Investors who got used to easy money during the boom years - helped along by Wall Street, Freddie Mac, Fannie Mae and private mortgage insurers - need to adjust to some sobering new realities: Their traditional sources of credit are squeezing the pipeline.

For example, Freddie Mac recently told lenders that as of August 8th, it plans to clamp down on rental home investor loans.

Currently Freddie is relatively friendly to small scale investors who have multiple rental units. With good credit and appraisals, it will finance rental unit mortgages for investors who own or co-own up to 10 properties carrying mortgages.

As of August 8th, however, the limit on multiple units for investors will drop to just four. And that includes the unit to be financed by the new loan application. So the limit is actually three existing investment units plus a new one.

Freddie also plans to get stricter on cash-out refinancings. As of August 8, if a loan on a house was refinanced with cash out of the transaction, it will be subject to higher pricing if the property is refinanced again within six months. During that time period, refi applications will be treated as cash-outs, even if the latest refinancing involves no cash out.

Freddie Mac says the tougher standards “reflect the risk” of these mortgages in light of declining property values and higher default rates in many parts of the country.

Private mortgage insurers - who cover losses for lenders on loans with 20 percent or lower downpayments - are jumping in with new cutbacks of their own on investor mortgages.

PMI Group, one of the largest insurers, announced that it won't touch any rental property or investor loan applications from dozens of what it calls “distressed” or “declining” markets.

Nor will it consider cash-out refis or limited documentation applications from investors.

Even in healthy, non-distressed markets, PMI is banning cash-out refinancings on rental houses and second homes, as well as interest-only mortgages on investment real estate, and all properties containing three to four units.

MGIC, the largest mortgage insurer, says it too is eliminating coverage on investor loans with temporary rate buydowns, along with cash-out refis that have less than full documentation.

With all these new restrictions, where can small investors turn? Try shopping aggressively through mortgage brokers. Some of them have relationships with banks and deep-pocket private investors who still welcome investor loans in their portfolios - provided, of course, that they come with higher rates, solid credit and appraisals that can stand up to rigorous review.

Published: May 8, 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.