Underwriting Part III
Date: October 1, 2007
To: Fannie Mae DUS? Lenders
From: Phillip Weber, Senior Vice President
David Worley, Senior Vice President
Subject: DUS Lender Memo 07-13 – New Underwriting Part III and Multifamily
Fannie Mae announces new Underwriting Part III and Multifamily
At the 2006 DUS conference, we committed to our DUS partners that we would improve
our processes, restore efficiency and provide greater delegation in the DUS program.
We are pleased to announce the publication of a new underwriting Part III. The new
Part III is the first step of a multi-year effort to completely overhaul all our selling and
servicing Guides – DUS, NT and 3Max. This announcement delivers on our promise
and accomplishes our goal to providing you greater flexibility and delegation in the
underwriting process, increased speed for quoting and executing on transactions and
The Underwriting Part III consists of three sections: Base Underwriting Requirements,
Underwriting for Special Asset Classes, and Underwriting for Special Product Features
and Executions. The new underwriting Part III establishes clear guidelines; that gives
you more flexibility in the underwriting decision and allows you to focus your efforts on
the issues that impact loan risk. Additionally, the new underwriting Part III now relies
more heavily on industry standards and your firm’s prudent, professional judgment
during the underwriting process.
We have also developed a separate document – the Multifamily Underwriting Standards
– that provides comprehensive debt service coverage and loan-to-value ratio
requirements for our products and executions together with other base underwriting
requirements. The Multifamily Underwriting Standards was developed as a standalone
document that will more easily enable Fannie Mae to respond to quickly-changing
market demands. The Multifamily Underwriting Standards will be sent separately to
each DUS Lender.
We believe the new underwriting Part III and the Multifamily Underwriting Standards will:
? reduce waivers by 2/3rds on loans between $3MM and $25MM and 80% of
loans should be delegated except for pricing waivers;
? provide more delegation of Debt Service Coverage, interest only and
supplemental financing; and
? streamline the underwriting and reduce costs.
? Greater DSC delegation in strong markets
? Greater DSC delegation for acquisition loans with 30% cash equity
? full term interest only allowed for any loan with an LTV less than or equal to
70% (10 and 7 year terms only)
? Supplementals may size to the new DSC delegations unless the Mortgage
Loan is on the Watchlist or there is a declining income trend
? Senior Housing: Allows 30 year amortization, eliminated underwriting floor,
Independent Living must be at least an average of 90% economic occupancy
for the preceding 12 consecutive months; Assisted Living must be at least an
average of 90% economic occupancy for the preceding 15
? Affordable Housing: reduced DSC by 5 bps for Bonds and Preservation deals,
delegated 35-year amortization for Bond deals with defined criteria, reduced
minimum term for LIHTC Transactions to 15-years, revised Pre-review
? New approach to calculating NOI. Baseline NOI is the new formulaic
standard and Underwritten NOI is at the Lenders discretion and must be
achievable in 18 months. Maximum Differential between Baseline and
Underwritten NOI is 10%
? PNA-no prescribed form
? Appraisal- short form allowed at Lender’s discretion
? no threshold analysis
? Borrower Credit-delegation of due diligence on Borrowers/KPs – no tax
returns. One form for Borrower to certify rent roll, financial statement, real
estate schedule and operating statement.
? Commercial leases – Removed requirement for estoppels or SNDA for
laundry and cable leases. No SNDA for any commercial lease that is less
than 5% of gross rental income
II. NEXT STEPS AND USE OF EXISTING DUS GUIDE
The new Underwriting Part III and Multifamily Underwriting Standards are effective immediately. However, Fannie Mae recognizes that Lenders have Mortgage Loans in their pipeline that were underwritten using the existing DUS Guide underwriting and it may take time to modify systems and processes to reflect the new standards. Lenders are encouraged to begin using the new requirements as quickly as possible, however for all Commitments issued for the purchase of a Mortgage Loan on or after January 1, 2008, the Mortgage Loan must be underwritten using the new requirements.
Implications of Existing DUS Guide
As noted above, our effort to overhaul our selling and servicing Guides is a multi-year endeavor and this announcement is just the beginning phase. Our next milestone is to rewrite Parts II and IV of the DUS Guide and deliver before the end of the year.
In the meantime, our Lenders will need to use the new underwriting Part III and the DUS Guide in tandem. For any underwriting requirements, the Lenders should refer to this new Part III. There are, however, Parts of the DUS Guide that will remain viable pending completion of the rewrite. For example, the new underwriting Part III contains requirements for underwriting an ARM Mortgage Loan. And, the DUS Guide has the entirety of Part XII devoted to ARMs. In this example, Part XII of the DUS Guide remains effective for the content related to all matters other than underwriting. If the Lender has any question on the efficacy of a particular provision of the DUS Guide, it should contact its Deal Team.
Use of the new underwriting Part III and Multifamily Underwriting Standards is not permitted for Commitments already issued.
If the Lender elects to use the Multifamily Underwriting Standards, the Lender must also use the new underwriting Part III.
For transactions in process, use of the new underwriting Part III and Multifamily Underwriting Standards can begin immediately and the Lender should consult with its Fannie Mae Deal Team for guidance. Any structural changes to the transaction will require repricing and credit decisions.
As part of the work undertaken to prepare the new underwriting Part III, some of our
existing forms required updating as well as new forms prepared. Those forms are listed
at the end of the Lender Memo and are attached.
The Deal Registration process has been modified to include the addition of Baseline
DSCR. All new transactions that are registered within the Deal Management system
now require “estimated Baseline DSCR”. If a transaction is being underwritten
according to the existing DUS Guide, the Lender should enter “9.99.”
C&D: Committing and Delivery Process
The Multifamily committing and delivery system (C&D 3.0) was released on September
24, 2007 with additional data fields to capture Baseline data. During the transition
period, Lenders must follow the guidance below when committing and delivering
Mortgage Loans through C&D.
Loans underwritten to the new Underwriting Part III
? The Lender must check the box entitled “Multifamily Underwriting Requirements
Revised October 2007” in the Special Feature Codes section of the Loan screen
? The Baseline data fields are required for all Mortgage Loans. For a conventional
Mortgage Loan, there are five baseline fields:
o Est. Baseline DSCR
o Baseline EGI
o Baseline Total Operating Expenses
o Baseline NOI
o Baseline DSCR.
There are two additional baseline fields for Forward Commitments:
o Estimated Baseline NOI at Conversion
o Estimated Baseline DSCR at Conversion
Loans underwritten to the existing DUS Guide
? The Baseline data fields in C&D must be left blank. C&D will display a “fatal
waivable” error that will be overridden by the Fannie Mae Acquisitions team. The
error will not prevent the Lender from submitting the commitment for confirmation
or the Mortgage Loan for funding.
? Pricing Method: Tier Plus Alternative and Tier Plus/Plus Alternative were
removed as options from the Pricing Method dropdown list. If either pricing
method was used for commitments underwritten to the old DUS Guide, the
Lender should select the closest remaining option (Tier Plus in lieu of Tier Plus
Alternative and Tier Plus/Plus in lieu of Tier Plus/Plus Alternative) and note in the
Lender Comments section that the pricing method was Alternative.
The Multifamily Structured Facility Management System (a.k.a. MSFMS) has not yet
been enhanced to capture the new baseline data fields. System enhancements will be
made in 2008 to capture this data.
IV. OTHER INFORMATION
The Glossary attached only applies to the new Part III.
With publication of new Underwriting Part III, the underwriting components of Lender
Memo 06-03, Establishment of Preferred Delegation Plus, will no longer apply effective
January 1, 2007.
Elimination of Quarterly Operating Statement Submission Requirements for
Loans with Tier 2 DSCR Waivers
Fannie Mae is eliminating the requirement that Lenders collect from Borrowers and
submit to Fannie Mae Quarterly Year-to-date operating statements for loans with Tier 2
DSCR waivers. This change is retroactive and quarterly statements will no longer be
required for Mortgage Loans delivered prior to the release of the new underwriting Part
III. Fannie Mae is in the process of updating the Asset Management Operations (AMO)
system to remove outstanding Tier 2 templates.
Even though the new underwriting Part III contains comprehensive insurance coverage
requirements, Lender Memo 06-04 Optional Flood Insurance Moratorium (5/24/06) and
Lender Memo 06-09 Extension of the Optional Flood Insurance Moratorium (11/08/06)
is still in effect. The current moratorium is set to expire on December 31, 2007. Please
see the associated memos for more information regarding Flood Insurance for
Improvements located in Flood Zone A and V.
Please contact your Deal Team to discuss any questions you may have regarding this
Part I – Glossary
Part IIIA – Base Underwriting Requirements Part IIIB – Underwriting for Special Asset Classes Part IIIC – Underwriting for Special Product Features and Executions
Form 4662 – Underwriting Data Form Form 4663 – Letter of Credit and Sight Draft Form 4664 – Letter of Credit Certification Form Form 4665 – Ground Lease Review Checklist Form 4666 – Acceptable Superlien Statutes Form 4667 – Underwriting Certification