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Multifamily DUS Lender Memo 07-13

By Jacqueline Ford,2014-05-06 12:28
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Multifamily DUS Lender Memo 07-13

    New Multifamily

    Underwriting Part III

    Announcement

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

    Underwriting Standards

    HIGHLIGHTS

    Fannie Mae announces new Underwriting Part III and Multifamily

    Underwriting Standards

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

    cost reductions.

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.

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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.

I. HIGHLIGHTS

    ? 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

    consecutive months

    ? 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

    Process

    ? 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

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II. NEXT STEPS AND USE OF EXISTING DUS GUIDE

Effective Date

    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.

New Deliveries

    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.

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New Forms

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.

    III. IMPLEMENTATION

Deal Management

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

    within C&D.

    ? 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

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    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.

MSFMS

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

Glossary

The Glossary attached only applies to the new Part III.

Preferred Delegation

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.

Insurance

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.

    V. CONTACTS

Please contact your Deal Team to discuss any questions you may have regarding this

    announcement.

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VI. Attachments:

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

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