Investment Property Interest Rates Set To Rise

Approved loan application form and stacks of 100 dollar bills

The Federal Housing Finance Agency (FHFA) recently announced that Fannie Mae and Freddie Mac would reduce the number of investment and second home mortgages they buy to just 7% of their portfolio. This is approximately half of the number of mortgages they have been buying.

What this likely means for buyers of those properties is an increase in interest rates.

Very rarely do the banks or lenders who originate a loan manage it and keep it in house. Most often, they sell the loan to another entity and allow it to collect payments and pay things like taxes and insurance.

The biggest buyers of these loans are Fannie Mae and Freddie Mac, which are “GSE’s” or government-sponsored entities, which means the loans they buy are guaranteed by the federal government.

Prior to the Great Recession, Fannie Mae and Freddie Mac purchased a number of loans that were risky. As a result, the government had to bail them out when the economy crashed.  Not willing to be burned twice, the FHFA wants to reduce the two GSE’s risk as the impact of Covid-19 on housing are yet unknown.

Since Fannie and Freddie buy most of the mortgages in the U.S., lenders won’t have as many places to sell loans for second homes and investment properties. Consequently, they will have to assume more risk, and will seek to hedge their bets by charging borrowers higher interest rates.