Market Issues Threaten Investment Mortgage Options

Headlines today are filled with larger banks and mortgage companies in residential real estate lending rushing to raise capital, set aside loan reserves and just simply try to stay in business. Possible government intervention, investor nervousness and changes at Freddie Mac and Fannie Mae in a tightening underwriting market are threatening to topple the mortgage providers and the organizations themselves. While the previous cause for the foreclosure market has been focused on higher loan-to-value loans and faulty or aggressive underwriting, traditional real estate investors are now beginning to feeling the pinch as well.

Earlier this year, Freddie Mac sent an advisory letter to mortgage lenders specifying new product standards. The advisory, now implemented, requires individual real estate investors that obtain loans sold to Freddie to finance no more than four investment properties (previously Freddie capped the number of properties at ten). With Freddie and Fannie responsible for nearly half of the twelve trillion dollar mortgage market in America, many other underwriters have followed suit on the four-property limitation.

You can understand what this drastic change has meant for investment financing options. With the new requirement, real estate investors who already have more than four properties are now unable to refinance their existing loans. This is a potentially big problem for the many investors that have used adjustable rate or fixed initial rate mortgages. As cash flow is squeezed, the change may lead to even greater foreclosure numbers. Those mortgage companies that are continuing to finance investors with greater than four investment mortgages are naturally increasing their costs for providing a mortgage. The rising costs are impacting investment portfolios and dampening tax incentive strategies across the country.

Previously, tax-savvy investors were able to take a mortgage against their primary residence and invest the money in investment property. Many times, these mortgages were larger than $417,000 – the current minimum jumbo mortgage loan amount. The idea was that the return on investment from the property would be higher than the after tax deduction cost of the mortgage interest. However, as investors are forced to pay higher rates on these mortgages, the strategy becomes less attractive.

While real estate investors are definitely more limited today than in the past, they are not completely out of options. It is possible to bypass the four-property rule by taking out a line of credit - rather than a mortgage - at a local bank. Many of these are prime-base products and can possibly be a lower cost option today. Another option is to work with a local or regional lender (1031 Corporation’s parent, FirstBank, is one such option) that holds investment and jumbo mortgages "on their books" as investments and locally underwrites each loan.

Overall, the industry outlook is that the mortgage market is probably going to get tighter. With a hard fought and tight presidential election looming as well as a struggling national economy and financial markets, investor sentiment is that it will take a while for the mortgage market to improve. For investors, that means establishing - or keeping in touch with - strong, trusted local lenders and advisers that are in touch with the rapidly changing mortgage markets.