Earlier this year, when Fannie Mae tried to jump-start the housing market by loosening mortgage guidelines for real estate investors, banks and other lenders were widely expected to follow suit.
Eight months later, almost none of them have.
Even though Fannie is now willing to buy or guarantee loans to investors who own as many as 10 properties, most lenders have kept their limit at four. (So has Freddie Mac.) "None of our lenders are allowing us to originate on more than four properties, because they don't want the exposure," said Rob Bonahoom, a loan officer in Minneapolis for Cornerstone Mortgage Co., a correspondent lender based in Houston. "The big banks have chosen not to originate or service these loans, because of their assessment that the risk is too high."
When it announced the guideline changes in February, Fannie declared that "experienced investors play a key role in the housing recovery." But since then, as investors have continued to struggle to get financing, their role in the market appears to have diminished. According to a survey by the National Association of Realtors, just 8% of people who bought homes in August identified themselves as investors, down from 21% in 2008.
Fannie's failure to reverse the trend underscores how clout in the mortgage industry has shifted from the government-sponsored enterprises to large banking companies.
"It's no longer, 'When Fannie leads, lenders will follow in lock-step,' " said Brian Chappelle, a partner at Potomac Partners, a Washington consulting firm.
Fannie would not comment for this story.
The top two lenders, Bank of America Corp. and Wells Fargo & Co., originated 44% of all the home loans written in the second quarter. Known in the industry as aggregators, institutions like Wells and B of A get their mortgages through their own nationwide retail networks and through middlemen like Bonahoom's firm. (Neither B of A nor Wells returned calls for this story.)
Although they resell much of their production to Fannie and Freddie, the aggregators retain an ongoing stake in the loan's performance because they handle the servicing. When a loan turns delinquent, the servicer has to dun the late payer — and, if eventually necessary, initiate foreclosure proceedings, evict the borrower and fix up and sell the home.
All of which costs money and partly explains the servicers' reluctance to take on investor loans.
Real estate investors were partly responsible for the run-up in housing prices, particularly in second-home markets such as Las Vegas, Miami and Phoenix. In those areas, many borrowers simply turned in their keys to banks, defaulting on scores of second homes and investment properties that they had intended to flip, bankers say.
"Our banks are auditing almost every investment property file to make sure it's a good, solid deal," Bonahoom said.
Robert Simpson, the founder and president of Investors Mortgage Asset Recovery Co. LLC, an audit and fraud analysis firm in Irvine, Calif., said the higher the leverage, the greater the likelihood of default.
"We shouldn't be letting people play at being a real estate baron," Simpson said. "If you have 10 properties, then there needs to be big cash reserves and a 10-year record of ownership, because as soon as the investor needs $10,000 to cover vacancies, all the loans will go delinquent. If there are legitimate real estate investors that want to own 10 rental properties, they should buy five with cash."
Another risk for the servicer is that an investor-borrower succeeds in flipping the property quickly. The mortgage gets paid off sooner than expected, before the servicer has earned enough fees to recoup the money it spent to acquire the customer.
"There could be a little more servicing risk, prepayment risk and default risk with investor-owned properties," said Steven Horne, the founder and president of Wingspan Portfolio Advisors LLC, a Carrollton, Texas, servicer of defaulted mortgages and a former Fannie Mae director of servicing risk strategy. "I can see limiting the bottom feeders out there, because they don't want someone buying a property and trading it six months later for a $50,000 profit."
Chappelle said the threat of being forced by Fannie to buy back a delinquent loan has scared lenders away from investor loans more than anything else has.
In this sense, Fannie's efforts to aid a real estate recovery are at odds with its attempts to control its own credit losses.
"On the one hand, they're trying to jump-start the housing market, but they're also trying to minimize expenses and reduce risk exposure," Chappelle said.
Of course, a correspondent lender could try to bypass the aggregators and sell its loans directly to Fannie. But if the correspondent doesn't service loans, it would still need to sell the servicing rights to someone else, since Fannie doesn't service mortgages either.
Matthew Pineda, the president of Castle & Cooke Mortgage LLC in Salt Lake City, faced this conundrum recently. He was all set to lend $500,000 to an investor and sell the loan to Fannie. But since the applicant had more than four properties, Pineda, whose firm does not service loans, could not find a buyer for the servicing rights. He didn't make the loan.
"I'd be stuck with loans that I can't sell the servicing rights on," Pineda said.
In its February lender bulletin, Fannie said it wanted to finance only "high-credit-quality, bona fide investors." At the same time that it raised the maximum number of properties a borrower could own, it tightened other requirements.
Borrowers with multiple mortgages must have a minimum 720 FICO score, six months' reserves for each home that is not a primary residence, no missed loan payments in the past year, and no bankruptcies or foreclosures in the past seven years.
Fannie also introduced its own financing program in February called Home Path, which allows real estate investors to purchase properties the GSE has repossessed on generous terms: as little as 10% down, with no appraisals or mortgage insurance required.
Real estate investors have found other ways to finance purchases. Some opt for commercial lines of credit. Others work with so-called hard money lenders, typically regional real estate investors that charge rates as high as 20% at much shorter terms. Other property buyers may piggyback on the Social Security number of a family member to obtain financing from a bank.
Harsimran Singh, a New York real estate investor and the author of "The A to Z of Foreclosures: Real Estate Worth Millions Acquired with $101," said the four-property-per-borrower limit imposed by most banks is hindering a recovery.
"It's a terrible limit, because investors cannot get the loans, and there are so many houses still on the market," he said. "The best thing for investors to do is to find a partner who has cash." (The Realtors survey found that nearly 20% of real estate purchases in August were "all cash.")
A growing concern is that a huge supply of bank-owned properties is expected to hit the market in the next few years. Amherst Securities Group LP recently estimated that this "shadow inventory" totals 7 million homes. "The question is, who else is going to be buying this stuff but investors?" Horne said.