Correct me if I am wrong, but the main thing hurting the economy is real estate—specifically too much real estate that is sitting empty because of an epidemic of foreclosures. There are many ways to deal with this, but the most direct way is to have people buy these “empty” homes and take them off the market. Again we have to figure out who is most likely to do that for the good of the country, and hopefully themselves? You basically have two homebuyer choices: those who will live in these places, whether it be a primary residence or a second home; and those who will buy the properties and rent them to prospective tenants. That being said, I am of the opinion that those who will buy homes as income property will outnumber those who will be buying them as their own residences.
What group of buyers would you think are the least favorite of Fannie Mae and Freddie Mac, even now that Fannie and Freddie have been taken over by the government? Who else but investors! What am I missing? If real estate would turn around, so would the economy. Besides me, who else made that very statement this weekend? None other than Alan Greenspan, former head of the Federal Reserve. As of the day I am writing this column, we have new charges for non-owner occupied borrowers—in other words, investors—who seek financing up to 75% loan to value (LTV). The investor must now put up 1.75% (points) just to get a Fannie Mae or Freddie Mac loan. From 75% to 80% LTV, which means a 20% to 24.99% down payment, the points go up to 3.00% (3 points). Over 80% which means less than 20% down the cost is 3.75% (3 and 3/4 points). I don’t know about you, but this type of treatment seems counterproductive.
Freddie Mac has already passed a rule that says if you finance more than four properties, they will not buy the loan. Fannie Mae, reluctant to go along with Freddie Mac on everything, will go to 10 mortgages on 10 properties, but charges an extra .25 in rate on all loans beyond the fourth one. In January they are going to give in and drop it to four total mortgages to meet Freddie Mac’s rule. Before January, however, Fannie has a four-loan limit on second homes and investment properties and a four-loan limit when financing using conforming jumbos. Unless you have a lot of cash, it seems that owning a number of houses is “out of the question.” Again, this doesn’t appear to be the way I would encourage people to go out and buy real estate. My next question: do the “powers that be” know this is going on? And if they do, is this copacetic with them?
Just recently, an investor client followed my suggestion and consolidate all his loans. He had seven loans and we turned them into two loans on two properties so he had room to buy more real estate. That won’t happen again as the allowable LTV in investment real estate cash-out loans has been reduced from 90% to 75%, making the above almost impossible. Now that I have talked about the “small” costs of being an investor in real estate, let me get serious. If you are interested in a duplex, the additional cost is 1/2 of a point, while a tri-plex or four-plex has an additional 1 point cost.
Let’s add this up. If you are buying an investment property, your minimum points to Fannie Mae and Freddie Mac are 1.75 and your maximum (3 or 4 unit with 19% down) would be 4.75 points. On a $400,000 property we are looking at $7,000 to $19,000. But that is just for starters. If your credit score is below 720, and you don’t want a 10- or 15-year fully amortized loan or a 40% down payment, there are additional cost for your FICO/LTV relationship. The hits (costs) will range from .5 point to 2.75 points. And the beat goes on! All of these costs are before any cost to buy down the loan or the closing costs associated with the loan. On that $400,000 loan, you have costs of $12,000 to nearly $30,000 to fund the loan for a non-owner occupied house or units. That seems like a pretty good deterrent to anyone thinking about investing in real estate.
Now that you have made it through all the boring and factual info, what does this all mean? These fees show how diligent we are in closing the barn door once the horse has gone. We are saying to the regulators that we aren’t ever going to let this housing crisis again, so we’ll soak “speculators” and “house flippers” with big upfront costs. That way, we’ll stop their “buying sprees” which inflate home prices and load up the system with dodgy mortgages…right? Not so fast, friends. A lot of people who own multiple income properties are average, hardworking Americans who are investing in real estate for their families’ future. They are not big companies, con artists or slumlords. So, is overcharging such ordinary investors the way to prevent another housing collapse? A resounding NO! Now that we have taken the fluff out of the value of houses, why are we being extra-careful to tamp down speculation when it wasn’t being done before when prices were vastly higher? News flash: we need more homes sales, not fewer.
People who feel that Fannie and Freddie are correct in discouraging the purchase of investor real estate had better make sure they have good financials, plenty of reserves and a very low cost of living because this crisis could easily become long term. If real estate stays in hibernation, you will quickly see how the ongoing ripple effect can turn into a tidal wave of problems in this economy. The simple solution is to help those who can help the real estate crisis—in other words, to motivate home buyers by giving them reasonable access to capital. We are subverting this solution by looking to punish anyone who remotely fits the profile of the “housing offenders” continuously dredged up by the media—people who bought too much real estate, people who took on too much mortgage debt. I close by asking a simple question: where are our leaders?