Chances are, as a real estate agent, some of your clients are real estate investors. If that's the case, they may have been rocked recently, to learn about Freddie Mac's new lending changes going into effect on August 1, 2008. This rule change could mean hundreds of thousands of real estate investments are now in the wrong business structure.

Freddie Mac, one of the two largest underwriters of conforming loans on the secondary market, have changed their internal rules to state that they will no longer refinance a property that has been inside of a Limited Liability Company (LLC) for any time within the past 6 months.

Conforming loans are typically used for single family homes and four unit properties (also known as four-plexes or four family homes) that fall within certain loan limitations. It's the backing of Freddie (and Fannie Mae, the other major underwriter) that keeps the loan rates for these type of loans so much lower than the rates for stated income, jumbo loans and any other loan that doesn't fit within their criteria. In other words, if you've got a great deal on your loan, chances are it was underwritten by Freddie or Fannie.

With this change (and potential change, in the case of Fannie), that means if you have a conforming loan, you have 3 choices:

(1) Never refinance. This is not my favorite strategy because you end up losing the velocity of your money.

(2) Go bare. Don't put it in a business structure to protect the asset. This is definitely NOT recommended. You put all of your personal assets at risk with this plan.

(3) Use a Trust Sandwich^TM. The Trust Sandwich puts a Single-Purpose Trust in place to hold the asset, the LLC owns the beneficial interest and there is then a Main Trust to provide estate planning as well. It's the best of all worlds. I've got more information about it at, www.trustsandwich.com.

Since I broke the news to my clients and TaxLoopholes.com members about the changes, one of the biggest questions I've been getting is why isn't anyone else talking about it. To be honest, I don't know. The press release issued by Freddie Mac was pretty clear. It said (in part):

"We are revising our requirements for Investment Property Mortgages to reduce the number of financed properties in which a Borrower who owns more than one financed Investment Property may have an individual or joint ownership interest (including the subject property) from 10 to 4. Also, effective for Mortgages with Freddie Mac Settlement Dates on or after August 1, 2008, the Borrower on a cash-out refinance Mortgage must have owned the subject property for at least six months prior to the Note Date of the new refinance Mortgage."

The last statement is the key -- transferring title into your name before applying for a cash-out refinance will be considered a change in ownership and the 6-month trigger will apply. This change won't affect most homeowners, but it has caused a major ripple in the investor community, as has the reduction of properties an investor can own and still get Freddie Mac refinancing.

As a real estate investor myself, I think the timing of this announcement is lousy. Smart investors are positioning themselves to take advantage of our current market. House prices vary wildly throughout the country -- some areas are seeing growth, while others are flat and others are still depreciating. But I've been through many real estate cycles and one thing is absolute: prices won't stay low forever. As they begin to rise again investors will once more be looking for ways to leverage their equity as beneficially as possible. It will be interesting to see if the private mortgage companies will rise to meet the needs of investors when the market rebounds.