for investment property financing programs. These programs/loans can then be offered by banks. When a loan is originated and closed, it is packaged and sold into the secondary market to then be traded like a security.
This process allows investors to come in and finance properties in bulk. Fannie Mae and Freddie Mac, when it comes to the Fourplex Investment Group, are the loans that we utilize and secure for investors because they truly are great programs. They allow for 30-year fixed financing. The interest rates are very low. The financing process, as far as guidelines/underwriting is much easier than a commercial program.
So here's the news...
About a month ago, Fannie Mae came out and said they are reassessing their portfolio and the number of loans that they are going to allow. They also stated that they do not want their portfolio of second homes and investment properties to exceed 7% of all loan volume that's originated through these conventional loan channels.
Now, historically, these loans on second homes and investment properties for Fannie Mae and Freddie Mac have been in the 11-14% range of their portfolio. This means that they're asking all of the lenders that originate investment property loans to scale back.
This announcement kind of came out of nowhere and threw everyone a little off guard. At this point, we've spent about a month or so dissecting it and want to give an update on what this means to investors.
Fannie Mae is in conservatorship with the government. Or in other words, the Treasury, who was in charge of Fannie Mae and helps make these rules, more or less reached out to Fannie Mae and made them put the statement out.
They reached out to lenders who do a very high volume of investment property financing to say "we need you to pull back a little bit. Your numbers are too high." Then they had a round of other lenders that they reached out to said, "here's your warning." And then the third round of notifications to lenders saying, essentially, "you guys are good, just kind of keep an eye on it."
All of these phone calls have been made at this point. First Colony Mortage (FIG's preferred lender), received a call as well. Our numbers were pretty close to that 7% line, but they essentially told us that we need to keep our numbers under 7% moving forward or else we do not get to originate investment property financing at all.
This is something lenders are taking very seriously. There will be some prioritizing as things calibrate a little bit. When it comes to First Colony Mortage's relationship with FIG—FIG loans and FIG investors for individuals coming out of construction and into their long-term loan is a major priority for us to be able to take care of FIG investors on their financing.
You may have issues trying to do a rate-term refinance or a cash-out refinance for the next 3-6 months on an investment property that is already own in your portfolio that already has a long-term loan attached to it. These are going to be the types of loans that lenders are going to look at and say they're going to hold back on for a little bit as they try to get their numbers in line.
This does not mean investment property financing is going away. It might be limited in the sense of its scope for the next 3-6 months. But what does that mean in the long term?
Essentially, investment property financing and investment loans have performed very well for the last 10-12 years since the recession happened (2008-2011). Fannie Mae and Freddie Mac are giving up a large chunk of the market for loans that are performing very well. We don't know if it will take 6 months, 12 months, or 18 months... but there will be other securities formed where someone's going to come in and capitalize on the piece of the market that Fannie Mae and Freddie Mac walked away from.
And they essentially walked away for no reason other than they wanted to recalibrate what the size of their portfolio was in order to meet some guidelines in their paperwork, or what their representations are to their stockholders.
There might come a time that they reassess this and decide they're going to open it back up above 7%. The reasons behind their change are essentially part of the CARES act which allows tenants to continue to default on rent payments, and for landlords to continue their mortgage payments in forbearance through the end of 2021.
We think there are still question marks as to what this will look like when loans come out of forbearance or when these tenants are required to reconcile with their landlords. A lot of states which have been closed are continuing to reopen.
It could be temporary in nature. The guidance we've been given so far has been minimal.
As of right now, and as far as this concerns FIG, it's still business as usual. If any additional changes or information come out that is relevant to FIG investors, we'll do another update keep you posted.