Fannie Mae is tightening the underwriting criteria for second homes and investment properties, the government sponsored entity said in a letter to sellers on Wednesday.
“Recent amendments to our senior preferred stock purchase agreement with Treasury impose additional risk criteria on the loans we acquire,” the GSE said in a letter. “One of those restrictions is a 7% limit on our acquisition of single-family mortgage loans secured by second home and investment properties.”
Fannie Mae said that the amendment has prompted changes in its eligibility policies. All second homes must be underwritten with Desktop Underwriter, receive an approve/eligible recommendation and be delivered as a DU loan, Fannie Mae said.
“The above policies apply to all lenders and include loans delivered under negotiated terms (such as variances or special requirements). The only exception that will be permitted for second home and investment properties loans is for high LTV refinance loans that are manually underwritten in accordance with the Alternative Qualification Path and delivered with Special Feature Code 840.“
The policies will take effect for loans submitted to Fannie’s loan delivery system on or after April 1, and for loans delivered into MBS pools with issue dates on or after April 1.
Among the unknowns servicers face in 2021 are changes that could affect lender-placed insurance (LPI). Servicers must have the flexibilities in place to keep up with the latest changes to remain compliant and efficient while still providing an optimal borrower experience.
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“Due to our need to comply with these restrictions in the Treasury agreement, we will be monitoring deliveries of second home and investor loans on a lender-level basis, and will be working with lenders that have excessive delivery volume of these types of loans,” Fannie said in its letter to sellers.
Fannie also said its selling guide and eligibility matrix would be updated in April to reflect the changes. The company noted that it might further update negotiated terms to restrict the risk characteristics for non-DU purchase and refinance loans.
The GSEs have had an eventful 2021. Although the Trump administration confirmed that it wouldn’t remove Fannie and Freddie from conservatorship, the Treasury Department did allow the GSEs to retain more earnings.
In 2019, the Treasury began allowing the GSEs to retain a combined $45 billion in capital – $25 billion for Fannie Mae and $20 billion for Freddie Mac. Without an increase to the capital the GSEs are able to retain, they would both soon be sweeping all profits back to the Treasury.
The new Treasury agreement allows for an aggregate of about $283 billion in GSE capital retention, a move the GSEs applauded. Fannie Mae’s full year net revenues increased 16% to $25.3 billion in 2020, largely due to record acquisition volumes. The GSE’s estimated total capital requirement under the new rule would have been approximately $185 billion, including $135 billion in common equity tier one capital.
Fannie and Freddie both tightened underwriting standards in response to the coronavirus pandemic.