Vacation home buyers have propelled the mortgage market. Now they face a test.
The pandemic has sparked a furious rush to buy vacation homes. From now on, restrictions on the financing of these purchases will test the resilience of this market.
The number of buyers who blocked mortgage rates for second homes in February rose 93% from the previous year, far outpacing the 32% increase for primary residences, according to real estate broker Redfin. Corp.
But Fannie Mae FNMA -0.94%
and Freddie Mac FMCC -2.04%
set up roadblocks. The two mortgage giants, whose government support is key to keeping mortgage rates down, earlier this year began to cap the number of such loans they buy, under the leadership of federal authorities.
The coronavirus pandemic has had a counterintuitive effect on the housing market. Usually, a downturn in the economy weighs on home prices. But many white-collar workers have done well, keeping their jobs and saving money by not going to the office. Additionally, the coronavirus has spawned record mortgage rates and fueled city dwellers’ desire to escape cramped living. This fueled bidding wars and invisible buying in US vacation areas, which already had dwindling stocks of homes for sale, according to realtors.
The booming market is also attracting investors, some of whom have made substantial profits by repairing old homes and then flipping them. Growth in home prices hit a 15-year high earlier this year, preventing many middle-income families and laid-off workers from buying.
Buyers trying to acquire second homes and investment property accounted for 14% of all mortgage purchase applications in February, a record high in data dating back more than a decade, according to the Mortgage Bankers Association, a trade group.
“It’s like a binge eating,” said Amy Mora, a real estate agent at Redfin in Bend, Ore.
The new restrictions say that no more than 7% of the mortgages that lenders sell to Fannie or Freddie can be tied to second homes or investment property. The cap is based on the overall dollar volume of loans purchased by Fannie and Freddie, although companies are implementing restrictions on lenders who sell them loans.
Freddie is already meeting the new limits while Fannie slightly exceeds them, according to officials from the Federal Housing Finance Agency, which oversees mortgage lenders. Fannie has called on lenders to be in compliance by June 1.
While second home buyers largely recognize that they are in a privileged position, Fannie and Freddie’s shift is pushing mortgage rates further for some. Matthew Smith, a wholesale insurance broker from Essex, Connecticut, recently got his offer for a vacation home in Vermont accepted. His wife, Kaitlin Smith, an interior designer, plans to fix it and they hope to teach their children to ski in nearby Killington resort.
But the mortgage rate turned out to be higher than expected. When Mr. Smith was pre-approved, he figured he would be able to get a 30-year fixed mortgage at the going rate in the lower 3% range. But his mortgage lender told him that because of Fannie and Freddie’s downturn, the best he could get was 3.875%.
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He is still considering making the purchase, but the higher rate will cost him an additional $ 45 per month, or thousands of dollars over the life of the loan. “This extra amount of money that I have to find takes away the ability to fix the house,” he said.
Vermont, Maine and Arizona are among the states whose housing market growth is most dependent on second home and investment property sales, according to real estate research and consulting firm Zelman & Associates. This means that Fannie and Freddie’s new rules could have a bigger impact on the price of their home.
Dick Kittredge, Mr Smith’s mortgage banker in Manchester, Vermont, said between 60% and 70% of his business is helping city dwellers in the New York and Boston areas purchase vacation homes. His business is booming, but now he fears the new rules will reduce it.
“It’s not good for the industry,” he said. “It’s not good for my business.”
Lenders said they were caught off guard by the cap, especially those who already had loans they planned to sell to Fannie and Freddie this spring.
“It created panic, it created volatility because people were scrambling to find housing on loans above 7%,” said David Battany, executive vice president of financial markets at Guild Mortgage Co. in San Diego, California.
Still, some expect the effect of the new rule to be mitigated. Many motivated buyers choose to pay in cash, eliminating the complications of financing. Some may choose to tap into the equity in their primary residence to purchase another property. And wealthy buyers who take out mortgages that aren’t backed by Fannie or Freddie likely won’t be deterred from paying more interest each month.
The Treasury Department in the final days of the Trump administration called for the cap during negotiations over the government’s stake in the two mortgage giants. Both companies were placed under government control during the 2008 financial crisis.
The Treasury’s view was that second homes and investment properties are less geared towards Fannie and Freddie’s missions to support affordable housing, according to FHFA officials, who negotiated the changes with the Treasury. The FHFA supervises Fannie and Freddie.
Mark Calabria, a libertarian economist who heads the FHFA, told lawmakers in 2011 that Fannie and Freddie should be banned from acquiring such mortgages. More recently, Mr. Calabria has expressed general support for reducing Fannie and Freddie’s role in housing finance.
Darin and May Shelstad bought a vacation home last fall on the edge of a golf course in Bend, Oregon. As the new borders were not yet in place, the financing went off without a hitch. They paid more than half the purchase price of $ 850,000 and got a mortgage from a credit union for the rest, Shelstad said.
They had been thinking about a vacation home for years, but the pandemic accelerated their plans as they and their two teenagers waited for the days in their suburban Portland home. They spend about two weeks a month in their new home and plan to rent it out for part of the year. “For some reason,” Mr. Shelstad said, “we got lucky.”
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