Buying a second home in the Plymouth area (and nationally) just got more expensive, if you are using a Fannie Mae or Freddie Mac mortgage. 

Originally formed to stabilize mortgage lending, these quasi-government agencies purchase and repackage loans from mortgage lenders.  Fannie and Freddie will now be charging second-home buyers four points on loans with only 10 percent down of the purchase price and more than 2 points on loans with 25 percent down.  (A point is one percent of the loan amount; do the math.) 

For second-home buyers, these costs are significant, but not insurmountable. Importantly, the new changes only impact buyers of Fannie and Freddie loans. Jumbo loans and portfolio loans (loans not resold, but held by the original lenders) avoid these extra charges. In addition, second-home buyers often have the ability to make larger down payments, lowering the amounts paid on Fannie and Freddie products. (Larger down payments, of course, translate into lower loan-to-value ratios, making loans less risky to lenders.)

In addition, Boston- and Providence-area residents seeking second-homes may have the luxury of holding huge equity in their first homes; they may opt to finance a second home with a credit line or lower-interest second mortgage on their existing properties.

Editorial:

So city and suburban dwellers should drive down to Plymouth and The Cape to shop for their oasis. (Better yet, with more urban and suburban folks working from home a few or more days per week, and seeking more elbow room, they may be able to cash in on their massive home equity and buy a Plymouth property that’s likely less expensive than their existing residence, pocketing the difference. That’s what my wife, Beth, and I did six years ago – downsized from a huge Boston 3-story Victorian to gain a home along the ocean and a new lifestyle in hip Plymouth – America’s hometown: 10 reasons why we relocated to Plymouth.)                   

I digress. So why did the Federal Housing Finance Agency (FHFA) mandate the introduction of points on Fannie and Feddie loans?  Because it can get away with it.  That’s the paraphrased answer from local mortgage-loan experts.  “The reason for the implementation is clearly to make more money on these loans,” explained Paul Beatty, managing partner of Homestead Mortgage, a reputable mortgage broker. “No need to overthink it.  They’ve suggested that money from points will be used to create better opportunities for entry-level home buyers, using such programs offered by HomeReady and HomePossible.”  Yet Beatty and other lenders are doubtful these funds will ever get siphoned to first-time home buyers.

Why hasn’t there been much written about this topic?  “From a political perspective,” Beatty said, “there isn’t going to be an outcry of sympathy or empathy from the public, if vacation buyers have to spend a little more money to get their vacation homes.  It does impact our (real-estate) industry somewhat, but again, we’re not likely targets for sympathy.”  

Greg Edson of Cross Country Mortgage believes the point hikes were introduced in large part by the emergence of second-home buyers who surreptitiously “use AirBNB and VRBO as a business strategy.”  These buyers seek low down-payment programs to purchase rental properties, claiming that they will be their second homes, Edson explained.  “These buyers intended from the beginning to rent the homes out for profit on these newer rental platforms.” 

Many second-home buyers are acquiring rental investment properties without putting down the 15% to 25% that many loan programs require, he and other lenders said. “These buyers,” Edson noted, “are savvy enough to know that they can’t disclose their intent to rent, so they are, in fact, committing loan fraud.”  Most lenders are not complicit, because they are unaware of the actual plans that buyers have for these properties, he was quick to point out.   

By charging points for second-home loans “Fannie and Freddie are levelling the playing field, hedging their risk for the next housing correction. They hope the points that they are imposing will discourage occupancy fraud, Edson said.

It’s important to note that these “Loan-Level Pricing Adjustments” are being charged to the lenders by Fannie and Freddie; the lenders are not profiting from this change.  “It’s essentially a pass-through to these two agencies.”

Occupancy fraud

Occupancy fraud has been one of the biggest issues in the lending industry since the implementation of the Dodd Frank Financial Reform Act.  Fraud also exists by buyers purchasing their primary residences with FHA loans and renting them out, Beatty said.  With the point hikes, it might make as much sense to seek an investment loan, he noted.  “In an ironic twist, people could say they’re buying investment homes to help qualify for the loan, using projected rental income, and then just keep it as a second home.”  

The changes to Fannie and Freddie mortgages will likely make those options more popular to buyers as well as increase the number of cash buyers.  Many second-home buyers have the cash option, but with cheap money choose to finance.  As mortgage costs goes up, cash becomes a better alternative, either in the form of a straight out cash purchase or simply a larger down payment to achieve a more attractive interest rate, Beatty explained. The industry has always been creative and will likely create more solutions and opportunities for the second-home market, lenders predicted. 

Second-home buyers’ “sneaky” use of VRBO and AirBNB “finally got the attention of policy makers at Fannie and Freddie.” Edson argues. “This is how they intend to discourage occupancy fraud.”

Prior to these changes, one could purchase a second/vacation home with as little as 5 percent down with reasonable mortgage insurance and an interest rate similar to what’s offered on a primary residence. Investment properties require at least 15 percent down.  Anything less than 25 percent down blows the rate up. Even with 25 percent down, the rate offered is substantially higher than it would be for a primary residence.

“The risk of default is always higher statistically with non-owner-occupied properties,” said Beatty. “So frankly I’m surprised it’s taken this long for the agencies to, essentially, even things up between investment properties and second homes.

Said Deborah Colanino of Shamrock Home Loans: “I believe (these price hikes) are trying to capitalize on the second-home market, and also slow it down, leaving more homes for primary-home buyers. Fannie and Freddie assume people buying second homes have money and will buy anyway. And the ones who don’t the money will back out of the market, eliminating more risky loans.  We’ve seen this happen before; eventually they drop the fees or at least lower them.”

In a statement, FHFA Acting Director Sandra Thompson said the fee increases are another step FHFA is taking to strengthen government-sponsored enterprises’ safety and soundness, and ensure access to credit for first-time homebuyers and low- and moderate-income borrowers.

“These targeted pricing changes will allow the enterprises to better achieve their mission of facilitating equitable and sustainable access to homeownership, while improving their regulatory capital position over time,” said Thompson.

A different take

Chuck Fowke, the chairman of the National Association of Builders has a different slant: “With the nation in the midst of a housing affordability crisis and many more workers electing to telework, this is exactly the wrong time for federal regulators to be raising fees on homeownership and second homes,” Fowke said. “If FHFA is truly interested in promoting housing affordability, the agency would not be taxing home buyers to pad the capital positions for Fannie Mae and Freddie Mac.”