Posts Tagged 'apartment building loan'

HUD issues new multifamily rules, finally.

Earlier this month HUD finally issued their new multifamily rules.  These were previewed at the CFEF/MBA meeting earlier this year and have been much disused since.  The full announcement can be found on the web at HUD Mortgage Letter 2010-21.   The announcement covers a number of HUD programs and outlines different rules for affordable properties and market rate properties.  However, today I will discuss some of the more important changes as it relates to owners of market rate properties. 

For owners of market rate properties HUD has been a major refinance lender in the last two years and a major construction lender for longer than that.  These new changes do not affect some of the most desirable attributes of the HUD programs like their long term fully amortizing nature and relatively low rates.  However, it does affect the underwriting criteria and particularly the leverage that is available on HUD deals. 

From my perspective the three most important changes are 1) new ratio levels on maximum LTV, minimum DSCR levels; 2) required occupancy levels and 3) the process.  In addition there are numerous other changes including an increased focus on the borrower, their tax returns and financial position; an increase in working capital reserves for new construction deals and the ability for HUD to revisit certain items such as the level of replacement reserves over the life of the HUD loan.   

Many borrowers went to HUD for a loan because of their high loan proceeds.  HUD could offer an 85% LTV on a purchase or refinance 223 (f) and 90% on new construction D (4).    For market rate properties that is over.  The level is now 83.3% LTV or both refinance and new construction.  When you take into account that HUD loans usually have higher costs than conventional loans, I believe the net proceeds are now on par with more conventional lenders.    The DSCR requirements have also been tightened to 1.20x.   This is still slightly more aggressive than most conventional lenders who require a 1.25x, but only slightly so.

For purchase or refinance properties HUD was one lender who was not overly focused on current and historical vacancy.  HUD would look at deals that were just stabilized or even experiencing a stabilized occupancy at an unusually low level.   They did have 85% occupancy rules, but these could be worked with and modified by exception.   HUD is now very focused on occupancy.  The new rules state that the property needs 85% minimum physical occupancy and “projects must demonstrate a pattern of stable occupancy i.e. average occupancy… for a period of 6 months prior to submission of the firm commitment application and through” the process.   This is a sea change and will eliminate many projects from the program.  Additionally HUD is now using a 7% minimum vacancy in its underwriting which is more conservative than many conventional lenders.

The process changes are very interesting.  In the past it was common to have a pre-application meeting with HUD on new construction projects.  It seems HUD likes this process and is now requiring it on construction deals and is recommending it on refinances.   I think this is very wise and should help reduce the HUD timelines as they only see deals in final application that they really like.   However, l this will require more from the borrower up front who will now have to put together a package before knowing if it fits the HUD program.  This also makes it more important to deal with a HUD lender who has experience with the local office you are using.   If there is a pre-application meeting then it’s better to be with someone who knows the people in the local office vs. an out of town HUD lender who fly’s in for the meeting.    By the way, expect to pay for that flight and other costs before you go under application.   In line with that HUD has also initiated a 15 BPS fee for pre-app construction deals that will not be refunded if HUD does not accept the deal. 

As with any new thing there is an implementation process that means these rules are not yet in effect.  However, HUD offices have started to look at all new deals through the glasses of these rules.   As for real implementation that will start with 223 (f) deals whose final application are being submitted to HUD after September 6 (60 days after the letter) or D (4) deals whose outstanding invitation is less than 120 days from submission. 

For borrower who do not fit these new rules, but want a HUD deal I think you have missed your mark.  If you are already under application you might get in under the wire, but it will be tight.  Also, HUD is clear in the letter that if you submit a full application package under the old rules and it is not complete and correct they will return it to the lender and if it’s after the new rules have gone into effect the package will have to be redone under the new rules.

Looking at these changes HUD is getting more mainstream with respect to market rate deals.   This should reduce their workload on this type of deal and focus more of their time on “affordable” deals which better fit the “mission” of HUD.     Deals that were marginal will no longer get in front of HUD and they will only see construction deals they really want to do.  For borrowers who do use HUD it should reduce processing timeframes to more reasonable levels.  This won’t happen right away and I see things slowing down from the last flurry of business under the old rules.  However, by next year things should be back on track and timeframes should be down. 

For many borrowers who have started to do HUD deals as the rest of the market tightened, the game is no longer as lucrative as it was.   It’s still pretty good with very low rates and long term fixed rate financing.    However, HUD is no longer the clear choice for most borrowers.  Anyone financing an apartment deal needs to look at HUD, Fannie, Freddie and maybe even banks or life companies.   The best lender for each deal depends on its location and structure.   Talk to an experienced lending professional and shop more than one lender before you decide who the best lender is for you and your property.


June Rate Survey

Continue reading ‘June Rate Survey’

Fannie Loosens the Reigns

You know the recovery may actually be happening when lenders start getting more aggressive.  I wouldn’t say the recent Fannie changes are aggressive, but they so represent a crack in the underwriting wall that was built in the end of 2008.

Many of the changes are technical and relate to how they look at trailing income and underwrite properties that are collecting less today than they were a year ago.   They also made changes to their underwriting rates for 7 year loans.   Fannie uses an artificial underwriting rate to evaluate loans and for what they consider short term loans (5 and 7 years) this rate has been well above current rates.  This has had the effect of reducing the loan amount available on most loans, especially high quality loans in low cap rate markets.    The change in underwriting rates in not dramatic, but will help the 7 year borrower achieve a slightly higher loan amount.

The most notable changes Fannie made to their multifamily programs was to reduce the number of loans they have to pre-approve from the DUS lenders.   For most of the last 18 months many markets were pre-approval markets with any deal in the market having to be reviewed by Fannie.  Fannie has just allowed loans under 65% LTV (Tier 3 and 4 loans) in almost all markets to be made without pre-approval.  This will speed up the process on these loans and make the experience better for borrowers.  Of course if you are looking for maximum leverage in these markets you will still need pre-approval and the delay in the process that causes.

In addition to these changes Fannie is just more aggressive at looking at waivers to their rules.  They have approved 10 year I/O deals even on fully leveraged transactions.  The one area where I would say they are not being flexible is on the borrower.  They want strong borrowers with good liquidity and no global real estate issues.   On small loans they will not generally make FICO waivers and liquidity is king.  If you don’t have any don’t expect to get a loan.

Expanding the “Bad Boy” carve outs

One reason many borrowers choose to borrower from non-bank lenders is the ability to get non-recourse financing.  On a multifamily (or commercial) investment you don’t want to put your full financial condition on the line if things don’t work out.    However, over the years the line on what it means to have a non-recourse loan has been moving.  While old documents (From the late 1980’s/early 1990’s) were fully non recourse, most modern loan documents have been non-recourse with exculpation for certain items.    This change came after S&L crisis when many lenders discovered non-recourse provided strange incentives to a borrower or borrowing principal.     The most notable items are fraud, misrepresentation, waste and certain environmental items. 

Yesterday Freddie announced a slight expanding of the line in non recourse financing by adding creditor’s rights to the equation.  Creditors rights has been a required title endorsement to protect the lender in the case of fraudulent conveyance of a property including misappropriation of funds from a new loan by one partner from another.     Getting this coverage was no big deal a few years ago, but more recently title companies have asked for significant documentation relating to this coverage, have substantially increased the rates for this coverage and in some cases have refused to provide the coverage at all. 

In order to assist borrowers who are having trouble with this title insurance Freddie is allowing borrowers to choose between obtaining the coverage or adding a new clause to the “bad boy” carve outs .    This would ass recourse “for loss or damage incurred by the lender as a result of the voidance of the mortgage due to fraudulent conveyance or bankruptcy” .  In itself this is not a big deal and will help some borrowers.   Most borrowers I know would rather assume this minor liability than pay the cost of this insurance.   This change will help Freddie borrowers, but we will have to see if other lenders will follow their lead.     

The last round of non recourse tightening came in response to the last commercial real estate melt down.    It makes me wonder if this is just a single action to address one item or the beginning of a bigger trend.

Freddie Loosens the Reigns

Freddie Mac multifamily issued a letter to their customers yesterday announcing changes in their maximum LTV/Minimum DSC for various term loans.  For the last year or so Freddie has been limiting loans under 10 year terms to lower LTV/ higher DSC parameters.   Freddie is keeping the same strategy except moving from 3 categories (5 year, 7 year and 10 or more years) to 2 categories (under 7 years or 7 or more years).  

As they have done for a while 5 year loans are limited to 70% LTV/1.30 DCR for a no cash out refi or acquisition loans and 65% LTV/ 1.35 DSC for cash out refis.   For loan terms of 7 years or higher Freddie Mac will do an 80% LTV/ 1.25 DSC for a no cash out or and acquisition loans and 75% LTV/ 1.30 DSC for for cash out refis.   Basically they moved the 7 year loan into the same category adds the 10 year loan. 

Fannie has handled this differently with artificial underwriting rates for 5 and 7 year loans instead of strict LTV/DSC hurdles.  This has made Fannie a better lender for 5 and 7 year loans.  However, with this change Freddie becomes the more aggressive lender on 7 year loans.  With the yield curve at a unbelieveble angle borrowers should consider a 7 year loan.   Current rates on a 7 year Freddie CME loan are about 5.25%.    For many borrower this is the best option in today’s market.

The discount rate rises; whats next.

On last Thursday evening the Fed increased the discount rate by 25 Bps to 0.75%.   This comes about a week after Bernanke said  such an increase could be coming soon.  The treasury market jumped on this news and many reports indicated this could be the beginning of an increase in treasury, and thus other, rates.    While this is a sign, I am not as concerned.

Why am I taking this position after preaching for the last 6 months that rates will increase soon.   I still believe this, but honestly don’t think this will occur till summer.  Treasury rates increased about 10 Bps, significant, but not dramatic.  The main reason I think the Fed will not in crease rates for a while is the planned ending of the MBS purchases.  This is scheduled for next month and until the market absorbs that action in a positive fashion (meaning MBS and mortgage rates don’t increase dramatically)  the Fed will not move on the rates they control. 

Other news items from this week I find interesting are; 1) news that China unloaded a record amount of treasury securities in December.  Currently Japan is the #1 foreign holder of Treasury securities.  2) January consumer price  index (without food and energy)  fell in January by 0.1%. 3) Barron’s reports that corporate debt refinancing has increased dramatically.  4) Jobless claims are not falling  and despite additional temporary employment there are few new jobs.  and 5)  Inflation adjusted money supply fell last month meaning the flooding of funds into the system is not really expanding the economic pie.

 I really don’t know what all this means, but it seems there are a lot of counter indicated items out there.  With all this I will take the Fed at its word that they will are likely to maintain “exceptionally low levels of the federal funds rate for an extended period”.  The treasury market may not follow their lead, but I don’t think it will vary too widely for the near future.

MFLoan Update February 2009

Key Rate Indices Current Last Month Change
6 month Libor 0.38% 0.43% – 5 Bps
1- year Libor 0.85% 0.98% – 14 Bps
Prime 3.25% 3.25%
Fed Funds 0.25% 0.25%
1 year CMT 0.30% 0.45% – 15 Bps
5-Year Treasury 2.37% 2.68% – 31 Bps
10-Year Treasury 3.58% 3.83% – 18 Bps


Rate Update

Treasury rates dropped for the month with the 5 year ending near its levels form early November and the 10 year back to mid December levels.  I still believe the long term trend is for higher rates.  However, I must concede that current economic factors are driving rates down.

Issues with Greece and other sovereign debt, the weak stock market and erratic public policy are all reasons for money to flow into or stay in safe government debt keeping rates low.   This will probably keep treasury rates low for a while, but with all the liquidity in the system and Fed support for the MBS market scheduled to end in a couple of months the 10 year treasury is bound to increase.  I think it will be over 4.5% by the end of the summer and over 5% by the end of the year.

In contrast to my view many multifamily lending pros are arguing that rates will stay low.  They feel the 10 year treasury will stay in the range of 3.50% – 4.15%.  At the same time they expect Freddie and Fannie to keep 10 year rates in the 6% range by increasing or decreasing spreads accordingly.  This may be wishful thinking or may be good reading of the economic news and the political tea leaves.  Only time will tell.

For multifamily borrowers using Freddie and Fannie the month has been pretty good.   Rates have dropped as treasury rates decreased and Agency spreads decreased, though only slightly.  While Freddie and Fannie continue to do most of the financing their overall business is down because of the large drop in overall financing.  The press is also full of speculation about the future of these agencies.  A change in the structure of these agencies could mean higher rates for borrowers, but in the current economic and political environment it is highly unlikely that such a change will occur before the end of this year.

During the month Freddie announced changes in their Affordable housing programs making them more conservative and giving Freddie more control of underwriting decisions.   This is just more of the trend of both agency lenders to be more conservative and take control of their lending decisions.  Expect

additional announcement for changes in the Freddie and Fannie program to come out of next week’s Mortgage Bankers convention where they usually announce changes and plans. 

HUD lending volume is way up and many borrowers are seeing the process grind to a halt.  Lenders and HUD offices are overwhelmed and having difficulty meeting demand.   Their rates and structure are still the best in the business.  HUD is thinking of making changes to deal with the backlog and to take more control of the risk in their loans.  For more information see our blog post HUD discusses changing their program.

Banks are still making loans and are the mainstay of the smaller loan market.  We still hearing of banks not renewing good borrowers and loans because of overall problems at the bank.  There is also an increased activity in selling loans to clear problems off of bank books.  These banks selling portfolios or pushing borrowers out are in trouble and, for the most part, are not lending.  However, other banks are still active and looking to put out money.   Looking for a bank now takes much more work than in the past and the hurdles you need to jump through to get the loan is still significant.  If your loan is conservative, be patient, you will get what you want.  If you have high leverage you may not get what you want and have to work with your existing lender to find a solution that works for both of you.

My best advice to borrowers is to keep focused on the bottom line.  Manage your property well and to do your best to build up cash reserves.  In refinancing you may need to pay down a loan or put up a deposit with the lender.  At least this liquidity will show them that you have a financial backstop in case issues occur.  This will go a long way in calming their fears. 

Yes CMBS is back, and at least in structure it does not seem to different.  However, the reality of getting a loan is much different and is still evolving.  For more details see our blog post CMBS is Bank, Sort of.  This is an issue that will need to be closely monitored because it has the potential of solving a lot of issues both in the banking system and for borrowers.  Stay tuned.

Multifamily Rates*
  Loan Terms   Fixed Rate
  Min. DSC   Max. LTV   5-Year   10-Year
Freddie Mac 1.25-1.40x   65%-80%   5.25% – 6.00   5.25% – 6.50%
Fannie Mae (DUS) 1.20-1.40x   70%-80%   4.75% – 5.75%   5.50% – 6.25%
FHA/HUD 1.175%   85%       5.25 – 6.75%*
Life Companies 1.30-1.50x   65%   6.00% – 7.50%   6.50% – 8.50%
Banks 1.20-1.30x   70% – 75%   5.75% – 7.00%   6.25 – 7.50%
* FHA loans are 35 year fully amortizing and include MIP.  Data is based on informal survey of lenders.  .

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