Welcome back to another episode of Passive Real Estate Investing. I’m your host, Marco Santarelli. And today we are going to talk a little bit about what the heck is going on with Fannie Mae and Freddie Mac and the mortgage financing in this country, especially as it relates to you as a real estate investor, you’ll want to stick around for the next 20 minutes. As I bring Aaron Chapman back on one of our primary mortgage lenders that we work with, we probably work with five or six different companies to help investors finance their deals. And the nice thing about the people we work with is they specialize in investment loans, conventional financing for real estate investors. They don’t do anything but that, so they understand the mindset of the real estate investor, what they’re looking for and what they need and how to structure their financing to maximize their returns, their ability to leverage the lowest rates.
And remember, it’s not always about interest rates. Yes, rates are important, but you’ve got to look at the bigger picture because your returns are spread across different legs of the stool. It’s not just having a very low, I guess it’s all relative. So I can’t really compare that to anything, but it’s not about having the absolute lowest debt service payment, because even if it’s off by 10, $20 a month, you might be missing out on great deals that can provide you literally thousands of dollars of additional equity gains each and every year, if you’re not missing out on those deals. So don’t get too hyper-focused on interest rates. It’s a bigger picture. And we can have that conversation with you with our investment counselors here or with any of our mortgage lenders that we work with. So Fannie Mae released some interesting news just recently. They are tightening up their standards on investment properties and how much they’re willing to lend from their pool of funds. So with that, I wanted to bring one of our mortgage lenders, Aaron Chapman, to the show. And with that, let us get right onto that interview.
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It’s my pleasure to welcome back to the show, Aaron Chapman. He is one of our rock star mortgage lenders that we use frequently and quite literally every day. So Aaron, welcome back to the show.
Good to be back to the show brother. This is I think number five or six.
I dunno, it’s a lot, but it’s not enough, but it’s all good. I mean, you’re a, you’re a wealth of knowledge and we do a lot of work with you and you know, what’s going on in the mortgage industry. So let’s talk about that. Something hit the wire, as you were saying just recently. And it has to do with changes to mortgage financing that investors really need to know about. So before we get into that, I want to make sure that people who are new to the show, understand who I’m talking to. So tell us a little bit about yourself.
So, uh, been in the lending industry for 23 years, got into it in 1997. The stories really, really detailed how I got here. So we’re all going to hit that at all today because we don’t have the time. So I’ve been focused on the real estate investor in 2003 and then really started developing a relationship and an understanding of the investor to the extent that that’s right, but business focused now to kind of give an idea, but I tell people is that, you know, the main thing you got to have is good solid professionals on your team. If they don’t know what you’re trying to do, and they don’t have the experience to guide you, then you don’t use those people. I don’t care about the price, right? So you’re the CEO of your real estate investment business. And as a CEO, you don’t hire the cheapest CFO or COO you get the right people.
So to give you my background, you know, there’s the history, but there’s over 300,000 people in the United States that do what I do. The average person in our industry does between three and four deals a month, three and four closed loans per month. It doesn’t matter if it’s owner occupied, FHA, VA, first-time home buyer. They don’t care. They just want to close a deal. I only focus on investors last year, I closed 1,332 transactions for investors. That’s equal to 6.17, every working day. We know what we’re talking about. We deal with it all the time in an excessive amount, and we deal with a lot with Narada. And I’ll just tell you, there is no better group of minds at one space about the real estate and especially turnkey real estate. Then what you put together, Marco.
Well, Aaron, I really appreciate you saying that. And that was completely unsolicited. I appreciate it.
Well, and you wouldn’t have to solicit that with my 1,332 transactions. I talked to a lot of people. I deal with a lot of folks and there’s not everybody operates on the level that you guys do. Right?
I appreciate you saying that. Well, thank you. So let’s take that and segue into the big news of the day, which could be the big news of the year. And that is that Fannie Mae has been tightening up on their standards for, or on investment properties. And that’s a big deal to me and to my team and you and real estate investors that we work with. So let’s talk about that. What’s the big news. What happened with Fannie Mae and their tightening standards?
It’s actually really, really huge news for us. And this is, I got a lot of people sending me the article, asking my opinion on it. And this came out literally 24, not even 48 hours ago. It took me yesterday to really understand what’s going on. So our rates have been moving a little bit to the negative and we can’t understand why right there was just none of enough information. There’s no bond analysts out there that could explain to me why things are moving the way they work, because the way the economy is set up, the way things are acting rate should stay the same or get better. We’ll come to find out. There was a mandate that came through the us treasury to impose an additional risk criteria to the loans acquired by the GSEs Fannie Mae and Freddie Mac. And one of those restrictions is a 7% limit on their acquisitions of single family mortgages secured by second home and investment properties.
That’s a big deal. That means they are saying the us treasury is telling Fannie and Freddie, you know, you still follow what we say and because the U S treasury funded the majority of the mortgage backed securities for the last year through the federal reserve, they now have a say on what goes on. They’re trying to tell them, or what they’re telling them is that 93% of all the loans that they close and they securitize have to be owner occupied. Now to put that in perspective, how many we did a lot of investor deals last year, significant amount investor deals out there. Well, from what I understand, I could be off on this. It probably be, I think it’s a little bit more than this, but the number I was given is last year, 10% of Fannie Mae and Freddie Mac’s take was investor. That didn’t include second home.
That was 10%. So second home had to be what may be two to 3%, maybe. So let’s say 13, maybe 14% of all their business was second home and investment property. They’re being told they got to cut it down to seven that’s, half that’s cutting all the business that they were willing to securitize for second home investors into half. Think about that. That’s massive cutting that in half. So if I did 1,332 transactions last year, that cuts it way back down to 600 right now, again, this all depends upon the investor concentration within different lenders. So what does that, what does that mean for the real estate investor? We had a ton of people that got into the market to buy investment properties because the interest rates were the lowest ever in history since came in, we’re making bone tools, nothing has been lower than that time, right?
So as a result of that, people were jumping in that. In reality, they’re not going at this from the perspective of a real estate investor, who’s starting a real estate investment business. They’re just, Hey, here’s a great opportunity. And it was a great opportunity, but now those people are going to be shaken out of the running who are not serious about this. They’re going to get out of that line. So let’s say, Marco, you, aren’t going to go to an extremely nice, our favorite steak joint, where we meet up, right. And the price of beef just doubled because that’s ultimately what’s happening here. Price just doubled, you know, only a certain person is going to walk back in there and pay double for that steak. Right? It may have been 50 bucks last two days ago. Now it’s a hundred bucks. Do you think the line is going to be as long? Or is there going to be a lot more people over at taco bell?
Well, I know what you’re saying, but I’m going to take it a little different twist on this and throw a question back at you. So sure. This is big news and it may have a huge impact on the lending landscape in this country when it comes to investment properties and the conventional loans that are available to real estate investors. And by the way, for those listening, we have to make sure that we’re clear here, that we’re talking about the world of conventional financing, not anything outside of that, right? So if we’re scaling back to 7% of all the loans that Fannie and Freddie are putting out there for investors, that’s a reduction from the 12 or 15% or 13% that you were talking about a minute ago. But even though the slice of that pie is smaller. My question to you is this, could it be, especially with the Biden administration that the size of that pie is getting bigger. So even though the slice of the pie is smaller overall, there is more money being put towards these government sponsored entities of Fannie and Freddie by the government and for the federal reserve to actually make the pie larger. Even though the percentage is smaller, we might actually end up with a net increase.
That’s definitely a solid possibility, cause I don’t know what their projection is for the future. So what we have right now is we have a lot of people pulling out of the mortgage backed securities pools because of this news. A lot of people stepping back because they don’t understand what the impact will be. So we did see a little bit of a shrinking of the pie because the mortgage backed securities, where we get the money from, right? If the pie shrunk a little bit over the last couple of days, it didn’t shrink anything more than what we had happen exactly. One year ago when COVID hit, you know, and the Fed had to get in, started dumping in, well, the fed has dumped in trillions of dollars. Since then, the fed has said, we’ll continue to jump trillions in until 2023. So to your point, it could very well be that once this sells out, the pie grows, therefore that 7% is of a bigger pie. We may not see any impact on this or very minimal impact, but here’s the other thing you live in California, right? Yes. How many of those loans are conventional loans? Most of our jumbo, correct?
They have to be jumbo. It was just the market’s too expensive.
Exactly. The jumbos over there, you’ve got the Northwest, you’ve got New York, you’ve got plenty of places in the United States. That jumbo is the predominant way that loans get done in that area. That’s not Fannie and Freddie either. So jumbo was getting done. There’s aggregators out there. There is funds being built around jumbo. They’re going to build funds around this. That’s the flip side of this. I want people to understand there’s going to be a knee-jerk reaction. I understand the knee jerk. I understand the free cat a little bit. That rates are going up and all that. And you got to understand as a real estate investor, you got to weather this stuff and rates in the fours is not a bad gig at all. You know, anything beyond last year, if I was offering in the fours, people would’ve made a mosaic of me and put it in their living room. But now just cause we had this last year of just extremely low stuff, we got spoiled a little bit. So not only are we going to have possibly higher rates, we’ll still be able to tap into the GSEs, potentially a bigger pie, but we’re also going to have the private market out there. That wall streets always create something just like that. It was a jumbos it’s going to get funded in one form or another.
So before I ask you a couple of other questions, people are always curious about rates. Of course. So I’m going to leave that here for a couple of minutes, given this new news with Fannie Mae tightening up and what’s going on with what you know today and the trajectory that we’re on right now, what does this actually mean to the real estate investor? They’re listening to this and they’re saying, okay, this is interesting news. Clearly it’s a big change, but I don’t understand what it means to me as a real estate investor. So what does it mean to me?
So what it means to them is they’re going to have a higher interest rate than what we had last week.
So this will affect rates. This has an impact on rates.
Right now affecting it is interest rates. Because when you have anything like this happen, you have those who are putting their money in because it’s where rates come from is a supply and demand of money. The more money in supply and the lower, the demand, the cheaper, the rate is the less money and supply and the higher, the demand the more expensive rate is. So the demand is out there. And we did have a shrinking of supply due to all this news coming, and a lot of entities or individuals or whatever you want to call them, going into the mortgage-backed securities pools have stepped back a little bit. And as a result of taking that back, shrunk the pool somewhat. So the rates went up, we’ve seen about a half to three-quarters of a percent in interest rate movement just in the last few days.
Okay. So I know you don’t have a crystal ball, but where do you foresee rates going over the next three, six, 12 months.
So you, when you’re looking at the charts from the past, you go all the way back to last year and they were on an incline and an improvement all the way up until March 9th of 2020. And that’s why I had this interruption due to COVID the stock market crash and all that. And then the fed steps in on March 20th, all the way to March 30th and dumped a trillion dollars in, and then maintained anywhere from a four to $10 billion a day injection in their market to keep it where it was going. So here’s, what’s interesting about the market. Once you’ve tasted it the first time it tends to go back. So I am thinking at some point we may go back into the threes on a 30 year, fixed 20% down, seven 40 plus credit score single-family purchase because we’d been there before. It’s only when you’ve never been there.
Is it harder to get there? It’s kind of like when they broke the four minute mile, right. Impossible to do until somebody broke it, then everybody started breaking it. So it’s the same thing we’ve been there. I think we get back there at some point when I do not know, they need to settle out what this means, you know, why are they putting this restriction? Me personally, I think they’re gonna come up with some sort of other housing initiatives. They need a haircut from somewhere, so they’re gonna allocate it here. But I think that the market is going to feel the need when there’s a need, the need gets filled.
There are experts out there that are also predicting sub 2% mortgage rates. And we’ve seen that this was like two years ago. And I know someone who’s very intelligent personally, who studies this stuff on a regular basis and they predicted 2% mortgage rates many years ago. And some people laughed at him and said, you’re crazy. Sure enough. It happened. Uh, so could that still be the trend? I mean, could we still see, um, you know, this might be a short term pull back right now, as far as what we’re seeing, but mortgage rates will continue to go down because we need to keep, uh, credit very loose and free flowing and keep the housing market humming along.
Well. It’s to me, it’s when you have a drug addict, he want to wean them off. You take them off something real quick. How did they react? Right. So you got to give them a little bit more again, and that’s the American economy in reality. They’ve got to put that back in there. And I don’t think that we’re, we’re never going to see that again. I think it’s coming back. Notice what that means for the investors. Do you wait? No, because opportunity is opportunity. If you’re in a position right now in a, in a property pops up and it cashflows at four or 5% and you can reasonably keep that renters in it and you can continue to make the payment plus make cashflow on it and you can raise rents and all those things. Then the element of a good business decision is still there.
But when a person decides, well, I got to wait for the rates. You know, there’s no way to time the market. You know, it’s no different than being a star football player, sitting on the sidelines, waiting to get on the highlight reel. The only people on the highlight reel are on the field. You’re never going to time that perfectly to jump from the bench to get on the highlight reel. So keeping the game set your baselines, know what you want to work and deals will fit. What’s available to you when you find them.
I think, it’s important to put things in perspective and keep them in perspective because there was a day, a few years ago, a number of years ago where mortgage rates dropped for the first time below 6%. And now we were in the 5% range and people were saying, this is unbelievable. Like these are historically low mortgage rates. I’ve got to take advantage of this because we may never see these rates again. And then rates continue to go down, you know, to the low fives and then into the fours and then the low fours. So back then, that was a good deal. And today you’re getting rates in the low 4% or, you know, upper 3% range as an investor. That’s a screaming, great deal. So, you know, it’s always relative. You got to keep in mind, what are you comparing it to? Because there was a time when even 8% was a great deal. So take advantage of the opportunity and interest rates are still low. Don’t be. So I guess, focused at the micro changes in the rate, when you’re losing sight of the big picture, that you can control an income producing asset that is going to grow in value over time, increase your net worth because the equity is increasing and generate cashflow for you for decades to come. So, you know, we got to keep things in perspective, just people get lost in the minutia and they lose sight of the big picture, I think.
Oh, most definitely. And the other thing take a look at what’s, there’s a lot changing in the market and the economy right now. So rates have moved half, maybe three of a percent. Look at what Lumber’s done in just a short window of time has nearly doubled, right? There’s all these things have changed dramatically and rates have not move much in comparison, but yet people are freaking out as if the whole world’s coming to an end, as a result. There’s a lot going on because of what’s happening out there in the market. This is bound to have some sort of influence. Now it’s going to all settle out. We got to understand what’s going to happen with our new administration, what initiatives are going to push, how that’s going to affect the economy, all these things. I think this is just a pull back and to get an understanding, figure out where we’re at and then start to move forward into stuff.
Do you have any opinion or comment about what changes we can expect to see this year and next year with the change in government and what’s going on with, uh, you know, the current administration?
And now without getting really, really political too, because I’m at a loss with everything I see that comes out, everything I’m looking at it. Like I don’t understand. It makes no sense to me how people can really, in those particular arenas, talking with where their focus is at is not where it needs to be completely off of where it needs to be. What I’m hoping for is that we maintain a little bit of some normality in these markets because it’s so misunderstood, right? When you’re talking about the people who are out there, supposedly making laws and making adjustments there, they misunderstand this so much that they’re very, very focused on low income housing and certain demographics and trying to take tax dollars to affect that. But I don’t know if they understand what’s happening over here with enough could, well, of course somebody understood enough cause they cut the limit for single family investors and second homes. What does that do for multi unit? I don’t know. There may be something else going on in that.
All right. Well, as we wrap things up here, I know we’ve got about four or five minutes here before you have to jump on another call. Do you have any comment about the loan products that are going away or may have gone away what we can expect in terms of loan products going forward this year and to the future?
Um, so what’s really kind of faded out and it’s not really even faded. They just don’t price. Well anymore is your short term stuff. Your seven years or five years or 10 years or 15 years, things like that. They’ve priced them soon. And your 15 year 20 or fixes, they priced themselves out of it because there’s a lot of fear with our economy being fairly unstable that people will have a hard time making those payments. So we’re not going to give them or price it and advantageously for them to take a short-term loan or take something with a higher payment. They want them to have that longer payment and have a greater opportunity to make those payments. So that’s when I do get that question about their short-term loans, I never thought them good anyway, but now I also express a reason as to why those are starting to fade off and we’re not seeing much usage of them. And as far as anything else, really just your good old fashioned, 30 or fixed seems to continue to hold strong and continue to have a lot of people behind it to ensure that it survives.
Yeah. Gotcha. Okay. Well, I don’t know if there’s anything else that, you know, you want to add to this. I think we’ve kind of covered the main issue that popped up just this week. So, uh,
Well, that’s the main thing I think that you need to be at least addressed. Cause people are going to question it, what was this? Why is it, what does, how does it affect me? And the bottom line is you always got to have professionals around you to work with you and help you understand things that are going to inform you when things are going to affect you right now. It, it does affect investors, but I don’t think it’s something to get completely alarmed about quite yet.
Here’s a very general and specific question all rolled in one real quick, given what you know and what we’re seeing happen and the way the economy is and trends in housing. What advice would you give anybody listening to this? That’s thinking about investing in real estate, whether they’re starting or building on top of their existing portfolio.
The same advice I always give everybody find the right people to work with more so than anything. There’s always going to be a deal that works. There’s always going to be numbers that works. You got to set your baselines to be comfortable with the deal and then find the people to work with because it doesn’t matter if you have a solid gold brick house staring over the Bay that anybody would rent. But if the people you have working with you suck at their job, it’s not going to cashflow or rent for you. If you’ve got a little, you know, you hall box sitting on a street corner, if you got the right people working, we do that stays rented all the time. That always cashflows because the people and the work that they put in, you know, as long as you set your baselines and you know what you need to have to make it work and be profitable. That’s where it isn’t all. So remember, it’s not about the cash on cash return is not about the cap rates. It’s about the ability to leverage it. It’s a value bill. Use somebody else’s money for a very long period of time and pay them back with a declining instrument like the US dollar. You want to know more about that? We set up a call. We talk about that. I can illustrate to you why the long-term finance is the greatest asset in the deal.
I love it. Aaron. That’s gold. All right. Well with that, Mr. Aaron Chapman, I appreciate you taking the time to come back on the show and update us with what’s going on with Fannie and Freddie and the lending landscape. So we’ll have you back on again and I appreciate your time.
Appreciate you, man. You too. Thanks.
And there you have it, Mr. Aaron Chapman. He is a smart guy and a good friend, and he does a lot of mortgage loans for real estate investors, but he is one of the people that we often refer our investor clients to here at our company Norada Real Estate Investments. So when you’re working with one of our investment counselors, guess what? He’s one of the people that we will introduce you to in order to take care of your mortgage financing, regardless of where you are in the country investing.
So that’s it for today. If you haven’t subscribed, please do so. Remember click that subscribe button. That way you will get notified of all the new episodes that come out, which happens at least once a week, sometimes twice and occasionally on three days. That is it. If you have a question about real estate investing, feel free to send that over to me, go to passiverealestateinvesting.com, click the Ask Marco button. I get those notifications and I will answer as many as I can, or I will batch them together into common questions. Help us spread the word. Remember to share the show with your friends and family. We will see you again next week. Thanks for listening. And we will see you on our next episode.
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