Thinking of buying a nice investment property in this "buyer’s market"? Financing that dream "flip" just got tougher: [Thanks L!]
Major lenders and mortgage insurers are turning off the money spigot for investors who want to buy rental houses or condos with minimal downpayments.
The most dramatic cutback takes effect next week, when giant mortgage insurer United Guaranty — a subsidiary of AIG International, the world’s biggest underwriter — says it will stop covering loans to investors in any of the thousands of Zip codes from coast to coast that it defines as "declining" real estate markets.
The ban includes all non-owner-occupied rental houses or condos — including "mom and pop" two-to-four unit properties where the owners occupy one and rent out the rest.
United also is cutting off coverage of all condominiums and cooperatives – whether owner-occupied or rental — plus all second home purchases. It’s even refusing to look at loans to investors or owner-occupants that have limited documentation in any market, whether declining or not.
Other major mortgage insurers are expected to follow some, if not all, of United’s tough new restrictions in the coming weeks.
Add to that Fannie Mae’s and Freddie Mac’s new guidelines on condominium financing, which are causing condo associations to adopt stricter rules on the percentage of units owned by investors — and you’re looking at some crunching changes underway for small-scale investors.
A slow housing market is about to get slower.
From time to time I wish I had some snappy numbers to put up on this board, instead of sweeping general statements, but, here’s another of the latter:
For all we heard about how things were different this time, about how the mortgage professionals and investors alike were smarter than before, about how risk was being better distributed and placed through “innovative” “products,” the actions accompanying both the greed on the way up and fear on the way down are CLASSIC historical examples about boom/bust mentality. Specifically in this matter, United Guaranty adopting this policy while seemingly ignoring the ability of the borrower to pay, regardless of the future direction of the market,(which, of course, I still believe in the near term is down), seems to be ignorant at best.
Boo-Hoo. People buying ‘investment’ properties in this market with borrowed money are not investing, they’re speculating. All ‘flippers’ are speculators. In this market, the banks want no part of that, and rightfully so.
I’ll go all in pre-flop on 7/2 with your money, but I’ll hold out for pocket aces if I’m playing with my own. Poker gets a lot more serious when you’re playing with your own money.
Agnostic-
Insurance companies have always played by the numbers, charging according to sex, age, smoking/non, etc. They don’t like to gamble, really- they want the numbers in their favor.
This must say something about the default rate for investor loans. If they could make money insuring some of them, I imagine they would. The numbers must be telling them these loans are too risky.
Apparently falling prices are a bigger risk factor than the borrower’s ability to repay.
I got some numbers Friday for any Montana pple. It was not published anywhere. They keep a good gag here. The President/leader of Gallatin Valley Assoc. of Realtors slipped on an AM radio show.She said sales were down 33% in ‘07 from ‘06. Of course a virus killed my excel sheet w/ harddrive couple weeks ago, but, and there is always a big but,my median price calcs was close. I called in during their BUY Now speil. Prices down, options up. I asked what the med price was. She actually hesitated and then said, “For a single family home…$419,000.” I shizam you not. We are 49th in med income in US. W.O.W. Positive spin: When we are done living in boxcars, there will be some REALLY nice houses for sale at our 35K avg income. Granite is the new Formica.
“Apparently falling prices are a bigger risk factor than the borrower’s ability to repay.”
Bingo! The Bozos who modeled these risk profiles finally figured out that they forgot to consider negative equity. As it turns out there have been very few instances (California, Texas) where nominal (not real) negative equity had previously occurred. And those losses were offset by stronger markets elsewhere. As it turns out even good borrowers become a significant payment risk when they have negative equity. Whoops.
The M/I companies are simply recasting their risk models with the consideration (probability) that some of the previoiusly hot markets have much further to drop. Investor mortgages are a much higher risk anyway, even without declining prices.
For those that “saved their powder” and can afford 20% down, there will be plenty of opportunites in the year ahead.
The appraisal process may get even tougher for those loans that they WILL consider. However, the following proposal should have been the practice all along:
http://www.foreclosureexpert.info/2008/04/fannie-proposes.html
Boo Hoo is right! Tissue, anyone?
foreclosure expert: Excellent blog, thanks for all the good insight.