If a development has a large number of short-term rentals – individually owned units or single-family homes rented out similar to a hotel’s operations (condotel) – what unique lending standards for home sales should apply? FHFA opened a comment period that runs through July 5.

WASHINGTON – The Federal Housing Finance Administration (FHFA) is questioning whether lending standards should be changed for homes destined to be used exclusively as short-term rentals.

The issue impacts loans that Fannie Mae or Freddie Mac (the Enterprises) will eventually buy from lenders. A bank or other lender can make a loan to anyone they wish, but if they hope to keep making loans, they often plan to sell the loan to Fannie or Freddie and use the cash to make even more loans. They’re assured of a Fannie or Freddie purchase at the time of origination, providing they follow the rules established by FHFA for those loans.

FHFA is now looking at those rules as they apply to short-term rental developments.

“There are several attributes of short-term rentals that can increase liability risk, such that the standard unit owner’s insurance policy may be inadequate, resulting in losses that are uninsured, underinsured or improperly insured,” FHFA writes in its request for comments. “Condotels and other transient or resort type projects located in areas with higher exposure to natural disasters increase exposure to inadequate hazard insurance, flood insurance, special assessments and concentration risk. These factors can lead to increased default risk due to loss of rental income both at the project and unit levels.”

FHFA says that Fannie and Freddie’s loan policies for short-term rental projects are similar, but there are some differences. It’s seeking input for various reasons, including whether “these differences might contribute to industry confusion or processing inefficiencies.”

The request for information (RFI) is posted online and includes instructions for responding, including a list of 11 specific questions about any potential changes to short-term rental mortgage loans.

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Author: kerrys