We are in the middle of a very serious financial crisis in this country and around the world, yet a real solution is being missed. Let me take it a step further: Intervention by the powers that be are making a real solution harder to achieve. What exactly am I talking about? The initial cause of the financial crisis, if you recall, was the so-called sub-prime problem. Loans were being written down by the banks because of the perceived lack of value in them. To this day the greater percentage of these loans are still intact, but most of the banks are not.. Following the discovery of the "toxic" loans, we found real estate had been falling and sales of real estate started slowing. The die was cast and all sorts of discoveries were made about the entire financial system, from banks to brokerage houses, from insurance companies to giant mortgage lenders. The collapse was beginning.
Now everyone is looking for a way out even though it is right in front on their eyes. Although this isn't a chicken and egg riddle, there is some discussion whether the loan problems hurt the real estate or whether the falling real estate prices escalated the problems in the lending industry. I favor the argument that falling prices hurt the loan industry. If you subscribe to that theory then the answer to this financial mess is to do everything possible to get real estate moving again. It is that simple! If real estate prices increase home owners will have more equity, toxic loans will start to move in the right direction where they become a percentage of the value of their security, real estate, instead of the security being a percentage of the loan.
If ridiculous rules had not been foisted upon the lending community this could have already happened. I don't think it was an accident that real estate picked up steam to the downside when Fannie Mae and Freddie Mac started surcharging loans that they offer to the public. Along with the surcharge were restrictions and program changes that may have strengthen their financial position, although their isn't evidence about that as yet, but it did slow down real estate dramatically. Jumbo loans, those whose balances are higher than conforming loans purchased by Fannie and Freddie, haven't come out of the freeze as yet which makes anything Fannie and Freddie does more significant.
Let me give you some examples of what I am talking about. There has always been a premium for a loan for an investment property. In the past it was anywhere from 1% to 1.5%. Now it is 1.75% up to 75% of the value of the property and 3% for a loan that is over 75%. On a $300,000 loan the actual dollar charge was $3000 to $4500; now it is $5250 to $9000. This money is just to take an investor loan. There is more coming.
If your credit score is under 720 and you wish to go to 75% on the loan, for any loan that amortizes longer than 15 years, there is another charge. This charge applies to all borrowers on any property usage, principal residence,second homes or investor. At a 75% loan to value the charge goes from .25% for a borrower with credit scores from 720-739; 1.5% for 680-699 and 3% from 620 to 659. On a $300,000 loan the charges go from $750 to $9000. Nine Thousand Dollars!
Let's recap: As an investor with a 740 credit score buying a single family residence that will be rented with at least a 25% downpayment seeking a $300,000 loan the charge will be $5250. An investor in the same situation with a 680 credit score will have charges of $9750. Any investor with a credit score of 659 or less will have to pay 4.75 points which totals $14,250 to get the loan. (how many of the borrowers with a 659 credit score would you count on to buy a rental?)
We aren't finished yet. If you wish to borrow on a property of 2 to 4 units, owner occupied or investor, add another point (1%). In the example above the total charges would be $8250 to $17,250. This does not include any points paid to buy down an interest rate or closing costs. Do you really think this is helping lure people into buying investment real estate, or on the other hand keeping rents low?
Now, believe it or not if you have 4 mortgages including your personal residence you can't get a loan from Fannie or Freddie anyway. They will not make the 5th loan. One major lender will not make a loan to anyone who owns three properties in the same zip code even if those are owned free and clear.
I am just getting warmed up but the column needs to end. I will address in future columns other problems that have arisen that seem, at least to me, to be detering people from getting into real estate. In the meanwhile think about what I have written and see if you have any thoughts about the reasonableness of these rules. It just feels like the lyrics of an old song,"about pouring water on a drowning man"!
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