Banking, finance, and taxes

Fannie Mae Readies Implementation of New Rules on Loans for Vacation Homes

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As the COVID-19 pandemic worsened last year, there was a mini-landrush to sparsely populated parts of the country as city dwellers tried to escape the coronavirus by minimizing exposure to other people. Some Americans moved and some purchased second homes.

In a report on home equity increases for 2020, CoreLogic said that of the 10 states where home prices appreciated the most last year, seven were located in the western United States. If you purchased a second home last year, you may have gotten in under the wire of a change to federal policy that could make it tougher to get a mortgage.

Fannie Mae (FNMA), the government-sponsored entity that buys mortgage loans and packages them into mortgage-backed securities (MBS), has notified mortgage lenders that changes to the rules governing loans that Fannie can acquire will now be limited to 7% of loans secured by second homes or investment properties. The limits are measured on 52-week moving averages and, according to a report in Mortgage News Daily, that limitation has been met or exceeded since 2013. After the change becomes effective on April 21, Fannie Mae will only purchase such loans until the 7% limitation is met.

Also included in the rule changes are limitations on the ability of government-sponsored enterprises (GSEs) — Fannie Mae and Freddie Mac (FMCC) — to purchase high-risk, single-family loans to 6% of their purchase money mortgages and 3% of their refinance mortgages.

Last December, the U.S. Supreme Court heard arguments in a case that could determine the fate of nearly $300 billion in Fannie and Freddie profits that are earmarked to go to the federal treasury under the terms of the conservatorship under which the GSEs have operated since 2012. Investors in the two GSEs, unsurprisingly, want some of those profits. The court has not yet issued its ruling in the case.

Former Federal Housing Finance Agency (FHFA) director Mark Calabria pushed hard to end the federal conservatorship of Fannie and Freddie before the change in presidential administrations on January 20. The change to the preferred stock purchase agreement (PSPA) rules was announced on January 4.

The Urban Institute last month issued a brief asking the Biden administration to revisit the previous administration’s change to the senior PSPAs that govern the terms of the U.S. Treasury’s relationship with Fannie Mae and Freddie Mac.

The Urban Institute says these changes are “an ineffective means of managing risk and will come at considerable cost [and] will further diminish access to credit for families of color and undermine policymakers’ ability to better serve the mortgage market on several other fronts. … [T]he changes should be revised or abandoned.”

Fannie Mae stock was trading well off its 52-week high of $3.25, at around $1.90, while Freddie Mac shares traded around $1.85, also well short of their 52-week high of $3.08.

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