A new FHFA mortgage rule that goes into effect on May 1st aims to penalize those with higher credit scores and down payments, in favor of subsidizing higher risk borrowers. What does it mean for the real estate and mortgage market? What is the impact for investors?

New Mortgage Rules Going Into Effect

The new rule being instituted on May 1st switches around the long term trend of lower interest rates going to the most credit worthy and low risk borrowers.

There has always been risk based pricing in the mortgage market. Though, until now low risk borrowers that have been the most responsible with their credit, and who are putting more skin in the game with larger down payments have been rewarded with lower borrowing costs and interest rates.

Now the Federal Housing Finance Agency is working to subsidize the risk on lending to those with bad credit scores by charging lower risk borrowers more. Then using that money to give low rates to others.

For those purchasing a home or refinancing with a 680 credit score, on a $400k loan can expect to pay around an additional $40 a month, according to coverage from the Washington Times. Right during a time when mortgage rates have already doubled, and housing prices have been sky high, along with other inflation.

Trouble Continues To Brew In The Banking Space

Since the Great Recession FHA and similar loan programs have effectively acted as the new ‘exotic mortgage’. The types of loans that were blamed for the 2008 financial crisis. Loans with low down payments, to those with weak credit, and most likely to default.

This new rule seems to build on that, creating even more risk. Right when banks and lenders are already failing at great scale.

This may inflate that bubble even more, filling it with highly risky loans, and setting those lower credit borrowers up to lose everything.

Where it applies to ‘government backed’ loans, the other risk is of course that all taxpayers will end up footing the bill, and have to bail out these organizations for reckless lending.

The Opportunities

In the mid to long term this seems almost certain to lead to more distress, mortgage defaults, and in turn, more discounted homes and loan notes for sale.

At the same time, in the short term, it could mean an opportunity for those with weak credit and low down payments to still buy a home of their own. Which is fantastic for those that can really afford to sustain those homes long term.

This may be a new area of focus for some investors, who can flip and wholesale more affordable homes to lower income borrowers. Helping to fill the gap between distress and demand.

The good news is that, as a real estate wholesaler, you already don’t need a great credit score or any down payment with transactional funding. It’s a great way to make money in real estate and then pay cash for your own house.

 

Looking for and finding low priced wholesale properties is one thing. Ensuring you have a viable deal, that comes with plenty of appeal for end buyers, and which they can actually buy may require a little more attention.

Make sure you are watching these factors…

Deed Types

There are several types of deed used to transfer real estate. Wholesalers need to know what type of deed they can get and provide. Savvy end buyers will, and should be wary of only being offered quit claim deeds. These really offer no protection or security. End buyers want to be confident in their investment, ability to get title insurance and resell in the future.

Unpermitted Property Changes

Many low priced distressed properties (and even some very expensive ones) are so much cheaper because they have illegal changes. That can be additions, garage conversions, subdividing units, and so on. Those can lumber new buyers with big fines, prevent them from re-selling or refinancing, and from obtaining a mortgage loan to buy your property. They can still be deals, just know the challenges. Make sure your buyers do to.

Realistic & Appealing Spreads

Offering a property with a $68,000 ARV for $48,000 doesn’t really leave much of a spread for the next investor. Not when you factor in 2 sides of closing costs and repairs. It may be a nice discount for a retail buyer, if they have the cash and want to spend it in that neighborhood, but make sure you know your buyers and what they want.

Changing Mortgage Rules

It is important to anticipate changing mortgage lending rules and programs. If they tighten, they could cut plans and deals short. Fortunately, we are are expected to be in a period of loosening mortgage criteria. Most analysts don’t expect Dodd-Frank to disappear yet, but it could be stripped down.

Who Pays the Costs

One of the quirks in the market since 2008 is more distressed property sellers trying to get buyers to pay the burden of past due property taxes, liens, and fines. Sometimes even there closing costs. Those costs can often exceed the purchase price too. Know who pays what.