Fannie Mae quietly made a rule change last week that could be of huge significance for cash buyers of houses — whether they’re investors or owner-occupants — starting immediately. Call it cash-outs for all-cash players.
The company modified its long-standing requirement that all-cash home purchasers must be on the title for at least six months before pulling out money from the house by obtaining a mortgage. Now you can do it — if you qualify — virtually overnight.
Under Fannie’s new "delayed financing" option, buyers paying cash to gain a competitive advantage — lower prices, cleaner and quicker deals than purchasers requiring financing — can now turn around and pull out substantial money from the transaction shortly after settlement.
Given the growing role of all-cash purchases in many markets, Fannie’s change could create new opportunities for players in the bank-owned, foreclosure and short-sale segments, including Realtors, small-scale investors and ordinary buyers who have access to ready cash.
All-cash purchases accounted for about 30 percent of total home sales nationwide between mid-April and mid-May, according to the National Association of Realtors. That’s up from just 12 percent in May 2009. In hard-hit markets such as Las Vegas, they’re even bigger — 53 percent of sales, according to DataQuick.
During the first quarter, all-cash purchases accounted for 63 percent of sales in the Miami-Ft. Lauderdale metropolitan area, according to Zillow.
Fannie Mae’s rule change allows some of these all-cash purchasers to tap their equity and put it to work elsewhere — perhaps buying additional real estate. Of course, there are some limitations and restrictions:
- The mortgage cannot exceed the documented amount of the borrower’s initial cash investment in the house to be mortgaged. That’s no matter how much you subsequently invest on remodeling improvements.
- The all-cash purchase must have been arm’s-length, with no conflicts of interest among the parties.
- The purchase must be documented with a HUD-1 confirming that no financing was involved (i.e., there’s no existing mortgage lien on the property).
- The sources of funds used for the all-cash purchase must be documented, including bank statements, personal loan documents or a home equity line secured by another property. But to the extent that loans were used for the cash transaction, they "will be required to be repaid on the new HUD-1."
The loan-to-value (LTV) limit follows Fannie’s rules for cash-out refinancings. Generally, it’s a 70 percent LTV limit, but for owners of two to four investor units the maximum LTV limit is 65 percent. All of Fannie’s regular underwriting, credit and documentation requirements for cash-out refinancings also apply.
In its guide change on June 28, Fannie offered no rationale for liberalizing its rule out of the blue. A Freddie Mac spokesman, Douglas Duvall, said in an email that his company not only is retaining its six-month seasoning rule, but "we are not considering a change to this requirement."
Fannie Mae spokeswoman Amy Bonitatibus said that her company is making its change to serve the growing number of purchasers making all-cash offers to obtain advantageous pricing.
"Why not have that option and close that deal?" she asked in an interview.
My own interpretation is that Fannie has concluded, "Hey, why leave money on the table? Why not generate new business by providing thousands of credit-qualified buyers with a lot of cash a way to liquefy their investment rather than leave it tied up for half a year? Give them a quick cash-out tool but insist they also have adequate skin in the game."
Initial reactions from investors and Realtors appear to be mainly positive. Tom Demogenes, an agent at Re/Max Realty Team in Cape Coral, Fla., said he sees "no downside, only an upside" in his local market, where he estimates about one half of sales are all-cash.
Demogenes said cash buyers get an average 5 percent to 7 percent price break compared with purchasers needing financing to close, and they virtually never lose head-to-head competitions for houses.
Paul Skeens, CEO of Colonial Mortgage Group in Waldorf, Md., and an active investor in some of the foreclosure-burdened suburbs south of Washington, D.C., welcomed Fannie’s loosening of its rules on cash-outs. But he’s concerned that the fine-print restrictions might be problematic for investors.
For example, he said, the limitation on maximum loan amounts to a buyer’s initial cash investment will be a serious obstacle for investors who buy homes requiring major repairs and upgrades — some of which may exceed the price they paid in cash for the house itself.
Other aspects of the new option could also prove challenging, such as the documentation of sources of cash and the payoff of any existing liens on the property to be financed.
Skeens, for instance, uses a commercial line of credit — across-collateralized by personal and business assets — to draw down funds for cash purchases of houses. He said he is not sure how the delayed financing program would treat that source of funds.
Despite these limitations, Skeens said Fannie’s new option "is great — I love it. And I think it’s going to work for a whole lot of buyers."