Why Haven’t Loan Officers Been Told These Facts? Growing ADU Opportunities
The crisis of housing affordability and availability requires innovative solutions beyond traditional planned unit developments, single-family tract homes, and suburban landscapes.
As communities grapple with the current housing challenge and affordability hardships, these weighty problems give rise to new opportunities for entrepreneurial lenders. Accessory dwelling units (ADUs) are not a perfect solution, but they provide communities with another tool to address diverse and complex housing needs. However, ADUs present new risks for stakeholders, which are still being evaluated as ADUs gain popularity. Current data on the impacts of these housing configurations will help stakeholders better facilitate these options.
The policies governing ADU financing differ from those for traditional multi-family housing.
Mortgage Loan Originators (MLOs) must know ADU investor policies and any lender-specific requirements for these products. This knowledge will enable them to set appropriate expectations for both referral partners and borrowers.
As an ADU expert, lenders can discover new opportunities to enhance their value proposition within their communities. Collaborating with referral partners to promote these housing solutions is one effective way for MLOs to provide added value to both existing and prospective relationships.
FreddieMac on Accessory Dwelling Units
Accessory dwelling units (ADUs) are emerging as a key solution for adding affordable housing units to the market, particularly in regions severely affected by the housing supply shortage. Is this market opportunity right for you?
From FreddieMac
Key Borrower Benefits
- ADUs can provide independent housing within a property’s existing footprint, often requiring minimal construction and no additional land.
- ADUs can be a part of the main home, such as a converted basement or above-garage unit, or a detached structure on the main home’s lot.
- Borrowers have the option to apply rent earned from an ADU toward mortgage payments or home upkeep to help sustain homeownership.
- ADUs are a great option for multigenerational households.
- An ADU can allow a homeowner to offer independent living space for relatives or office space to remote employees.
- ADUs may have the potential to increase long-term property and re-sale value.
- Borrowers may be able to use ADU income to qualify for home financing on their subject 1-unit primary residence (Guide Chapter 5306) or non-subject investment property (Guide Chapter 5306).
FreddieMac FAQs
Question: Does Freddie Mac require an ADU to have a bedroom?
Answer: No. Freddie Mac does not require an ADU to have a bedroom. Freddie Mac will provide financing for properties where the ADU is an efficiency unit.
Question: Is a mortgage secured by a property with more than one ADU eligible for sale to Freddie Mac?
Answer: No. A mortgage secured by a 1-, 2- or 3-unit property with more than one ADU is not eligible for sale to Freddie Mac. Additionally, a 4-unit property with one or more ADUs is not eligible.
Question: Is it acceptable for an appraiser to ignore the existence of an ADU or simply provide no value for the ADU when appraising a property with an ADU?
Answer: The appraiser’s analysis must be documented in the appraisal report and conclude whether an adjustment is supported for the ADU. If the analysis of comparable data (i.e., comparable sales, contract or pending sales and/or current listings) with an ADU indicates there is no market reaction to an ADU in that market area, the appraiser may reflect no value for the ADU. However, to simply ignore the ADU due to a lack of comparable sales is not an acceptable appraisal practice. The appraisal report must justify and support the appraiser’s analysis and conclusions.
Question: If the borrower occupies the ADU of a one-unit property, is the property still considered a primary residence?
Answer: Yes, the property would still be considered a primary residence.
Question: Is a mortgage secured by a 1-, 2- or 3-unit property with an ADU eligible for sale to Freddie Mac when the ADU does not comply with zoning and land use requirements?
Answer: The answer depends on whether the subject property has 1, 2 or 3 units. When the subject property is a 1-unit and the appraiser provides two comparable sales, each with an ADU that does not comply with zoning and land use requirements, the mortgage would be eligible for sale to Freddie Mac. These comparable sales are required to demonstrate the marketability of the subject property to its market area. When the mortgage is secured by a 2- or 3-unit property with an ADU that does not comply with zoning and land use requirements, the mortgage would not be eligible for sale to Freddie Mac.
Question: Will Freddie Mac purchase a mortgage secured by a 1-, 2- or 3-unit property that has a manufactured home ADU?
Answer: Yes. Freddie Mac will purchase a mortgage secured by a 1-, 2- or 3-unit property that has a manufactured home ADU that meets the Guide requirements for both the manufactured home and the ADU. However, a manufactured home may not be an ADU for a mortgage secured by another manufactured home unless the mortgage is secured by a Freddie Mac CHOICEHome® mortgage.
Question: Can ADU rental income be considered as qualifying income on a subject 2- or 3-unit property with an ADU?
Answer: No. At this time rental income is allowed only on an ADU subject 1-unit primary residence.
FHLMC Underwriting Rental Income From An ADU
BEHIND THE SCENES, Mortgage Fraud Prosecution
ATLANTA – Kimberly Johnson has pleaded guilty for her role in a mortgage fraud scheme spanning more than three years and resulting in the approval of approximately 450 mortgage loans based on fabricated documents and false information. Many of the loans are insured by the Federal Housing Administration (FHA), resulting in claims being paid for mortgages that have defaulted.
“The defendant and her co-conspirators brazenly manipulated the real estate lending process out of sheer greed,” said U.S. Attorney Ryan Buchanan. “Criminals like Johnson, who engage in mortgage fraud, threaten the soundness of the real estate market in our communities. Our office is committed to prosecuting these bad actors who abuse the system for their personal gain and to safeguard the mortgage lending system for those who rely on this financial support.”
“Kimberly Johnson engaged in a massive mortgage fraud scheme, fabricating material documents on over 450 loans to falsely qualify individuals for loans they would not have otherwise qualified for,” said Special Agent-in-Charge Jerome Winkle with the U.S. Department of Housing and Urban Development (HUD), Office of Inspector General (OIG). “When individuals commit fraud against federally funded programs, it creates significant risks to the programs and limits the financial resources available to assist hard working individuals realize the American dream of homeownership. HUD OIG will continue to work with its prosecutorial and law enforcement partners to vigorously pursue those who seek to profit by abusing HUD-funded programs.”
“Ms. Johnson’s guilty plea is the result of our commitment to hold anyone who exploits the mortgage lending system for personal gain fully accountable,” said Edwin S. Bonano, Special Agent in Charge of FHFA-OIG’s Southeast Region. “This case highlights the importance of collaboration between our law enforcement partners to protect the integrity of the housing market and prevent fraud that undermines public trust.”
“The defendant in this case pleaded guilty for her role in altering and fabricating supporting documents in fraudulent mortgage loan applications, as part of a scheme that resulted in the approval of approximately 450 mortgage loans,” said Kyle A. Myles, Special Agent in Charge of the Federal Deposit Insurance Corporation Office of Inspector General (FDIC OIG), Atlanta Region. “The FDIC OIG remains committed to working with our law enforcement colleagues to investigate those who commit fraudulent acts and threaten to undermine the safety and soundness of our nation’s financial system.”
“The FBI will vigorously investigate criminal offenses that impact the integrity of the residential mortgage market. In this case, Johnson had the duty to conduct business honestly but instead chose to engage in mortgage fraud, securing mortgages for individuals who otherwise would not have qualified for one,” said Sean Burke, Acting Special Agent in Charge of FBI Atlanta. “We are proud to have worked with our law enforcement partners and the U.S. Attorney’s Office in the effort to prosecute anyone who engages in this type of misconduct.”
According to U.S. Attorney Buchanan, the charges and other information presented in court: Kimberly Johnson participated in a conspiracy in which homebuyers and mortgage brokers submitted fraudulent loan applications to induce mortgage lenders to fund mortgages. Johnson’s role in the scheme was to alter or fabricate the supporting documents for the loans, including bank statements, pay stubs and Forms W-2. Over the course of more than three years, Johnson helped approximately 450 homebuyers to commit mortgage fraud by obtaining loans for which they were unqualified. The fraudulent loan applications were submitted to numerous mortgage lenders, and some of the mortgage brokers who worked on obtaining the loans were part of the conspiracy. These fraudulent loans totaled approximately $161 million. Many of those loans have already defaulted.
Kimberly Johnson, 55, of Hampton, Georgia, pleaded guilty to one count of conspiracy to defraud the United States in a mortgage fraud scheme and, as part of her plea, has agreed to pay restitution to the victims of the conspiracy, including the U.S. Department of Housing and Urban Development, which insures many of the residential mortgages in the United States. Johnson is scheduled to be sentenced on April 11, 2025, before U.S. District Judge Sarah E. Geraghty.
This case is being investigated by the U.S. Department of Housing and Urban Development Office of Inspector General, the Federal Housing Finance Agency Office of Inspector General, the Federal Deposit Insurance Corporation Office of Inspector General and the Federal Bureau of Investigation.
Assistant U.S. Attorney Alison Prout is prosecuting the case.
Tip of the Week – New Market Thinking
Challenge yourself with some fresh thinking. If you haven’t read “Blue Ocean Strategy” by W. Chan Kim and Renée Mauborgne, do yourself a favor and check it out. Although it’s an older book, its principles remain relevant today.
The authors describe Red Ocean and Blue Ocean markets as analytical metaphors. The Red Ocean represents overly competitive environments, where many players suffer from increasingly narrow profit margins. In contrast, the Blue Ocean signifies untapped or under-leveraged markets.
The author’s thesis focuses on expanding the existing customer base by identifying and selling to what they refer to as “non-customers.” These non-customers are prospects who are unknown to the seller, and vice versa. For example, the author uses Cirque du Soleil® as a case study. Traditionally, circuses were family events aimed primarily at entertaining children. However, Cirque du Soleil® targeted upscale buyers with more refined tastes, transforming the circus into an elaborate theatrical production.
Who are your non-customers? For example, in this issue of the LOSJ, there’s an article about Accessory Dwelling Units (ADUs). ADU solutions can address a variety of housing needs, including:
- Aging in place
- Accommodating a disabled or aging family member
- Generating additional income
- Improving livability
- Downsizing without the need to move
Market segmentation provides a means to target non-customers more effectively. Consider consumers with specific needs, such as aging baby boomers or households caring for children, disabled family members, and elderly parents. Reflect on the networking opportunities that arise from these insights and challenge yourself to think creatively.
One of the most effective practices for thinking creatively is brainstorming. Get together with your referral partners, investor reps, management, or any mix of key stakeholders, and see if you can’t create a little magic.