Call it the backlash after the boom: Major lenders and mortgage insurers are turning off the money spigot for investors who want to buy rental houses or condos with minimal downpayments.

The most dramatic cutback takes effect next week, when giant mortgage insurer United Guaranty -- a subsidiary of AIG International, the world's biggest underwriter -- says it will stop covering loans to investors in any of the thousands of Zip codes from coast to coast that it defines as "declining" real estate markets.

The ban includes all non-owner-occupied rental houses or condos -- including "mom and pop" two-to-four unit properties where the owners occupy one and rent out the rest.

United also is cutting off coverage of all condominiums and cooperatives - whether owner-occupied or rental -- plus all second home purchases. It's even refusing to look at loans to investors or owner-occupants that have limited documentation in any market, whether declining or not.

Other major mortgage insurers are expected to follow some, if not all, of United's tough new restrictions in the coming weeks.

Add to that Fannie Mae's and Freddie Mac's new guidelines on condominium financing, which are causing condo associations to adopt stricter rules on the percentage of units owned by investors -- and you're looking at some crunching changes underway for small-scale investors.

The Fannie Mae guidelines now require lenders to make certain that at least 51 percent of the units in a condo project are owner-occupied, not rented out by investors. Though that percentage has not changed from prior guidelines, the fact that buildings and projects will now be under scrutiny by lenders every time a unit comes up for purchase or refinancing, is causing condo association boards to keep a stricter lid on rentals.

In small projects, just a handful of rental units could put the whole building over the line -- making all units ineligible for Fannie Mae or Freddie Mac financing. That's an especially tough situation in resort areas, with high rental usage, or in depressed markets, where owners are renting out their units or simply walking away from their loans.

Still another Fannie policy is causing condo boards to worry: If more than 15 percent of the unit owners in a project are late on their association fees -- not uncommon in down markets -- lenders may not finance any individual units.

Bottom line: Easy money days for investors, especially anybody looking to pick up condo units -- are over. Don't hold your breath waiting for the return of nothing-down, no-doc financing for speculators looking to flip condo contracts for quick profits.

Published: April 25, 2008

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.