Hello, and welcome to another episode of Passive Real Estate Investing. I’m your host, Marco Santarelli and I am happy to have you here. Well, you know, the government has made some changes recently and they have removed some restrictions on investment property. And I have a guest today who I’ve had on about a year ago, last December, Caeli Ridge. And she’s going to talk about what this is and what it means to us as real estate investors. It is a positive move forward, and it is an attempt to address the housing supply shortage that we have in our country. Right now, more specifically, what they’re trying to address is the limited affordable housing, and I’ll say affordable in air quotes, but the affordable housing problem or supply problem that we have going on. And hopefully this relaxing of these restrictions will help that and be a sustainable solution.
I don’t think that’s the entire answer to the problem. We just have a lot of demand. Lack of supply inflation is high. It’s going to continue for a while. Inflation is a problem, and it’s something you should really wrap your head around and understand. So with the lack of supply, strong demand, monetary inflation, price, inflation, all these dynamics going on and property values going up along with supply shocks that have been going on for over a year now in part due to the whole COVID situation, you know, we’re not out of the woods, we’re going to see this problem go on for at least the next three or four years. According to research that I’m reviewing, but potentially is as long as 2030, you know, for the next nine years or so, it’s something that we need to be aware of. Now, if you’re on the right side of the equation, if you are a real estate investor or you are starting to invest in real estate, guess what?
You have a tailwind, you don’t have headwind, you’ve got the cards stacked in your favor, and this is a great place to be. So think about that, you know, in real estate investing and real estate investments specifically, residential are arguably the best investment class, the best asset class to be in. And so with that in mind, let’s kind of unpack this whole government removing the restrictions on investment property and what it means to you as a real estate investor and what it means to go forward over the next year or so. So I’ll ask Caeli various questions about what that means trends that she sees going on and various loan products that are on the horizon for us as real estate investors. So let’s dive right in and get going.
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It’s my pleasure to welcome Caeli Ridge back to the show. She is the president and CEO of Ridge Lending Group. She has been an established real estate investor for over 20 years now. And she has worked with tens of thousands of real estate investors all over the country, helping more people and more families realize their dreams as real estate investors than any other mortgage lender out there today. And with that Caeli, welcome back to the show.
Mr. Santarelli, it is my pleasure, sir. Thank you so much for having me.
Well, it’s great to have you back on you are a wealth of knowledge and you do a lot of our clients, mortgage loans for them, which is great because it makes them happy and it makes it for a smooth transaction. And really, you know, I think most investors dislike the financing part of the purchase process the most. So anytime you can make that easier for them, I think they’re very, very happy. So thank you.
And I’ve never heard that before. In fact, it’s usually I hire people say, let’s just do the financing, you know, at nauseum, they love it so much. It’s I we’ve heard that we do try to make it as seamless as possible. It’s an imperfect process, I think just in general terms, but, we do our best to, to keep as much brain damage out of that.
Yeah. A hundred percent totally agree. So the big news today, and this is what you reached out to me on is that the government and specifically the announcement came from the treasury department and the FHFA and for those who are not familiar with it, it’s the Federal Housing Finance Agency and their big job and role is really focused on promoting the safety soundness and ensuring that the government sponsored entities serve as a reliable source of liquidity and funding for housing financing, which basically is a bunch of lingo and language to say that they’re essentially providing guidance for Fannie Mae and Freddie Mac to buy all the mortgage loans that are originated and put them on the secondary market. So with that, they have basically removed some restrictions on investment property, making it hopefully easier for investors to get more loans. And this is what we’re going to talk about today. So why don’t you give us some background on what this is and what happened, and then we’ll talk about how this impacts real estate investors.
Absolutely, and to, to kind of add some more context for those that may not be aware. Um, you had mentioned GSEs Government Sponsored Enterprise. This is what Fannie Freddie are comprised of. They are GSEs and the Fannie Freddie, the distinction that applies to non-owner occupied loans, that’s where investors that are looking for 30 or fixed mortgages at low, low interest rates are going to get that kind of funding through Fannie and Freddie. What that really means to them is that this is a quasi government backed mortgage, right? So when they do go to resell these, these mortgage backed securities, it comes with an assurance or guarantee from the United States government that in the event of default, that piece of paper, that mortgage backed security is insured against default. And really guys, the only reason that we have 30 year fixed mortgages in the threes and fours, um, all of that said just kind of connecting a few dots for your listeners here.
So for anybody that follows this stuff, they probably remember that back in March of this year, there was an announcement, unbeknownst to many that came from the, the, FHFA, the Fannie Freddie and treasury telling us that certain occupancies specifically non-owner occupied, right investment, property loans. And second homes were being added additional layers of risk because of the treasuries preferred stock agreement with Fannie Freddie. The reason that the treasury had a preferred stock agreement was because over the last 18 months, they have been purchasing mortgage backed securities to the tune of 40 billion that’s with a B dollars a week. So the treasury had some weight to throw around. And as a result, these extra risk layers for those two occupancies, again, non-owner occupied the second home, they imposed a 7% cap purchase cap per aggregator. Let me define what that means. So as a direct lender, right, we fund all of our own loans on our warehouse lines, but we don’t service these loans.
We will bundle them in packages and resell them on the secondary market to what are called aggregators. So for example, if I had $10 million worth of loans that I’m going to resell, and I’m going to resell it to this one, aggregator not more than 7% of that 10 million could be for not on our occupied and second home that we have dozens of aggregators. So that piece of the announcement didn’t adversely affect our ability to fund loans. But what it did do is that the announcement itself kind of reveled the secondary market in the industry. By saying that there’s extra risk here, there’s going to be less opportunity for the backing, the insurance backing from the United States government. So we are going to impose what are called LLPA’s – Loan Level Price Adjustments. I’m going to give an example really quick. So before this announcement, let’s say for the occupancy of an investment property, non-owner occupied had a loan level price adjustment of 3%, okay.
This doesn’t necessarily need to meet anything except to fast forward to the announcement. Now, the LLPA is at 4.75 in general terms what that means is, is that immediately overnight from this announcement, we went from interest rates in the threes to interest rates in the fours. It was about a 1% interest rate hike or increase immediately to this March 10th, 2021 announcement. So that’s kind of the backstory fast forward to about two weeks ago. I think it’s been now, they have since suspended that announcement and the 7% restriction per aggregator of those occupancies has now been removed and immediately again, within about a 24 hour period of time, we saw interest rates come back down into that mid 3% range.
That’s a big change very quickly. So is there a capital or is 7% change to something else?
It’s gone? It’s completely gone. So I don’t want to go too far into the weeds because it gets even more tactical than what I think I’ve already, I’ve already tried to articulate, but there is no longer a, um, a maximum delivery, her bundled set of mortgage backed securities, while we’re reselling to aggregators before they kept us at 7% per sale. Now that’s gone. And it it’s, it’s just changed the playing field and those loan level price adjustments, the increase that we saw has also been removed. So we’ve seen the improvement there as well.
So the most visible change is the drop in the interest rate. What else does this mean for investors? Does it mean that there are more loan products or the ability or the possibility of having more than 10 conventional loans going forward?
No, everything else, as far as they’re concerned is going to remain the same, any difference would have been invisible to them anyway. So really all this announcement means to the individual real estate investor. Residential real estate investor is the interest rates are, are now back from, you know, four and a half to three and a half, just as a round number based on the variety of variables that can dictate an interest rate. That would be the margin that I would communicate.
Do you see this being a temporary move, or do you think this requirement or this restriction will come back? Because I know that the motivating factor for them in removing this in the first place was just to help promote housing stability and address the affordable housing sector by allowing more liquidity into the system for mortgage financing to allow them to build them as in the industry to build more housing supply. That’s my understanding of it. So will it fulfill that requirement? Who knows, but what do you think?
Yeah, I don’t think that this is a temporary thing. I think that it’ll, it’ll stay in this way. I feel like when they made the announcement, it was a little bit short-sighted and they weren’t accounting for all of the variables that necessarily where we found the negative impact, the severe negative impact of it. Again, some of this gets into the weeds, but what I will say is is that for home ownership and in particular renters, right now that announcement back in March really negatively impacted their abilities to, to have reliable cost-effective housing for the renter. When those interest rates went up, investors like us found, you know, and it’s very closely tied together when interest rates go up, what happens to rents, right? They will go up. They’re not going to go up simultaneously. If we see a big hike in interest rates, we as landlords and investors, don’t, it doesn’t happen right at the same time.
But interest rates going up will equal over 3, 6, 9, 12 months post the interest rate increase rents will continue to, to rise. So a lot of that is what they saw as an initial trickle-down effect of the announcement. So backing that back off, and then having those lower interest rates in the particular environment that we find ourselves in granted, we’ve got all kinds of, of inflationary concerns, et cetera, but given the pandemic, and then the last 18 months, I think that the move to do that really impacted renter’s ability to find reasonably priced housing, if that makes.
Yeah, well, that’s been a problem for a long time and it’s a continuing problem. Do you think the removal of these restrictions dropping interest rates for investors will have any impact on investor demand for residential investment property? Or do you think that demand is just going to continue the way it is, which is very strong.
Certainly there’s going to be the fence sitters that might jump off and dip their toes because they’ve heard announcements and rates are better. But I think as, as a whole, most investors recognize that, you know, the investment, isn’t just about $20 a month of extra cashflow, depending on the loan size of $50. So I think that the demand for housing for real estate investors is going to be consistent. I don’t see that backing off. And I don’t know that this change will create some massive extra flood. You know, I think it stays where it is and, and I’m pretty bullish on real estate for the coming years. Now, hopefully the appreciation levels that we’ve been seeing over the last 12 plus months starts to level out a little bit. Cause I don’t know that I feel that’s super sustainable, but overall I think that the demand remains pretty consistent, which is strong.
Yeah, all the research that I’m looking at and the reports that I’m reading are showing that there’s going to be a significant drop in the annualized appreciation rate next year. Like this year we’ve surpassed 20% on a national average. If you really look at the major markets, it’s huge, which is an absolute anomaly. And it was very strong last year as well. You know, regardless of what factors COVID played into that, which had a lot to do with supply shortages and whatnot, but this has just been an absolute anomaly of a year for appreciation next year. Um, you know, what I’m reading is somewhere in the four to 7% and the year after that, it’s probably going to be a little bit softer. So I do not expect to see the same thing happen in the coming years as what we saw here in the last 12 months. But you know, we’re talking about trends here in regards to the removal of these restrictions, what it can mean for investors, interest rates dropping back down, staying historically low. I mean, these are all good trends, positive trends for us as real estate investors. Are you seeing or noticing any other trends out there in the industry, whether it be in the lending space or even in housing that you want to comment on or just bring up.
Um, trends? I feel like, um, you know, oftentimes from my perspective, which is a little bit unique, right, as the lender that has a nationwide presence and really focuses on the investor, the appraisal piece, there’s been some, some changes to how appraisals will be delivered. And a lot of people are thinking that the automation based on certain trends that we’ve been seeing that Fannie Freddie and the automation and delivering a valuation for a property might see some significant changes. In other words, there is lots of indicators to say that an appraisal will no longer be done by a human being an individual it’ll be more automated. So we’re kind of keeping a close eye on that. I don’t know if that’s necessarily called a trend. You might say that the same is true for real estate agents as a trend. That might be something that is futuristically. Not as, I don’t want to upset the real estate agents association. I’ll, I’ll pass on that one, who knows what’s going to happen. But I, it just going back to appraisals, we are seeing that appraisals are coming in more consistently at, or above the estimated value or purchase price. Whereas, you know, over a year ago, year plus two years ago, we would commonly see short values where they’d come with 5,000 less or 10,000 less or whatever it might be. That’s no longer the case. So that might be a trend, but I could speak to.
Well, you know, the whole mod, the AVM model – Automated Valuation Model has been around for over a decade. I mean, there have been attempts by many companies over many years trying to automate the valuation of property. And there’s been a lot of progress made, but it’s still not a very tight, accurate model that works well. But the other thing that, you know, to your point is the whole thing with AI, you know, artificial intelligence, it’s replacing and will continue to replace a lot of jobs in many different sectors and industries. And who knows it could be that appraisers are going to be squeezed out and there’ll be a less of a need for residential real estate appraisers. It’ll just one day be automated. It’ll be all on the blockchain. Everything will be, you know, completely in a public ledger. And it will be just automated in a way that artificial intelligence can determine the market value of a property. Given a few variables plugged in like the condition of a property. We’ll see, I mean, who knows. Wow, but there’s, there’s always going to be trends, especially in this industry. So anyway, we’re approaching October very quickly here. There’s only a couple of months left in the year, another quarter, you know, what should real estate investors be aware of going into 2022? Do you expect any kind of big changes, any, a stock market crash shock of any kind, a black swan event?
I, you know, I don’t, I think that we’re kind of par for the course with regard to lending anyway, um, and real estate investing. I don’t see any huge changes to what we can and can’t do. If anything, I see maybe some additional access to credit guideline. I don’t think it’s going to go backwards. I think that if anything, it’ll probably stay consistent. Maybe we get a little flexibility in X, Y, or C, but as far as underwriting guidelines go as investors, we are the most scrutinized, right? We, you know, I’ve said this, and maybe I said at the beginning of our talk vials of blood and DNA samples is what we’ve been come to expect of our, of ourselves to qualify for a conventional loan. Um, and that’s been going on for over 10 years. So we’re pretty accustomed to that. Any little bit of reprieve that we might get is going to be welcomed. And everybody always asks, when are we going to get more than 10 conventional loans? I don’t know between now and our death, maybe it’s the answer they usually do. There has been talk over the years that Fannie Freddie may open up from, you know, 10 to 12, 10 to 15, but I might just comment that beyond the tenders, there’s all sorts of, of loan products available for investors that have maxed out their 10, that we can, we can get them into with very conservative and competitive pricing in terms of pricing.
Yeah, I think that’s a good point. It’s important for people listening to this to understand that you’re not capped at 10 conventional loans, there are loan products that go far beyond that, theoretically, an unlimited number of loan products. So if you have questions about that, you know, certainly talk to either my team or our Caeli or whoever it may be, but that’s kind of a good way to kind of bring this to a close is talking about loan products, or have there been any changes in the loan products? Have things gone away, are new loan products coming out, or what do you see on the horizon? I know back in 2006, you know, in that period of time, there were all kinds of interesting loans that came out when we had lots of credit and liquidity like we do right now, there were stated income loans, no income, no asset loans, the ninja loans, you know, like there were all kinds of products. And interestingly enough, I haven’t seen a lot of that today. Like, you know, this year, last year, I mean, there are some stated products that I’ve seen advertising for, but very, very little.
Yeah, we, we have a very diverse product line of loans. Many of which are specifically geared to the investor. We do have a debt service ratio product. Um, we’re just going to take the gross rents and divided by the proposed EITI principal interest tax and insurance, for those that are familiar with that, that acronym. And if you get a 1.1 or greater, you can get a 30 year fixed mortgage rates will be higher. Obviously you’re not submitting the rent or the income documents and things of that nature. You’ve got asset products where we’re looking at, you know, a self-directed IRA. And if there’s enough in the face value of that asset divided over a certain number of months to qualify you, to get your debt to income ratio in line, there are those products, you’ve got bank statement products. There really is a pretty diverse product line of loans for investors. Then you’ve got commercial products that can even apply to residential property where you can cross collateralized multiple residential properties into one blank commercial one. So it’s pretty diverse.
So just to be clear, not just for myself, but people are listing everything you just described as from a qualification perspective, but market value is still determined by a local appraisal it’s based on sales comparables.
More often than not. Now, there is something called a PIW- Property Inspection Waiver that if you run an AUS, an Automated Underwriting System, depending on the system, Fannie Freddie have their own proprietary, AUS but there are others. If the scenario runs through an AUS and gives us a PIW property inspection waiver, no appraisal is necessary. It’ll use the number that we put into the system, um, as the value in determining the loan to value of the transaction.
Interesting. I’d like to talk to you about that a little later. That’s pretty interesting. I didn’t know that existed, so, all right. Well, very cool. Well, let’s wrap it up Caeli. Is there any final comments, thoughts that you want to, mentioned to the audience? And then of course, I want you to tell everybody where they can find you and get more information about what you provide.
You know, I, I think that the, the closing comment I would have for this, this topic Marco is, but, um, I’m anxious to hear from everybody rates are amazing. We’re back in the threes. So if you were kind of holding out to see where rates would go or take advantage of anybody that’s been paying attention has been through the rollercoaster rides. So take advantage while they are low, we are here to help. Um, you can reach us at ridgelendinggroup.com, our email address is info@ridgelendinggroup.com, is where you can contact us in email or feel free to call us toll free at 855- 74RIDGE [1-855-747-4343].
Cool. All right, Caeli, as always, it’s great chatting with you, and thank you for your time today.
My pleasure, thanks, Marco.
Well, again, as a reminder, mortgage rates are very, very low, historically low, and it’s cheap cheap money. And when you can borrow against an asset that appreciates in value is a great inflation hedge generates cashflow, and will create wealth for you over the years. It’s almost crazy to think of not borrowing as much as you can to acquire more and more real estate, more and more assets that will create cashflow and create that wealth for you. So something to think about, and if that’s not clear to you that whole concept and how that plays into the inflationary environment that we are living in, especially the rates of inflation that we’re seeing right now, because of all the liquidity and the easing that is being created by the federal reserve. Then you need to study this and do some research, wrap your head around it, or talk to the investment counselors that we have here.
I have a whole team, nine investment counselors that can help you and let us help you understand the benefits and the impact that real estate can provide you, especially residential income producing real estate. So just keep that in mind, you know, having Caeli on the show here is great. She’s, you know, very smart lady understands mortgage financing and lending very, very well. She’s been doing it for a long time, and she just understands the power of having good debt, good financing to acquire assets and control a hundred percent of the benefits and own a hundred percent of the benefits of investment real estate. While you’re only putting down 20, maybe 25% and borrowing the rest. So it’s a great deal if you want to call it that, just, you know, think about that. It’s arguably the best investment out there. So with that, let’s wind things down.
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