So, if you’re planning to or have a refinance in with BofA, you may want to move to plan B.

More details as they become available…

Fannie Mae and Freddie Mac are getting tough on cash-out refinancings for multifamily borrowers.

The government-sponsored enterprises (GSEs) are changing the way they underwrite cash-out refis, with Freddie Mac announcing stricter terms in January and Fannie Mae expected to tighten up in the coming days.

A cash-out refinancing—when a property is refinanced for more than it owes, and the owner pockets the difference—is a critical strategy for many multifamily owners. They’ll often take the equity from a refi of a strong property and balance their portfolio by investing the cash in a weaker one.

This is especially crucial now. At a time when many markets have seen declines in rent and upticks in vacancy, owners are looking to the GSEs to provide just that kind of strategic liquidity to help prop up underperforming assets.

But 10-year cash-out refis from Freddie Mac now offer 75 percent loan-to-value (LTV) ratios and a 1.30x debt service coverage ratio (DSCR), and it gets even tougher for five- and seven-year loans. Previously, 80 percent LTVs and 1.25 DSCRs were the norm.

While tighter underwriting standards is the prudent thing to do in bad times, the changes could have unintended consequences. “You wonder if this will crimp some potential opportunities for developers to tap into places that can help them ride through this downturn,” says Phil Melton, a senior vice president at Grandbridge Real Estate Capital. “Now, you’re trapping the equity within a specific transaction.”

One of Freddie Mac’s strengths is its ability to assess individual transactions and make adjustments to its credit parameters when the deal merits it. But to what extent will the company adhere to its new rulebook?

“It’s still a little early to see how Freddie is going to apply these standards,” says Don King, head of GSE production at CWCapital. “Early indications are that they are sticking pretty hard to these new credit and pricing standards.”

The changes to Freddie’s cash-out refis were part of a larger move toward more conservative credit standards. The company also announced stricter terms for conventional five- and seven-year loans in January.

In general, the concern on these tighter standards is that it will make a bad market worse. It’s a delicate balancing act for the GSEs, who have become the last men standing in the multifamily debt market.

“If we’re cutting back the amount of money we can lend to an acquisition, we are increasing the pressure on real estate values, which makes the problem worse,” says King. “You risk falling into the death spiral.”

Fannie Mae is expected to announce similar changes in early March. Fannie will likely institute underwriting floors for sizing five- and seven-year loans. For top deals, the underwriting floor will likely be 6.25 percent on a five-year deal and 6 percent for a seven-year deal. Lower-tier deals would be underwritten at even tougher standards.

Let me give you a few examples of what I mean.

A few years ago, I saw the writing on the wall with regard to stated income loans. I just knew that they were going away. (If you’re thinking, “What? Whaddya mean no more stated income loans?” then you especially need to keep reading).

I had several self-employed residential mortgage clients that were going to be affected by that so I contacted them all two years in advance and told them that if they wanted to be able to continue to use conventional loans to finance their properties they needed to start showing income on their taxes. What was the response?

“Yeah, but then I’ll have to pay more taxes.”

Last week one of the investors contacted me and was desperate for a refinance of one of his properties to pay off a private lender. Yep, you guessed it.  He had no income on his taxes to document his income and owns more than 4 properties so he is unfinanceable.

He asked, “What should I do now?”

I told him that he could start working with portfolio lenders to refinance his properties into his LLC so he can pull them off of his personal credit. They also may be a little more lenient in the income qualification – using deposits and business income.

He said, “Yeah, but the rates are higher than what I have right now.”

People, the “yeah, but” is lethal.

Real estate investing (like a good marriage) is a series of compromises. You have to weigh the consequences of your decisions. Pay taxes and remain financeable or don’t. Lose a little cash flow to become financeable or don’t. It’s your decision. But that decision will have consequences.

The investor in this example is stuck. He has “yeah, butted” his way right into failure.  He is still trying to do business the same way he has always done it and he is so entrenched in his ways that he is losing tons of opportunity.

What about you? Are you still trying to run your business using outdated strategies? Or are you flexible enough to pay attention and take the advice of the ones who are doing their best to advise you?

Be smart enough to immerse yourself in “what’s working now” because I guarantee you it isn’t the same stuff that worked a few years ago.