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Sneak Preview of December's Real Estate Report Feature

Lending Changes Impacting Investors
And How To Work With Them

There is no secret that 2008 brought the most sweeping changes in lending guidelines, practices and regulations to hit the industry in decades if not ever. While the new directives are targeted toward solving the issue of illiquidity and thawing a frozen credit market there are millions of worthy borrowers caught in the crossfire. In fact within just the last few weeks both major Government Sponsored Enterprises matched adjustments in attitudes toward the number of properties an investment buyer can have on their credit to use Fannie Mae or Freddie Mac financing.

Limiting financially strong real estate investors to only four properties certainly appears to be a move which will result in negative market projections for the housing market which will only be of further detriment to stabilization and recovery. While many industry insiders, like myself, are lobbying to have a market niche within the GSE’s restored based on high credit scores, high income and ample assets other lenders have compounded the issue by misreading the GSE directives, specifically the Fannie Mae directive of 0822 to say a borrower may have only a total of four properties on their credit including their primary residence. In actuality we believe the primary residence to be exempt from the directive which states a borrower may have only four mortgages secured by a non-owner occupied property. This would include investments and second homes.

Solutions are available to work around these Fannie and Freddie guidelines even though they are few in number. One way to possess more properties is to refinance blocks of properties into cross-collateralized commercial holdings. The vast majority of commercial lenders will not permit this even when properties are contiguous but there are a few who are opening up to understanding a note backed with five or more non-contiguous properties at sixty to seventy percent of their fair market value is a smart investment. Moreover properties this size and of this type generally have a debt service coverage ratio as much as thirty to fifty percent better than normally required.

At least one smaller lender is now stepping outside of the box and creating a solution where none existed prior. We know of no other lenders at this time offering a very unique solution which will allow an investor with a 661 or higher middle credit score and able to fully document their income to purchase or refinance a maximum of two properties regardless of how many other properties they have on credit. While they are currently exclusive to Novation we do hope to see more of these common sense solutions appear on the market within the next several weeks. This solution may be used for acquisitions, refinances and cash out. It may not, however, be used for rehab properties.

Additionally it is possible to own property in a self-directed retirement account either fully purchased with cash or purchased with a down payment from the retirement account and use of a non-recourse loan. Since these mortgages are non-recourse and the property and loan are in the name of the retirement account these properties do not show on the borrower’s credit report thus leaving room for four GSE loans. The explanation of this method of investing would require a full article in and of itself so my recommendation is to call a retirement investment specialist prior to making an offer on a property expecting to be able to use this type of solution.

Today offers a great number of opportunities. I have written before of the falling knife analogy and how it is applied to investment in hard assets, specifically real estate, and I still believe we are at, near or slightly past the bottom for valuation decline in the major metropolitan Atlanta market. While we may not see a full recovery for several months it is highly possible we will see property values begin to increase in the second quarter of the coming year and to regain most of the lost ground within the next twenty four months. Is today the time for you personally to buy? I believe if you have a solid, conservative plan and a good understanding of the real estate investment business you will be able to make some of the greatest investments of your career. In the words of Baron von Rothschild, “The best time to buy is when there is blood on the streets, even when it is your own.”

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Ken Cook is Director of Operations for Novation Mortgage. He is also a real estate investor, trainer and author. He may be contacted directly at 67-946-0101 or by email at reibroker@gmail.com