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Fannie Mae and Freddie Mac recently announced that they will be allowing banks to have only 7% of their books as second homes or investment properties. In this episode we discuss what these limits mean for small time investors.  --- Transcript   Tom: Greetings, and welcome to The Remote Real Estate Investor. On this episode we're going to be talking about a topic that came up recently on Reddit, it was related to Fannie and Freddie Mac's new announcement that they will only be allowing banks to have 7% of their books as second home and investment properties. We're going to talk about broadly what that means, kind of some crystal ball thoughts on how that could impact remote investors and real estate investors in general, and just kind of riff on it. So Alright, let's do it.   Welcome back, everybody. So before we get into it, just a reminder, this is the hosts opinions and thoughts. This is not opinions and musings of Roofstock. This is this interesting news came out. But before we get into it, who do we have on the call right now? Who am I co hosting with today?   Micheal: Michael Albaum,   Emil: Emil Shour   Tom: Awesome. Alright, so let's unpack this news that came out today related to Fannie and Freddie's guidelines around allowing banks to only have 7% of the books as second homes and investment properties. So Michael, do you want to lead with an initial little speech about a kind of unpacking this this update?   Michael: Yeah, totally. So I mean, it's really interesting that they came out with this announcement, and that they're really going to be limiting the amount of loans that they're purchasing, which is I'm imagining going to have an upstream a pretty dramatic upstream effect on folks. And so basically, as it stands right now, when somebody goes to buy a home, for as an owner occupant, they can typically get what's called a conventional loan through a lender, then that's bought on the secondary market by Fannie or Freddie, these government backed institutions, and they subsidize the cost of the loan, which is why the interest rates tend to be so low versus going to a hard money lender or a private lender, the rates tend to be a bit higher.   So investors can do this too, we can go get conventional loans, or conventional lender that gets sold in the secondary market for investment properties, we tend to pay a little bit of a higher interest rate, because it's not our primary residence, and that's perceived as a higher risk. But we can still get access to very cheap debt.   Now, the fact that Fannie and Freddie are going to be limiting the amount of total investment and second home loans on their books means that they're just going to be buying a whole lot less of the investment property and second home mortgages from those origination lenders. So I think that it's going to force a lot of investors to have to go outside the conventional route. And they'll probably be looking more towards commercial and private capital, my guess is there's going to be some new players that emerge in the space to service those types of loans, because now there's a real opportunity, investors are not going to slow down acquisitions, any, they're just going to have to pay a bit more for the debt. And so the the days of super, super cheap debt being backed by the federal government, probably behind us, and I think it was, as of April 1, these new guidelines are going into effect.   Tom: Yeah, you know, I guess, like kind of down the line, it's going to be tighter for investors, you know, loading up on conventional loading loans for investment properties. And I guess it's the same, but for owner occupied buying those properties, it's just, I guess, frees up a lot of those traditional lenders to just serve as more of those type of loans.   Michael: Yeah, I think we're gonna see a lot more house hacking because of that.   Emil: I wonder if this just means, you know, banks make money every time they do a loan, right? They make money on closing costs, all the fees that they charge to originate a loan, all that stuff. I wonder if you know, will the fact that investors they can do less investor loans? Is that going to cut into their revenue enough? where they're going to have to start just trying to do more owner occupant loans? And do they loosen the standards there? And then do we get a run up of people buying owner occupant? Do you have something like we saw, I don't know 2007 2008? Where it's easier than ever to get a loan, even if you're less qualified as an owner occupant driving prices?   I don't know if the investor market is that significant of a revenue stream for a lot of these lenders. But that could be something interesting that comes out of it. No idea.   Tom: I don’t know you'd like in getting like doing refinances all of them are so so busy, I wonder if this is an exercise, just to kind of slow down the amount of volume, you know, that Fannie and Freddie are taking, you know, I think they're shrinking the by, you know, putting this limitation on in second homes and investment properties, this surely is going to tighten up the number of loans that they're originating. So I wonder if this is like purposeful, just to to limit that liability of how many additional loans they're taking on, you know?   Michael: Kind of similar to Emil’s point, I would be curious to know of the refi surge, how many of those have been investment properties versus owner occupant properties? That's a good question. I don't I don't know how we find the answer to that. But I'd be very curious. And also, like you mentioned about the profit margin coming from investors versus owner occupants. I've got to imagine I mean, investors, we talked to agents to like, investors buy tons and tons of properties regularly. They're buying and selling, buying and selling constantly versus your owner occupant. That's a once in a several year typically occasion. And so if you can have investors on your books, I would imagine that they're more of a repeat customer more regularly than your owner occupants. So it seems almost counterintuitive that they would want to decrease the amount of mortgages that Investors are able to get.   Emil: It looks like this is being disguised as better underwriting, making sure that there's less chance for default and things. I actually think that it's the opposite. Those are the ones that default more. I mean, if you look back to 2008, it wasn't, yes, there were tons of investors losing homes, too. But it was a lot of just owner occupants losing their homes. So I wonder like, is this a way to help more people be able to get into homes so less investors are going for single family homes so more owner occupants can get into? I wonder what the dynamics at play are here besides what they're kind of saying is just smarter underwriting or whatever.   Michael: But it seems that they already have that a bit with the pricing as it stands today, prior to these, right, you're gonna pay usually around 1% more and your interest rate, because of the fact that it's an investment property versus owner occupant. So there already does seem to be incentives to be an owner occupant buying a property and with low down payment requirements, I mean, there's a higher down payment requirement for investment property.   So it feels like they already have that. But maybe you're right, maybe this is just an additional layer that says, hey, you can't even get a loan from Fannie or Freddie as an investor, you know, if their limits are full for that year.   I mean, this might change the buying cycle two for folks, and that if they look at the calendar year, January to December, well, 7%, if it fills up in January, well, maybe we're Tough luck, everybody buying in April, May or June.   Tom: I'm marinating in my opinions are forming as we're having this discussion. So something that I like, just thinking about this a little bit further, that doesn't sit with me, like super well is, you know, this is very much impacting us as investors like individual, you know, investors, and what an advantage for like bigger companies that have big institutional lines of credits to buying now that it it's less competitive for individual investors…   Michael: Yeah!   Tom: …to get, you know, cheaper debt. So this just hit me right now and thinking about it. I mean, if I'm an institutional investor, and I'm competing against individual retail investors, this is great news. And that retails, one of their strongest points is being able to get really cheap debt through Fannie and Freddie back loans, it's going to be less available for them. So I don't know, this just kind of hit me just thinking about it right now. Like, you know, foods and of the different players that's involved, like, Who is this hurting? And the little bit, but I think it's still going to be available, I don't think it's going to completely dry up being able to do conventional loan for investment properties. But you know, I think it's going to be just a little bit less accessible, these really cheap, cheap kind of debt that you get.   Michael: So do you think that's going to drive prices in kind of that middle market where the institutions don't play and the kind of, you know, one off investors don't play where it's kind of the more semi sophisticated kind of professional investors play that now that they can't get access to some of that cheap, cheap debt? Getting it's gonna drive prices up or down?   Tom: I think possibly. I mean, I wouldn't, I wouldn't anticipate, you know, big swings…   Michael: Come on Tom 50% swings!   Tom: I think in the larger markets, I think there's so much institutional money buying stuff like I don't think you'll really see much of a difference. But perhaps in those first year in secondary markets, there could be some impact. And again, as I said, in the beginning episode, this is all our our hosts pontificating on this news updates. I don't know, Michael, I mean, maybe a little bit and some of the smaller markets, but I wouldn't anticipate the larger markets where it's already just so competitive, both from the owner oxide as well as institutions that are buying?   Emil: I don't think so either. I think you think about the small investor like us who's using conventional financing to go buy single family homes, that is a drop in the bucket of the overall people buying single family homes, I think about owner occupant, and then once you start really growing a portfolio, you can't even get conventional loans anyway. So like you're getting private money anyway. So I think the interesting opportunity here might be you touched on a little bit in the beginning of the episode is, is there growth in private lending now? Like, can more private lenders enter the game to help these smaller investors get into investment properties?   Michael: Yeah, something I talk about a lot in the academy is oftentimes new investors, I mean, myself included, look at loan products and see one at 4%. And one, two, and three quarters presenting, oh, my God, I have to go with the two and three quarters, it just makes so much more sense. When at the end of the day, if you look at the loan amount, and what that actually translates to, and what your monthly payment look like, you know, on a 65-75-$80,000 loan, even that one and a quarter percent spread might only be 35-40 bucks a month difference.   And yes, that would be better to have than not, but if you have to jump through all these hoops, and it might be more expensive to go even the traditional route, you know, sometimes it's just worth it to pay a little bit more and just be done with it for ease of transaction for ease of scaling. And so I just did that recently. I just got a private loan. It was at 4%. It's a commercial product on a triplex I own it was a little bit expensive, like my total closing costs, including points was like 3.7% of the loan amount, which isn't that unreasonable for a loan and especially for a private loan and 4%, like that's just not that unreasonable for an investment property. So I think that we just really need to understand and recognize that yeah, if that's our only option. Let's just go do it. And as long as the numbers still make sense, awesome, like, there will be a time down the road when interest rates will be less than they are now, maybe or there'll be higher, and that 4% will seem like a screaming deal. Right? And if they go lower, I'll refinance.   Tom: That's interesting, Michael, I mean, you know, you had a triplex and with four units and below, you could have gone for a more conventional loan, which is, you know, drawing up a little bit right, with this new announcement, what made you go private, right away, is it just the maxed out the number?   Michael: so it's interesting, I couldn't actually go conventional, because I am technically self employed. And I don't have two years of tax returns to show. And so Fannie and Freddie, nobody will lend to that's a requirement for my understanding for Fannie Freddie loans, you need to have the self employed for two years, and show that on your tax returns not be employed for two years. So if you started in May, in a given year, you're kind of up a creek without a paddle, so to speak.   So that was the big hurdle for me, I could have got something probably in the low to mid threes. But at the end of the day, this was so easy to get, and I could get it it was available to me. So I said, Let's jump on it.   Tom: Yeah.   Emil: So what's the big takeaway here for our listeners?   Michael: No price changes, go talk to your private lenders. Yeah, I think just exploring all the different options that are available, still talk to your lenders, your conventional lenders, and absolutely look to take advantage of local lenders as well, who can often be a bit more flexible, technically, that could be considered a private lender, in that there, they might not be regulated by Fannie and Freddie as much because they're not selling those loans at they're keeping those loans on their books, they can be a lot more flexible, and so they're likely not going to be subject to these the same requirements, since they're not selling their loans on the secondary market anyhow.   Tom: My takeaway would be to build your bench of conventional lenders, just because you might find some, you know, don't want to underwrite for investment loans with you, and some may have some more flexibility. So, you know, it's not like a monogamous relationship of you know, once you find a lender, you're only using that lender, lender.   So there are, as Michael said, there are local lenders, there are national lenders and meet a lot of people, a lot of lenders out there that don't limit yourself to one if one will not, you know, for whatever reason, maybe they're impacted by this change with Freddie and Fannie, in the secondary market, you know, some might be more impacted than others based on their current portfolio of loans that they have out. So, you know, get out and mingle, you know, meet some lenders meet some, as you're sourcing new conventional loans.   Emil: If you have a lender who is pre approved, you check in with them, make sure you're still good. Make sure everything you know, if you're out shopping, just check with your lender, make sure it'll still be good April 1st.   Tom: Awesome. I think that's great, guys, as always, thank you very much for listening. Have a great rest of your weekend. If you're listening to this weekend wisdom on the weekend, and if you liked the episode, subscribe like us all that good stuff and as always, happy investing.   Michael: Happy investing.   Emil: Happy investing.