Leave it to the government to take a crippled housing market (which they helped destroy) and make it worse by prolonging its recovery.
Regulators have taken a loose and passive role watching the housing bubble inflate. Now, true to their nature, regulators are making the problem worse with their slow response and lack of real-world solutions.
Real estate investors, in my opinion, have been unfairly squeezed by the ever tightening underwriting guidelines. We are dealing with larger down payments, higher credit scores, larger cash reserves, and lower debt-to-income ratios.
As a real estate investor, Fannie Mae and Freddie Mac require you to have a bullet proof credit profile to even be considered for financing. When you consider that investors put up a larger down payment than most home buyers, require better credit, and typically research and buy investment property with a cash-on-cash return, lenders and regulators should be more willing to finance these solid transactions. They would also help solve the housing crisis by reducing the excess foreclosure inventory sought by rehabbers and wholesalers.
Current Fannie Mae and Freddie Mac Policies
- There is a four (4) property limit.
Where is the rational thinking here? Why would you limit the number of properties that a well qualified investor can buy? The answer is that we are dealing with the same regulators that helped bring us the crisis in the first place!
- Increased down payment, FICO score, and cash reserves for properties 5 thru 10.
Those two policies alone have stifled the road to recovery quite effectively. Wall Street investors have pretty much avoided buying 5th thru 10th mortgage loans, although this is slowly changing. And most lenders have avoided that market altogether, which continues to defy logic.
- Ignore income on properties owned less than two years.
Underwriters are penalizing investors on properties owned less than two years by ignoring the income generated from those properties. Additionally, they are factoring in the annual debt service of the properties on top of the investor's existing debt load. This destroys their debt-to-income ratios and likely disqualifies them from financing.
- First time investors must prove they have two years of management experience.
Huh!? If they are "first time" investors, how could Freddie Mac expect them to have two years of management experience? What are we missing here? Do they want to effectively guarantee that even the most qualified first time investor gets disqualified?!
Think of all of the experienced investors with strong credit, sufficient investment capital, and adequate cash reserves that would be disqualified because of these illogical policies.
Thousands, if not tens-of-thousands of properties, foreclosures included, remain unsold as a direct result of these nonsensical underwriting guidelines.
Recommendations and Solutions
- Bring back HUD's 203(k) rehab loan.
The Department of Housing and Urban Development (HUD) has a Section 203(k) program for the rehabilitation and repair of single family properties. It is an important tool for community and neighborhood revitalization and for expanding homeownership opportunities. This loan program would help investors buy and rehabilitate a lot of the existing foreclosure inventory around the country. A true win-win.
- Eliminate the current FHA 90-day seasoning requirement.
The Federal Housing Administration (FHA) will not insure a loan for the buyer of your property if you, the seller, have owned it less than 90 days. Regardless of whether you bought the property through a short sale, at an auction, or from a bank or wholesaler, you cannot sell it to an FHA qualified buyer until after the 90 days. This is especially problematic when nearly 25% of the buyers today are buying with FHA financing.
Note: On September 1, 2009, the rule was relaxed somewhat. FHA now allows for a waiver when the property is owned by a bank or some other foreclosing entity. It also allows for a relaxation of the rule when a home is sold by a state or federal agency.
- Remove limits on the number of mortgage loans allowed for investment property.
By removing the limit on second home and investment property mortgages an investor can carry, we allow professional investors to take advantage of the excess housing inventory we see in markets all around the country. These limits are nothing more than unnecessary shackles on professional investors.
- Base appraisals on what the market is willing pay, not what lenders are willing to lend.
Appraisers must first make apple-to-apple comparisons when valuing properties. Too many appraisals are being skewed by foreclosures and other distressed properties. Days on market should also be considered as well as the number of offers received. The bottom line is market value should be based on what the market is willing to pay.
Without massive action by the government and regulators in a positive investor-friendly direction, we are unlikely to see massive improvement in the housing market for a long time.
I am a real estate investor in this time. I agree it is very hard to buy up and fix these foreclosures using bank financing. We really need to get this government to understand that to help fix this they need us investors.
The 90 day seasoning clause is painfully affecting my business. And I hate that the rules were relaxed for the banks and local governments. That doesn’t help me, the investor, who needs to put food on the table.
I don’t use financing and thus maintain purchasing at a fair price below value. It kills me that I’m played to be the bad guy who is taking advantage of people…really, how much do soda companies make off each can? Everyone is out for a profit, why would I do this if I couldn’t make a profit?
Around August-September 2009, Fannie Mae and Freddie Mac have relinquished the “4-Property Limit” Policy back to the maximum of 10-Property Limit. It should be pointed out, however, that this includes ALL properties (primary and investment) that are financed by a lender and owned by the Investor (i.e., HELOC, Conventional, etc.). The number of loans the Investor has is pointed out in the Investor’s Credit Report. It may be true, however, that properties five through ten, will require the Investor to put down a larger down payment, achieve and have higher FICO scores, and have approximately 6-8 months of Cash Reserves (Savings Accounts, Money Market Funds, etc.), this practice is unfortunately, being enforced upon the Investor by the Lenders. As a result, acquiring financing on the Investor’s fifth property to a maximum of ten will be tougher to acquire.
I agree though, that if Government is handcuffing professional RE Investors for the mess that is created, there may be some merit to that; however, I think it is because of careless lending practices that many Lenders offered to consumers and Investors alike. It was extremely easy to get financing several years ago. Whose fault was this? Who allowed this kind of financing? Wasn’t it the Government? Think of the many Credit Card offers people were getting a few years ago, as well as, Mortgage Loans to purchase homes and investment properties. I received more Credit Card and Mortgage Loan offers in the mail than anyone can shake a stick at!
The offered “Recommendations and Solutions” is a great start to the housing recovery for all Americans. Unless Government understands what it would take to recover from this financial mess, Americans will continue to be stagnant, stifled, and no place to go, but to allow the economy to continue to deteriorate and see additional foreclosures on the market everywhere. It’s going to take years before we really see any kind of recovery at all on “Main Street.”
UPDATE: It appears that yesterday (Friday, January 15th, 2009) the FHA has rescinded its 90-day anti-flipping rule for a period of 1 year, and will allow FHA buyers to obtain loans on properties that have been recently purchased by investors.
If you enjoy reading legal-eze, then you can read more here:
http://www.hud.gov/offices/hsg/sfh/waivpropflip2010.pdf