Here's some potentially good news for investors from the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac.
James Lockhart, who runs the agency, says there's been some "re-thinking" underway on the controversial limits on the numbers of rental properties investors can own if they're seeking new financing.
Current investor loan limitations:
Both Fannie Mae and Freddie Mac have imposed a four-unit limit, reversing their previous investor maximum of ten units.
The rationale for the change, according to the agencies, was their belief that investors who own higher numbers of rental condos and houses pose a greater risk of default, foreclosure and loss for the companies.
The restriction effectively shut out many small investors from Fannie's and Freddie's standard programs -- and pushed them into much higher-cost financing from so-called "hard money" lenders.
Perhaps a change is on the way?
In a letter to Charles McMillan, president of the National Association of Realtors, Lockhart said, "While no final decisions have been made, I can share with you the fact that the issue of raising the selling guide ceiling on investors loans is under active consideration at one of the (corporations), and reflects an appreciation of the role for investors in the housing recovery."
Realty Times obtained a copy of Lockhart's letter to McMillan, which was intended to respond to issues raised at the Realtors' annual convention in Orlando in November, where Lockhart spoke to two sessions. Lockhart did not disclose which company may soften its rule, but when one changes its standards, the other typically follows suit.
Reducing inventory will ultimately lead towards a stabilization of the housing market. With many economic markets in turmoil and housing prices having tanked in countless markets, real estate is beginning to get a second look from investors.
If Freddie and Fannie loosen the four-home limit imposed on investors and those investors have the financial means, they will most likely buy more than four homes since values in many areas are becoming increasingly attractive.
Real appraisals, a few dollars invested towards a down payment, and providing full documentation ... if an investor meets the said requirements, why shouldn't they be allowed to obtain lending to buy more than four properties?
Some investors may believe the headlines and assume that nobody's lending money anymore -- and certainly not for small residential rental projects.
The assertion:
But the reality is a little better than that. If you can come up with a downpayment, and are prepared to document income, assets and a solid appraised value, there are still some willing and able funding channels open to you.
Who's lending:
Portfolio lenders such as regional or smaller banks and savings institutions who continue to offer carefully-underwritten, specialized niche products for small investors.
Second, Fannie Mae and Freddie Mac, who continue to fund single and multifamily loans, although with lots more restrictions than before.
And finally -- if either of these two don't work for you -- you can explore the so-called "hard money" lending route, which will almost certainly cost you a lot more.
Caveat #1:
Let's start with number one: As just one example, Home Savings of America in El Segundo, California, still offers jumbo investor loans on one to four unit rental properties with a proprietary "pay option" adjustable-rate program, according to loan officer John W. Barnes.
You've got to sink some serious equity into the deal up front: Maximum loan-to-value ratio is 60 percent and you need to come to the table with a minimum 680 FICO score.
Caveat #2:
There are also some geographic limitations, but if you get through these hoops, you might qualify for a fully-indexed 6.65 percent rate, with a 40-year term and an "MTA" index tied to the average monthly yield of Treasury securities over a one year period.
Caveat #3:
For investors looking for a more plain-vanilla, 30-year, fixed rate mortgage, Fannie Mae continues to offer loans to rental property purchasers. But again, you need solid equity up front and higher credit scores than in the past. Even on loans with 30 percent down, Fannie is tagging on a 1.75 percent adverse market delivery fee on investor mortgages. Once you're over 80 percent LTV, the fee goes to 3.75 points.
No other options:
Finally, if all else fails, there is traditional "hard money" financing -- just ask local mortgage brokers who's in the market with the best programs. Since hard money investors are all about collateral and yield, be prepared to put a lot into the deal up front, and to pay double digit rates over a relatively short term.
My thoughts - Hmmm?
Caveat #1: Who has 40% to put down on a property? A 100k investment and you need 40k for a down payment, 80k for a 200k investment, 120k for a 300k investment. Perhaps you could use your equity line. Oh, that's right, most equity lines have been closed by the banks because values in many local housing markets have been battered. They're cutting limits on credit cards too, so be careful with the cash advance at 26%!
Caveat #2: Geographical limitations, if ... you might ... you could get. Better yet, use that 400k wad of cash you have sitting idle under your pillow and purchase a few homes in Las Vegas, NV and Phoenix, AZ. Home values in these locales have dropped significantly and you can buy 20-30% below today's battered values. In all seriousness, these will be good markets again and values are becoming very attractive. Take a closer look even though you may not have the 400k wad of cash under your pillow.
Caveat #3: Fannie Mae offers great loans. You only need high credit scores, solid equity positions, paying steep points (1.75%) with 30% down, paying hard money type points (3.75%), with 20% down. Again, who has the down payment and, if you do, can you make the numbers work with the associated fees? Perhaps I should back up and address my thought, "Can you make the numbers work?" That should be your first glaring indicator that there may be a problem. If you're trying to make the numbers work, need I say more?
The Hard Money Option: If you're rehabbing and reselling properties this is a viable short-term option. For a "rental property", this option is ludicrous unless you have the ability to refinance into one of the above-mentioned programs.
In short, for the average housing boom investor, the same investor who has foreclosed on homes and/or is hanging on for dear life, these are not plausible options. In fact, these options are nothing short of laughable.
If you're one of the few investors who actually figured all of this out. The same investor who usually figures it out. There's plenty of funding available, with plenty of options, because you have plenty of cash. You indeed, as always, are a small minority.
In conclusion, Harney's basic premise is right, the banks are lending to investors. However, the practical reality of his assertion is much different.
Getting an investor loan is like going into the supermarket to buy a turkey for your Thanksgiving gathering. The supermarket only has one 4lb turkey left when you need a 20lb turkey. The 4lb turkey costs $200.00 and the only method of payment the supermarket will accept is a cash advance from one of your credit cards.
Can you get a turkey, sure. Does it meet your needs, absolutely not. I'll let you ponder whether this is the return to fundamentals that we need or just more of the extremes. The drunken irrational exuberance of the housing boom has turned into a never-ending hangover.
Carlos Rossi anyone? Help yourself, it's in the refrigerator, top-shelf .... yeah the cardboard box. Drink up, your hangover will be gone before you know it.
Where's the Federal Funds Rate headed? Currently sitting at 1.50%, the markets are now nearly split whether they think the Feds will drop the rate to either 1.00% or 0.75% (a 50 bps cut moves the Fed Funds Rate to 1.00% while a 75 bps cut would drop the rate to 0.75%):
The FOMC meeting is now upon us. The two-day FOMC meeting is scheduled for Tuesday, October 28, 2008 with the Fed Funds Rate decision made during the Wednesday, October 29, 2008 meeting:
Home equity lines, home equity loans, or any other loans tied to the Fed Funds Rate, barring any unexpected surprises, will be getting more attractive once again.
On a 100k loan, a 50 bps cut will make your money another $500 cheaper over the span of a year. A 75 bps cut will make your money another $750 cheaper of the span of a year.
Since the June 29, 2006 meeting, the Feds have dropped the rates from 5.25% to 1.50%, a drop of 3.75%. Again, on a 100k loan tied to the Fed Funds Rate, your money has gotten $3,750 cheaper over the span of a year, $312.50 per month, $10.27 each day!
For real estate investors using their equity to fund their purchases, these rate cuts translate into phenomenal savings. Couple these savings with home values that have dropped significantly in many locales and a volatile stock market, it's no wonder that real estate is beginning to look attractive once again.
A return to fundamentals and improving cash flow scenarios translates into more real estate investors. With deals to be had, investors will continue to enter the market in greater numbers; ultimately chipping away at these huge inventory levels one REO and foreclosure at a time.
Washington, D.C. - The apartment market remains healthy although rental demand is slowing, said Ron Witten, president of Witten Advisors LLC, speaking this week at the National Association of Home Builders' (NAHB) Fall Construction Forecast Conference.
Witten said that apartment occupancy level has decreased by only half a point in the past 12 months, and is now at 95 percent on a national basis. Rent growth continues, but it has declined from 4 to 5 percent at its peak in 2006-07 to 2.3 percent in the second quarter this year.
"Fundamentals are still quite good in the multifamily rental sector," said Witten.
However, he said that rental demand is "definitely" declining. Witten said the "real threat" to apartments comes from the single-family "shadow" rental market. However, he added that in early-2008 there was a significant trailing off in rental singlefamily move-ins due to renters' avoidance of living in remote locations because of high gas prices.
Witten forecasts that job losses will continue through 2009 before modestly recovering in 2010, and he said there will be a "strong" 2011.
Witten said there are about 100,000 units of empty apartments, which is not a big overhang given the base of about 20 million-plus apartment properties. He said no significant progress will be made in reducing the inventory as long as there are job losses through the end of 2009.
"This is the only housing sector that is not oversupplied," he said. 2009 he said will see the end of job losses, and by the end of 2010, any excess inventory will be "behind us."
David Seiders, chief economist of NAHB, said at the forecast that there has been a strong increase in multifamily rental production in the past year. However, he said the NAHB forecasts this increase was "overdone" and expects a decline in apartment starts, which will continue for about a year before stabilizing.
We believe the rental market in general should remain strong due to the misfortune of large numbers of homeowners who have lost their homes, are continuing to lose their homes, and will ultimately be forced to rent.
The single-family residential dwellings should begin to present an increasingly larger drag on apartment type rentals as more homes will continue to flood the market due to the sub-prime / credit crisis and investors, in increasingly larger numbers, will begin to take advantage of attractive and significantly lower housing prices now found in many of the overheated markets.
Record numbers of Silicon Valley homeowners have been foreclosed upon this year, and most must seek rental housing once they leave their homes. If tenant-occupied houses are in foreclosure, tenants nearly always get evicted, pushing them into the rental market again. And many renters who could afford to buy homes size up the bleak economy and opt not to take on mortgages and home ownership.
The result: It's a competitive market for those seeking reasonably priced rentals, and it's a pretty good time to be a landlord.
"The rental market has definitely become tighter in the sense that rents are going up," said Martin Eichner of Project Sentinel in Sunnyvale, an organization that provides landlord-tenant dispute resolution services, as well as foreclosure prevention help.
Average apartment rents rose 5.2 percent in Santa Clara County in the third quarter, to $1,708 a month, according to RealFacts, a Marin County firm that measures average monthly rents for all types of units in complexes of at least 50 units.
But rent increases in the third quarter were not as steep as in the second quarter, a sign of the softening economy. And RealFacts said apartment complexes were 95.6 percent full in the July-to-September quarter, down from 96.7 percent a year earlier.
One reason apartment occupancy rates are slipping is that more single-family houses are coming onto the market as rentals, said Joshua Howard, executive director of the local division of the California Apartment Association. Some of those houses are previous foreclosures that were purchased by investors.
"That's providing competition to multi-unit buildings," Howard said. "The rental housing economy has more options available right now."
Again, this trend will continue and should become more pronounced as the housing market begins to find a bottom. Many markets may not have bottomed in terms of pricing, but leveling inventories (this past year has brought subsiding rates of vigorously increasing inventory levels found in many markets during 2006 and 2007), steady rental rates, battered housing prices, and a volatile stock market are all favorable indicators leading a fair number of investors to believe that they can hear some homes rightfully screaming, "it's time, buy me!"
