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In its last act as a semi-independent company, Fannie Mae altered mortgage guidelines for real estate investors last Friday. It was Fannie's 22nd update this year.

The first part of the guideline change limits the number of properties owned by any one person. 

Fannie Mae will now decline any mortgage application for a second home or investment property if the mortgage applicant already finances, or will finance, more than 4 properties in total.

The former guidelines allowed for 10.

There is a loophole, however.  Fannie Mae will not count properties against the 4-property limit if they are held in the name of a corporation.  This holds even if the real estate investor is the sole owner of said corporation. 

Investors, therefore, should consider moving their properties into a corporate structure to avoid triggering Fannie Mae's 4-property limit.  Investors often take this step for liability and taxation reasons, but it's now a good idea for mortgage approval reasons, too.

The second part of the guideline change cannot be so easily avoided.  Fannie Mae is assessing new, loan-to-value based loan fees on all investment property mortgages.

• Loan-to-value less than 75 percent : 1.75% loan fee
• Loan-to-value 75.01-80.00 percent : 3.00% loan fee
• Loan-to-value 80.01-90.00 percent : 3.75% loan fee

These fees are mandatory and are in addition to any whatever other risk-based loan fees Fannie Mae may assess.  Currently, those fees amount to a half-percent at minimum for real estate investors.

Since its Fannie/Freddie takeover, government officials have not addressed whether mortgage guidelines will be rolled back to "a looser time".   If they are, it would be a big deal for real estate investors because, as many are finding out, low rates don't matter much if you can't qualify for them.

If you're currently in the market for an investment property (or two), consider that it may be cheaper and simpler to purchase over the near-term versus the long-term.  And consider moving your existing properties into a corporate structure first.

Mortgage rates bounced around last week, ending up worse overall.  It was the second straight week in which rates deteriorated.  Sentiment was driven largely by the proposed Emergency Economic Stabilization Act of 2008 -- a.k.a. The $700 Billion Bailout. 

The good news is that Congress drafted its bill Sunday evening and within the 110 pages, there is an important clause that should be good for mortgage rates. 

On Page 40, it says, summarized:

• The U.S. Treasury gets $250 billion up-front
• It must ask the President to approve its next $100 billion
• And Congress must approve the remaining $350 billion

In other words, the U.S. Treasury checkbook is not "open".  By limiting the Treasury's spending to $250 billion up-front, with the next $450 billion subject to third-party approval, some of the market's inflation concerns from last week should ease, providing downward pressure on mortgage rates in general.

But, that said, there's a few important data releases this week that could counter-effect these improvements.

First, on Monday, it's September's Personal Consumption Expenditures data.  The report sounds fancy with a name like Personal Consumption Expenditures, but it's really just a Cost of Living measurement, adjusted for human behavior. 

For example, if whole grain cereal gets too expensive, PCE assumes that Americans will substitute for another breakfast food.  This is one reason why PCE is the Fed's preferred measure of inflation. 

If PCE is higher-than-expected, it's considered to be a signal of inflation and mortgage rates should rise.

In addition, on Friday, the jobs report is released.  It's widely expected that the September's job growth was negative (for the 9th straight month) and that unemployment remained in the 6.000 percent range.

Rates up or down, it's too hard to predict.  Therefore, if you see a mortgage rate with a comfortable accompanying payment, consider locking it in. 

With as fast as markets have moved this year, you can be pretty sure the rate -- whatever it is -- won't last for long.

(Image courtesy: The Wall Street Journal Online)

The August Existing Home Sales report was released Wednesday, showing a decline in the number of homes sold nationwide, and a reduction in the median sales price. 

Not surprisingly, the media singled these two statistics out, playing them as a big negative. 

They're not.

The decline in sales wasn't good, but it wasn't terrible, either -- sales were actually up in half of the regions around the country. 

And, citing "median sales price" is somewhat pointless because median sales price only measures the price point at which half the homes sold for more, and half sold for less.

No, it's the third statistic in the report that deserves as much -- if not more -- attention that the previous two.  According to yesterday's press release, the national home supply is decreasing. 

This is terrific news for home sellers.

In its report, the National Association of REALTORS said that the nation's existing supply of homes for sale fell by 7 percent in August. 

At the current pace of sales, that represents a 10.4-month supply, down from 10.9 months in July. With a reduced supply of homes for sale, all things equal, home prices would increase. 

This is Supply and Demand in its most basic form.   

Economists and experts have long noted that reducing the housing supply is one of the key elements to a sustainable housing recovery and we've seen several indications that this is happening, including builders not building as much.

Longer-term, this is good news for home sellers because a reduction in housing supply tends to lead to higher prices. 

(Images courtesy: The Wall Street Journal Online)

This is an unwelcome development for home buyers because the same market forces that pushed up oil prices had a similar impact on mortgage rates.

It all comes down to the U.S. dollar.

Because both crude oil and mortgage-backed bonds are denominated in dollars, the fate of both instruments has been closely tied to the greenback lately.

With respect to the mortgage market, when the dollar has been strengthening, rates have tended to fall.  And, when the dollar has been weakening, mortgage rates have tended to rise.

Yesterday, the U.S. dollar had its worst one-day performance against the Euro in history so it only follows that conforming mortgage rates spiked.  Across the board, they added about a quarter-percent.

Add this quarter percent to the run-up from last week and conforming mortgage rates are now close to 0.750% higher than where they were last Monday, further evidence that how quickly the market can move.

(Image courtesy: GasBuddy.com)

Getting a great, low mortgage rate is often a combination of luck and preparation. 

Consider what happened in conforming mortgages this week:

• Monday, mortgage rates plunged to their lowest levels of the year
• Tuesday, they bounced back in full
• Wednesday, they clicked higher by a eighth-percent
• Thursday, they clicked higher by another eighth-percent

And so, here we on are Friday, four days after the best rates of the year, and the mortgage market barely resembles itself.  Despite what the papers tell you, mortgage rates are not low anymore.

That's the luck element -- you can't plan for rates moving up and down.

But, if you missed Monday's plunge, and don't want to miss the next one, all you have to do is get prepared.  Then, you're waiting for luck when it happens.

There are 4 basic steps to prepare for low rates and the key is to follow them before rates plunge, not during.  That way, you're ready to pounce on low rates at the moment they present themselves.

The first step is to contact your loan officer. 

If you don't have a loan officer, or your loan officer is no longer in the business, ask a friend for a referral.  Do not call the 800-number on your mortgage statement -- you'll almost always get a better "offer" from a live person than from a call center representative. 

Next, give your loan officer a complete mortgage application, including a "credit pull".  Be honest and accurate and don't worry about the credit check harming your score -- the bureaus protect it for a period of 30 days.

Then, ask your loan officer what supporting documentation will be required to approve your eventual home loan.  Whatever it is, gather it and send it in -- either by fax or email.

And lastly, be ready to act when your loan officer calls with the good news. If rates have dipped to lower-than-normal levels, it likely won't last long.

This preparation process is very similar to what home buyers do before making an offer on a home.  Getting ready for a refinance is like getting pre-approved, but instead of waiting to pick out a home, it's waiting to pick out a rate.  

So, to summarize:

1. Contact your loan officer
2. Give a complete application
3. Gather and submit supporting documentation
4. Be ready to act

Mortgage rates don't plunge often, but when they do, it's usually short-lived.  If you're prepared for when it happens, you can lock in the best mortgage rate available at the best possible time.

It will be your lucky day and you will have been ready for it.

Have a specific mortgage question? Call or email me anytime!

Yesterday, the stock market suffered its largest one-day point loss since September 17, 2001, and its sixth-largest point loss in history.

Not everyone got punished, however.  Two groups of people, in particular, welcomed yesterday's losses:

1. Home buyers out shopping for a mortgage
2. Homeowners that snoozed through last week's mortgage rate drop

See, as the stock market dropped yesterday, investors anxiously moved their money away from risky investments like stocks and into the safe haven of government-backed debt.  

This includes mortgage-backed debt, of course.

As traders poured into bonds, bond prices rose.  They did so beginning at Market Open, all the way into Market Close. And, because mortgage rates move in the opposite direction of mortgage bonds prices, mortgage rates fell Monday.  A lot.

Today, the Federal Open Market Committee meets, adjourning from its scheduled conference at 2:15 P.M. ET.  In the Fed's press release, among other things, markets expect Ben Bernanke & Co. to address the financial system's stability -- or lack thereof -- that helped to fuel Monday's selling action. 

If markets find the Fed sympathetic, expect stock markets to rally, and mortgage rates to rise.

When comparing two investments with equal risk, a rational person will choose the investment with a higher rate of return.

This behavior is called Risk Aversion and is a basic tenet of personal investing.

An off-shoot of Risk Aversion is that a rational person will only invest in an instrument of greater risk if the returns are greater, too.

The chart at right illustrates this concept, comparing return rates on two investments:

• U.S. Government bonds
• Mortgage-backed bonds

The difference in investment return rates is sometimes called a "spread" and the historical spread between government debt and mortgage debt is somewhere near 1.5 percent. 

However, notice how the spread started to grow starting in July 2007.

July 2007 marked the "official" start of the Credit Crunch and as mortgage delinquencies grew nationwide, so did the market's perceived risk of investing in them. 

By the start of this month, the spread had nearly doubled.

But that all changed Sunday.  When the government announced its takeover of Fannie Mae and Freddie Mac, it put the same "risk-free guarantee" on mortgage debt that has helped keep U.S. government debt so cheap to finance and the spread immediately shrunk.

This is one reason why mortgage rates fell Monday and why they should continue to stay low over the near-term.  With the U.S. government backing the mortgage market, there's no room for the risk premium that helped keep rates high this past year.

It doesn't mean more people will qualify for conforming home loans, but for the ones that do, financing should be cheaper.

1. Sell the home, paying off the mortgage in full
2. Keep the home as a second/vacation home
3. Convert the home to an investment property

The most common action plan is the first one -- sell the home and pay off the mortgage.  However, with home prices poised to rebound, some savvy homeowners are trying to avoid "selling low".

Unfortunately -- as of August 1, 2008 -- waiting out the market won't be so easy. 

Burned by foreclosures and wary of risk, Fannie Mae issued new conforming mortgage guidelines that specifically apply to home buyers planning to convert an existing primary residence into a second home or investment property.

Among the highlights of Fannie Mae's changes:

Selling the primary residence
If the new home being purchased closes prior to the existing home's sale, both payments must be used to qualify the buyer for the new mortgage.

Converting to a second home
If the home has less than 30 percent equity in it, the home buyer must show 6 months of PITI reserves for both properties to qualify for the new mortgage.

Converting to an investment property
If the home has less than 30 percent equity, its rental income may not be used to help the buyer qualify for the new mortgage.

If it seems like mortgage rules are getting strict, that's because they are.  And they're expected to get tougher, too.  With each foreclosure and high-profile bank collapse, mortgage lenders tighten up their guidelines just a bit, freezing out the "fringe" borrower from access to mortgage money.

Mortgage rates may rise through 2009, or they may fall.  We don't know.  But what we do know is that borrowing money to buy a home will be tougher.

If you plan to buy a home in the next 12 months, consider moving up your timeframe or -- at least -- planning ahead.  Understanding the mortgage rules and how they can change may be the difference between getting approved for a home loan, or getting turned down.