Poorly executed loan oversight dragging down lending rates
One of the most troublesome issues arising from this tightened underwriting centered on how the limit on second homes and investment property would be enforced. After all, lenders who underwrite loans for Fannie and Freddie don’t do so in a uniform mix. Depending on location and customer base, some may have a high ratio of homebuyers; others may have a high ratio of investors or people looking for the perfect getaway cottage.
Logically, you’d think these different populations would be taken into account, and a 7% limit would be imposed on the entirety of the group of lenders, using some kind of tool during the underwriting process to ensure there weren’t too many loans of the wrong sort being written. Unfortunately, that’s now how it ended up shaking out.
Allegedly, what happened was that Fannie and Freddie were limiting these investment loans on a per-lender basis, not a global scale. It caused a serious, disproportionate interruption in funding for investors who previously had relied on conventional mortgages to cover their properties. Instead of all investment loans being limited to 7% of the total, each lender was limited to just 7% of their loans being written as such.
Now, this may sound like a case of six of one, half a dozen of the other (or, you know, “it’s all basically even”), but when you consider that some of the lenders in question wrote almost no investment loans, and others wrote a whole bunch, what you get is a massive decrease in the number of available loans for investors. In reality, far fewer than 7% of loans were made to investment or second homebuyers.
There’s a serious need for affordable housing that investors are able to provide (if they can get the funding they need) and the Treasury Department seems to recognize that.
“The suspension of these PSPA requirements recognizes that FHFA has the authority and responsibility for the Enterprises’ safety and soundness and to foster housing finance markets that support sustainable homeownership, and is not intended to stimulate aggregate housing demand, given current conditions in the housing market,” explained a Sept.14, 2021, press release from the Treasury. The press release went on to say: