On March 10, the Federal Housing Finance Agency (FHFA) announced that Fannie Mae and Freddie Mac would limit their buying of second home and investment mortgages to just 7% of their total portfolio. Compared to previous activity, this means that the companies will engage in about 50% less second home and investment property buying.
Fannie and Freddie serve a vital role in the mortgage market. A lender may originate a mortgage loan, but they rarely actually hold onto and manage the loan. Instead, they sell it, allowing some other entity to “service” the mortgage by collecting payments and managing the escrow account.
Fannie Mae and Freddie Mac are by the far the biggest buyers of mortgages on the secondary market. Because they are “government-sponsored entities,” the loans they buy are guaranteed by the government. Fannie and Freddie will buy any conforming loan—loans that meet their specific criteria. For 2021, the conforming loan limit is $548,250 for most areas in the U.S.
This greatly reduces the risk for lenders, making mortgages cheaper for all Americans.
Leading up to the financial crisis in 2008, Fannie Mae and Freddie Mac were buying a lot of risky loans, in addition to the standard loans they typically buy. When the economy collapsed, the companies required a government bailout.
At that point the FHFA became the conservator of the two mortgage giants. As such, the FHFA has regulatory oversight of the two companies, and made the recent announcement in an effort to reduce the companies’ overall risk. It is likely this move is related to uncertainty in the housing market due to COVID-19.
While the full impact of the announcement is not yet known, the news is not likely to be welcomed by real estate investors or those seeking a second home.
Combined, Fannie Mae and Freddie Mac purchase about 66% of all mortgages in the U.S. Now that the companies will be buying fewer second home and investment mortgages, it will be harder for lenders to resell the loans on the secondary mortgage market.
With fewer buyers, lenders will be taking on more risk in originating these types of loans. To compensate for the increased risk, mortgage lenders will likely increase rates.
According to Mortgage News Daily, Penny Mac—a lender not connected to Fannie or Freddie—“immediately added a 2.25% cost to new second home mortgages, regardless of equity.” It is likely other lenders will follow suit.
In addition to higher fees, the move will likely negatively impact housing prices in communities where a high percentage of homes are owned by investors or are second homes. When mortgages become more expensive—which will likely happen due to this case—it puts negative pressure on property prices.
In time, it’s possible that a new buyer of these loans will emerge and costs for these mortgages will decline once again. But in the meantime, investors and second-home owners are facing the prospect of much higher fees for a mortgage.