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Tuesday, January 6, 2009

How Will the 4 Property Rule Effect You?

By Susan Lassiter-Lyons

Portfolio lending is on the rise. The main reason for this is portfolio lending is not subject to the crazy 4 property rule. Through a portfolio lender, it is possible to have more than 20 mortgages. But those investors looking for conventional loans through lenders such as Fannie Mae and Freddie Mac will run into the 4 property rule wall.

It is understandable that new rules need to be put in effect to prevent the fiasco that precipitated the nefarious $750 billion bailout bill. However, the onset of the 4 property rule is among the most egregious. In fact, this particular rule is a complete rejection of the principles that the free market is founded on. That is, the 4 property rule is a massive overreach of government regulation designed to limit the free market. Worst of all, this type of regulation limits a great deal of personal liberty and freedom.

Wondering what the 4 property rule actually is? Fannie Mae and Freddie Mac announced in 2008 that the maximum number of financed properties a person can have is four. This crazy rule even includes a person's primary residence so really the maximum number of rentals is limited to three.

Specifically, if you are still financing your primary residence, you can only flip three properties if they are currently being financed! Again, this type of rule does very little for aiding investment circles. Really, it is a form of protectionism. And, as history shows, protectionism has the inverse consequence of what it was originally intended. That is to say, it does nothing to help the market and overall economy. Instead, the 4 property rule can significantly weaken the economy.

For example, prior to the current economic meltdown, many legitimate investors took advantage of skyrocketing real estate values. They would purchase properties at low prices and then sell high. In some cases, real estate investors would purchase significant volumes of property for resale. Some investors would purchase literally dozens of properties for resale. The profits derived from this wholesaling had an enormous benefit on the overall economy.

If the 4 property rule went away, there would be many positive effects. First, real estate investors would have to put their profits somewhere and my bet is they would go to the stock market. That in itself would provide a huge amount of liquidity. It would also fill up the tax coffers. And, of course, the wealth created would lead to more real estate being purchased thus improving values overall. The 4 property rule accomplishes none of this. I hope this rule will be overturned so we investors can fully participate in and contribute to the economic recovery.

Then again, regardless of whether or not this rule is revoked, portfolio lenders are not restricted to such a rule. If you wish to seek massive financing, a portfolio lender is the lender to visit.

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