Freddie CME – Legal Analysis

Below is a link to a good short (4 page) article on Freddie CME.  It’s written by one of the best Freddie attorneys I know and gives a good synopsis of the CME program and what’s required. 

The Return of Securitized Lending: Freddie Mac Launches CMBS Loan Product

OK, so what doesn’t this article tell you about the Freddie CME loan.  First, while there is some choice in taking the Freddie CME vs their portfolio loan, at least for fixed rate loans, the CME is really the only way to go.   Pricing on the portfolio is 1/4% – 1/2% higher than CME.   Also, loan proceeds on a CME loan can, and often will, be higher than on a portfolio loan.  Freddie uses an internal valuation on a portfolio loan, but bases the LTV on the appraised value in the CME program.  Given today’s world view the Freddie internal value is often lower than the appraised value.  So if your loan is value constrained, vs DSCR constrained, you will get a higher loan amount from a CME.

Those are the positives, the negatives are in document negotiation and structure as indicated in the article and a slightly slower and more bureaucratic process.  The CME loan needs to be reviewed by regional Freddie Mac underwriters as well as home office CME underwriters while the portfolio loan only needs regional approval.  This is not a huge issue, but increases the timing and certainly of execution by a slight bit.  Neither is anything to worry about if you are working with a good Freddie Mac – Program Plus lender.

If you want ot know more about the CME product of Freddie lending in general shoot me an e-mail at aklingher@mfloan.com.

Do I really need to send in all these documents?

I often get asked by clients why the need to send me so much information just to get a quote on a loan. They want to tell me what they think the property is worth and think I should then be able to give them a firm quote. They tell me other mortgage brokers do give quotes on such limited information. All I can say to that is garbage in/garbage out.

You need real information in order to get a good quote, one that can be delivered and closed without changes or re-trading. A good mortgage banker or broker will analyze the information you provide and present it to a lender in a format that allows you to get the best loan. Without having all of the information the lending package is limited and you don’t get the best quote from a lender.

While you should be able to get a rough indication quote with just the rent-roll, year-to-date or trailing 12 months statement, the last full years income and expense statements and a brief description of the property. However, the more information you provide your mortgage broker/banker the more accurate quote you are likely to get.

 The information listed below is a mortgage banker/ brokers wish list. It’s not necessary to send in all this information, but the more you have the better they will understand the property and the more accurate the quote.

Current rent-roll – This is critical and the loan can’t be underwritten without a rent-roll. Most lenders base the GPI of the property on the current rent-roll. Also, it is impossible for me to determine if rents are at or under market without such a document.

List of asking rents and concessions – This is not a critical document, but it allows the lender to see the upside or downside in the rent-roll.

Trailing 12 months income and expense statement – This has become an increasingly important document over the last few years and is a required document with many lenders. While lenders ask for full trailing 12 month statements they only really need trailing 12 months of income. This is a month by month statement listing the collections of rental and other income. Only with this can the lender see the trend in collections.

Year to date income and expense statement – During the first few months of the year this is not very important, but as it gets towards summer and later in the year this is critical. Also, if you have expensed any capital improvements such as carpeting, appliances or major rehab work you should provide an explanation of these costs so the financials can be adjusted.

Last three full years income and expense statements – Having at least two years historical income and expense is critical, but having three years is very useful. If there is a nice trend of increasing income it is easier to convince a lender to trend rents in underwriting your loan. As with the YTD statement above, if you have expensed any capital improvements such as carpeting, appliances or major work you should provide an explanation of this so the financials can be adjusted. Without such information your statement overestimates your true operating expenses.

A description of the property – This is critical. Any description should include the number of units, their size, type of heating system, appliances, in unit amenities and property-based amenities. This should also include a description of any recent or planned capital improvements with estimated costs, if possible. The lender will eventually find out the true condition of your property and if the property is worse than initially indicated they will probably change their quote prior to commitment.

Photos of the property (interior and exterior) – Lenders will usually require photos before issuing a firm quote. If I am able, I usually take these photos myself, but if a borrower sends me photo’s it makes the lenders job easier and makes it quicker to get a quote.

Resume of the borrower and management company – This should include information on the exact legal name and type of borrowing entity as well as information on the principals of the borrowing entity. It should include how many properties you own or manage and an estimate of your net worth. If you are looking for a bank or construction loan you should also include your current financial statement. Getting this information in written form is not always necessary. This information can be gained through in a phone conversation, but it is easer and quicker if it comes in written form.

Borrower Financial information - A copy of the borrower or borrowing principals financial statement is important.  Loans today are not just based on the collateral but the borrower.  Without knowing the borrowers net worth and liquidity position you really can’t tell if a loan will work or not. This is also information that can be obtained through a conversation, but before the loan goes forward the actual statement will be required.

A brief description of the location/neighborhood - This is not critical information, but it is certainly helpful. As an owner you probably know the best points about the property’s location and unless you share that information the lender may not find out how great a location you have. As they say real estate is location, location, location so giving a good description of the location can help you get a better loan.

A request for what you want – In order to get what you really want you need to ask for it. Unless you tell someone you might want a 25-year loan you will probably get a quote for a 10-year loan. If you want a certain dollar amount or maximum proceeds please let you lender know. You can ask for more than one type of quote, but unless you ask, you won’t get a quote for what you want.

Copies of existing reports – While getting copies of existing appraisals, environmental or engineering reports is not necessary, it is certainly useful. Even if these reports are old they give excellent descriptions of the property and issues that might need to be addressed on a loan.

 A description of any issues you see at the property – Through the due diligence process lenders will find out everything about your loan. If issues are found out late in the process you have limited negotiation strength. If, however you bring up issues early you will be able to negotiate the solution from strength. Once you are processing a loan most lender think they have your business, but if you negotiate issues before going under application they are still trying to win your business and therefore must negotiate with you.

The difference between 30/360 and actual/360 and why should you care?

Do you know how your lender calculates your monthly payment ad amortization schedule.   Its not as simple as you think.   In fact your lender may be calculating your payment differently than you expect or know.

A few years ago there was a lot of talk about payment methodology. People were talking about 30/360 payments, actual/360, actual/365 and all sorts of different methods to calculate your monthly payment.   From my perspective these various payment methods were just ways for lenders and brokers to hide the real deal and fool borrowers.  Today you don’t hear much about this issue, but its still an issue and one you need to understand in order to property evaluate your loan options.

For most of the 20^th century, all lenders used a 30/360 calculation in determining your monthly payment.  They assumed every month had 30 days and each year had 360 days. This allowed for easy calculation of interest rates and amortization schedules. A 30/360 calculation is listed on standard loan constant charts and used by your calculator or computer in determining mortgage payments.

During the mid 1990’s the Wall Street lenders started using actual/360 or actual/365 payments in mortgages.  These are methodologies used in some other debt instruments sold on wall street.  These methodologies call for the borrower to pay interest for the actual number of days in a month. This effectively means that you are paying interest for 5 or 6 (on a leap year) additional days a year.  By doing this a lender can quote you a lower spread and rate on a transaction but actually collect the same or a greater amount of interest each year.    

The difference between actual/360 and actual/365 is the monthly payments not the overall yearly interest charge.  Both calculations charge you interest on the actual days in a month, but on the 30/365 loan your monthly payment is increased by the extra 5 (or 6) days of interest.  On an actual/360 loan the monthly payments are the same as on a 30/360 loan, but the amortization schedule is adjusted to account for the difference in interest.  Therefore, your balloon balance for an actual/360 loan would be slightly higher than for a 30/360 with the same payments. An actual/360 loan will have a balloon balance approximately 1% to 2% higher than a 30/360 loan with the same payment.

At current rates of about 6% the difference between an actual/360 or 365 loan and a 30/360 loan translates into about 8 Bps.  So in order to compare a 30/360 loan to actual/360 loan you should subtract 8 Bps or so from the 30/360 quote to put it in the same terms as an actual/360 or 365 quote. 

While the Wall Street conduit lenders started this trend, the Freddie Mac and Fannie Mae multifamily groups followed quickly behind.   Freddie and Fannie found they were losing deals to conduit lenders because of the quoted lower spread and its lower payment even thought he effective interest rate charge was the same or in some cases higher.  They started offering actual/360 loans in addition to 30/360 and today you can request a loan using either calculation.    Though the conduits are dead you still see most Freddie and Fannie quotes being offered as actual/360.    This is because it makes the rate sound better, lowers the monthly payment and makes it more likely the borrower will go ahead with the loan.   However this is not always te case so ask your lender what calculation method they are using.

While most Freddie and Fannie loans are being quoted as actual/360 this is not true of most other lenders.  FHA/HUD loans are quoted as 30/360 as are most life insurance company loans and almost all bank loans.   Therefore when comparing a Freddie or Fannie loan to a quote from another lender you must adjust for the payment methodology.

What’s the better methodology?  It really does not matter as long as you understand the difference.   Some people prefer actual/360 because it’s effectively a longer amortization schedule.  I personally prefer 30/360 because I can calculate the payment myself on my trusty HP 12c.  On an actual/360 loan I need an excel spreadsheet and still need to ask the lender for a printout of the actual payment and amortization schedule to make sure I am correct.   Whichever you prefer just remember to ask what payment methodology your lender is using so you can properly evaluate your loan quotes.