New Lending Rules Change Asset Protection Plans
The hottest topic for anyone who invests in real estate this week is the big change by Freddie Mac.
Freddie Mac, along with Fannie Mae, control underwriting in the secondary market for conforming loans. Chances are your loan was underwritten by one of these two if you have a loan on your principal residence, vacation home, or rental properties that are 4-plexes or less and that isn’t a jumbo loan.
Freddie Mac has just stated that they will no longer allow a refinance for a property that has had a title change within the past 6 months. Fannie Mae is expected to follow suit.
Here’s why this is so earth-shattering for any physician who owns real estate. If you have real estate and wanted to protect it, chances are you put your property inside a Limited Liability Company (LLC), Limited Partnership (LP) or Family Limited Partnership (FLP).
In fact, if you were my client, I would have practically insisted that you do so. It doesn’t make sense, in my opinion, for you to build wealth and then just leave it hanging out there for anyone with an aggressive lawyer to take away from you.
Now, let’s say you also want to get a better loan or make better use of the equity in the property as it appreciates and/or you pay the principal portion of the loan down through monthly payments. Typically, you would transfer the loan out of the LLC, LP or FLP to get the better terms of a Freddie Mac or Fannie Mae underwritten loan. You would get the loan in your own name and then just transfer it right back into an asset protection structure.
You can’t do that anymore. In fact, Freddie Mac’s ruling now gives you three choices:
1) Don’t ever refinance—I’m not a fan of this plan because I like my high-income and high-wealth clients to use equity stripping to provide better asset protection and also take advantage of velocity of their money.
2) Go bare—Definitely not recommended! I’ve been a CPA to medical practitioners long enough to know that the public’s perception of the amount of income and wealth that doctors have is often very skewed. There is often this feeling of “Oh, he won’t miss it” and before you know it, there are frivolous suits galore.
3) Use a Trust Sandwich™—A Trust Sandwich puts a special type of trust in first place on the title. It’s a grantor trust, much like you would use for estate planning, so it will work in this instance. With a few more steps, you get the asset protection and the flexibility for financing. I’ve recorded a free tele-seminar for PFNLive readers here. There are also two free special reports on how to use velocity of money to your advantage and the three most dangerous mistakes you can make with your assets that could cost you everything.