Posts Tagged 'Fannie Multifamily'

June Rate Survey

Continue reading ‘June Rate Survey’

Advertisements

Thinking about the future of multi-housing

I spent much of last week at the National Multi-Housing council’s Strategies Update and Finance Conference and Board Meeting.  This was a group of about 300 industry professionals, owners, sale brokers, mortgage bankers and lenders who listened to a number of panel discussions about the industry and its future.  There was a lot of discussion about a number of topics, too much for me to recount.    For me the highlights were a discussion on capital markets (lending) and the last panel discussing the future of Freddie/Fannie and housing policy.

The discussion on capital markets did not reveal any new information, but confirmed many of my opinions.  1) Lending on multifamily is still strong, supported by Freddie/Fannie/Hud, but with some smaller banks and life companies also participating. 2) The lending pie is much smaller than in the past with many loans or borrowers not fitting today’s underwriting criteria. 3) More lenders are entering the market, but on their own terms.  Life companies are aggressive on lower leveraged class A/B deals in top markets, conduits will do multifamily, but at much higher rates than Freddie/Fannie and only on larger deals. 4) Everyone is looking to buy deals, but very few are finding deals that work.  5) There is no consensus on the future rest rates, but everyone recognizes today’s rates are low and if they had deals to finance they would.

The most interesting part of the discussion was how everyone is keenly interested in how CMBS will look when the market comes back.  There have been some CMBS deals and the pro’s expect there to be many more this year.  There is strong appetite for the securities so as long as the lenders can find product they can do loans.   But the interesting thing was how all the other lenders in the room were keenly interested in whatever the CMBS professionals said and were actively asking questions.  Clearly they see the potential/possibility for CMBS to drive the market again.   Everyone is hoping this time it will be more controlled and with wiser underwriting.

The other hot topic at this session and running through other sessions was how to deal with many of the problem loans/properties.   Everyone recognizes that over the next few years more and more loans will mature with properties that can’t be refinanced.   There will need to be new capital for these properties either through new equity or lender write-downs.   It sounds like there is equity for recapitalizing the properties in top markets, but lenders will probably have to take the hit in many weak markets.

As for the Freddie/Fannie discussion it was a knock down brawl between the speakers who represented the right and left spectrum of the debate.    There was consensus around a few items 1) nothing can be done about the agency lenders now, because we need them. 2) The solution is not just looking at Freddie/Fannie, but the total way our housing system works.  3) Multifamily is just an afterthought the issues will be made on single family and multi will just go along for the ride.  Beyond that there was significant disagreement about whether Freddie and Fannie helped create the problems and if they should be part of the solution.  From an audience perspective I think it was unanimous that if this discussion represents the two sides in Washington that it will be quite a while till anything changes.   Given Freddie and Fannie are supporting the apartment lending business today waiting a few years to make a change may not be too bad.

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.

May Apartment Rate Survey

Below are the results of this month’s rate survey.   Despite the drop in long term treasuries multifamily interest rates have only dropped slightly.   Banks have maintained their rates in the 6% ± range and Agency lenders have modulated their spreads as treasury rates move due to a number of factors including an increase in debt risk premiums.   This makes us feel more comfortable that rates will stay low for the near future.  We expect that as long as the 10 year treasury keeps under 4% multifamily rates will be stable.

 

Fannie Mae Small Multifamily Loans – Demystified

During the economic crisis of the last two years many banks that traditionally made loans to owners of small apartment properties have either left the business or cut back on lending.  This has left many owners of small apartment properties with limited borrowing choices.  One lender that has stuck with the small multifamily market and even expanded their outreach is Fannie Mae.  A number of Fannie Mae DUS lenders have embraced this program and its being marketed by almost every loan broker/banker in the country.   This program is different from bank loans that most owners are familiar with and many of the brokers/bankers who are selling the program don’t really know how it works.    Hopefully this article will explain some of the issues with these loans and make it easier for you to evaluate these loans.

First lets talk about who makes these loans.   These loans are made by one of a few select small loan lenders and then are either sold to Fannie Mae or are sold as Fannie Mae guaranteed mortgage-backed securities.  Because Fannie either buys the loans or guarantees the bonds backing the loans they must follow Fannie Mae guidelines.   According to the Fannie Mae web site there are 12 Market Rate Small Loan Lenders.  However, not all of these lend in every market and many are really not active in lending today.  My experience shows that there are really 4-5 lenders who are actively pursuing this business.  These lenders predominantly work through mortgage bankers/brokers and do not work directly with borrowers.

Let’s take a brief look at the program.  The basic program terms (listed below) are very similar to the standard Fannie Mae DUS program.  These are long-term fixed rate balloon mortgages with excellent rates, but a harsh prepayment premium. 

Loan Amount:

$500,000 – $3,000,000 ($5,000,000 in major markets)
Loan Term: 5, 7 or 10 year terms
Amortization: Typically 30 years, but shorter amortization schedules are available
Loan to Value Ratios: Up to 80% LTV, but 75% is more typical
Debt Coverage Ratios:  Over 1.25x
Pricing/Rates: Risk based pricing based on the properties LTV and DSCR – Rates are fixed for loan term, adjustable rates are available
Personal Recourse:  Non-recourse is available, but recourse is sometimes required
Prepayment Premium:

Typically Yield Maintainance

While these are the basic terms, it must be understood that these terms are not offered on every deal or in every market.   Most lenders are only interested in making these loans in major metro markets.   Loans are available in smaller markets, but typically on more conservative terms and not with every lender.  Also, while Fannie Mae has guidelines some lenders are more conservative than Fannie and won’t make certain loans even if they fit the guidelines.  Others stick to the letter of the law and won’t ask Fannie for a waiver of the guidelines when it might be warranted. 

The Process – The first thing to understand is that these loans have a process and they require a bunch of documentation.   These lenders do not issue a commitment or lock rate until all the reports are in and all the underwriting is complete.   However, once the commitment is issued rate lock and closing can be done quickly.    As a general overview of the process the lender will review some basic information about the properties historical income and the borrower’s financial situation and then issue a quote or application.  This application will not guarantee the borrower anything, but is an indication of what the lender believes they can do.  If the borrower likes the quote they will sign the application and provide the lender with an application deposit.   The lender will request a number of other documents from the borrower and will order the appraisal and other reports.  Once the reports are in and the borrower has submitted all the required documentation they will complete their underwriting and issue a commitment.    Total time from application to commitment is typically 30-60 days.  After the commitment is accepted and the borrower posts a good faith/rate lock deposit (1%-2% of the loan amount) the lender will lock the rate and quickly close the loan.

The biggest issue in the process is the amount of paperwork that the lender will request.  They will ask for organizational documents, personal financial statements, copies of bank statements, real estate schedules, property income and expense statements, copies of leases as well a numerous forms.  These are required and there really are no shortcuts.  You need to give them this information when they ask for it in order to get your loan.    The process will go smoother with a mortgage broker/banker who has experience with this program and if you have a good attorney who is brought on board at the beginning.  However there is no way to eliminate the paperwork or process.  Just go with the flow and know that in the end you will get a good loan.

Rates – The rate is determined by a number of factors including the LTV and DSCR (based on the actual rate or an underwriting rate) on the property as well as the loan size and term.  Because of this you may get different quotes from different lenders depending on how aggressive they are in both their preliminary (quoting) underwriting and in their final underwriting.  Some lenders will be much more aggressive on their preliminary underwriting in order to get a borrower to sign an application, but may not deliver that quote at commitment.  The rate may also consist of pricing add ons for different features or fees to the lender or broker.   It is hard to determine what add ons have been charged and if the lender or broker is taking a premium.  If you ask your broker/banker about the rate build up, they should be able to give you an idea of the rate build up. 

Since the rate on these loans is not locked until after commitment the rate can change.  When getting a quote a lender will give you the current rate as well as a spread on the loan.  While the spread is not locked it should not change much during the process.  Having the spread allows you to track the rate.   If, when you get the commitment, the spread is different than on the quote you should ask about this to understand the differences and what occurred.

Costs – The transaction costs on these loans vary by market and lender.  The processing of these loans costs lender almost as much as on a larger Fannie Mae loan.    The lender must pay for their staff, an appraisal, physical needs and environmental reports and lender legal.    These costs often run well over $10,000 per loan.   Some lenders are taking a deposit at application and charging actual costs of the appraisal, engineering report, and lender legal to the borrower.  However, most are capping their fee at the amount of the application deposit and paying for any additional costs by increasing the rate.   Today most lenders are charging a deposit $4,500 in major markets and up to $10,000 in smaller markets. 

In addition to the transaction costs on these loans you will have to pay for title, possibly a current survey and your own legal.   These costs vary by market and property.  The other cost of the transaction is the origination fee.   The lender themselves will charge some fee, but this is often built into the rate and is not identifiable.  However, the mortgage broker or banker showing you this loan needs to make a fee.  This can be paid as a direct fee or as additional rate into the loan.    Depending on the loan term, amount of fee being added and LTV the add-on can increase your rate by ½% or more.   I encourage you to ask the broker/banker if they are getting paid by the lender and if so how much the rate has been increased for their origination fee.  Typically brokers will make 1% of the loan amount (1 ½% for some smaller loans).  If you are getting charged more than that you should check around or give me a call.  Mortgage brokers/bankers should get paid for their work because they do provide you value, but that does not mean they should overcharge you for their services.

Underwriting – The underwriting of these loans is also a bit different than most small multifamily owners are used to.    The income and expense analysis is straightforward.  The lender looks at the current rent roll, adds in miscellaneous income and applies a vacancy rate to get their underwritten effective gross income (EGI).    Today lenders will be very careful to compare the EGI to historical collections and may ask for a trailing 12 month statement to show collections for the last 3, 6, 9 or 12 months.   If the trend is not favorable then the lender may underwrite a more conservative vacancy figure.  Expenses are underwritten based on the last full year’s expenses and what the appraiser says are stabilized expenses for the property.  Additionally a replacement reserve figure is underwritten based on the engineer’s estimate of replacement over the life of the loan.  This is typically $250-$300 per unit per year, but can be higher on older properties and is often the number most understated at preliminary underwriting.

The borrower and borrowing principals are also carefully underwritten by the lender.  They are looking for borrowers with FICO scores over 680 (over 720 is better) and who have strong financial strength.  Typically they want to see borrowers with a net worth greater than the loan amount and liquidity greater than one year of loan payments (principal and interest).   Lenders will verify liquidity by requesting bank statements and will only consider liquidity they verify as legitimate.  The other borrower item underwritten is their global real estate schedule.  The lender will require an extensive real estate schedule listing all properties, their current loans and current income and expense.  They will analyze the borrowers’ global cash flow and make sure there are no properties with either risky ballooning mortgages or significant negative cash flow.

One additional item to consider in underwriting is the engineering report/analysis.  Each lender has someone look at the physical condition of the property.  This may be an engineer or just a property inspector.  This person will determine what items at the property are not in good condition and need to be repaired or replaced.  They will also estimate the costs of capital improvements over the term of the loan and thus the replacement reserve used in underwriting.   This is probably the biggest difference between this type of loan and a typical bank loan.  Be prepared, the lender may make you repair/replace some items before closing or within a few months of closing.   This does not mean you are running a bad property; it’s just that they are looking at this as a loan for a long term and want to make sure there are no life-safety issues that could cause a problem and that the property is maintained in good condition.  One way to avoid this issue is to make sure the property is in its best condition before an inspection and to know about the property so any questions that occur are answered quickly and thoroughly.

Why this loan – With all these requirements why should I even consider this loan.  Well the main reason is a long-term loan at very low fixed rates.   Most of these loans are for 10 years with the rate fixed for the term of the loan.  There are not many lenders willing to offer long-term loans on smaller properties.  Also, the rates are very attractive.  For most of 2009 the rates being offered on these 10 year loans were a good 1/4% lower than rates on 3 or 5 year loans being offered by banks.  And for shorter term loans such as a 5 year loan the rates are often ¾%- 1% lower than bank offerings.   Additionally, today many banks are only lending up to 65% LTV while these loans are typically 75% LTV, sometimes up to 80%.

The second reason is these are often non-recourse loans.  Banks are almost always recourse lenders.  This means if the deal fails and you default on the loan they can go after your personal assets to pay the loan (this varies based on local law).  On a non recourse loan they can only take the property leaving all your other assets protected.  This is especially important for someone with investors and therefore does not own the whole property. 

From my perspective the biggest negative of these loans is the prepayment premium.  These loans almost always carry a yield maintenance prepayment premium.   I won’t explain how that works here, but let’s just say it means you should not expect to pay off the loan until shortly before it matures.   You can pay it off, but the premium (penalty) may be very high.  Smaller owners are used to a step-down prepayment premium.   This way you know the amount of the prepayment premium and you have some flexibility if you want to sell.   Such flexibility is nice, but it comes at a cost.  If you want a long-term loan and this type of rate this is the cost of obtaining it.  These lenders can offer you a step-down, but the rate is much higher.   The loan still allows you to sell the property and have the new owner assume this loan, so you are not totally stuck, but your flexibility is limited.

 Things to watch

  • Understand the quote before you decide to take the loan.  Talk with your broker and make sure you are considering all the issues when comparing this to another quote.  One item to evaluate is that these loans are quoted with an actual/360 calculation so the rate is not fully comparable to a 30/360 quote from a bank (see 30/360 vs. Actual/360).  Another issue is many of these lenders quote the loan on just the DSCR.  They don’t cut the loan quote based on value, but state the maximum LTV for the loan.  Make sure you are comfortable the value that is needed before you start the process.
  • Know the costs of the deal.  If you have to give a deposit of more than $4,500 in a major market or $10,000 in a smaller market you should know why.  Also, make sure the costs are capped or spelled out.  Finally, manage your own costs.  While I believe you need an attorney to close one of these loans, they should understand that the documents are not negotiable so don’t waste time, and money, trying to negotiate them.
  • Understand the rates/spread.  There are lots of premiums being included in these loans to pay for the transaction costs and to make sure the lender is adequately compensated for their work.  However, this leaves opportunity for lenders and brokers to overcharge you for your loans. 
  •  Know the lender you are dealing with.  All of the lenders participating in this program are not the same and each treats things differently.   Some will push for and can get waivers from Fannie and some wont.   I suggest you work with a broker/banker who has experience working with more than one of these lenders so they can advise you as to which lender is best for your individual situation and property.

This article tries to explain the main issues and with this program, but there are lots of features and issues that I did not address.  If you have more detailed questions on this program or want to discuss any specific deal please shoot me an e-mail at aklingher@mfloan.com or give me a call at 847-421-2217.

MFLoan Rate Update – January 1 2010

 

Key Rate Indices Current Last Month Change
6 month Libor 0.43% 0.49% – 6 Bps
1- year Libor 0.98% 1.02% – 4 Bps
Prime 3.25% 3.25%
Fed Funds 0.25% 0.25%
1 year CMT 0.47% 0.26% + 21 Bps
5-Year Treasury 2.68% 2.00% + 68 Bps
10-Year Treasury 3.83% 3.19% + 64 Bps

  

I know we have been talking about the impending run up in treasury rates for a while, but it came quicker and more dramatically than I expected.  During December the 10 year treasury increased by 64 Bps and the five year treasury was up even more at 68 Bps.  I read somewhere that this is the largest one month increase on record.   One reason for this might be a large part of the run up came during the holiday and therefore trading was weak causing higher than typical volatility.  If this is true then we should see a pull back during January. Let’s hope that happens, but either way rates are still good from a historical perspective, just back to where they were earlier in the year..

The year ended on a large run up in rates, but for multifamily borrowers all of 2009 has been a difficult.  The collapse of the banking system in late 2008 continued into early 2009 and left the lending world upside down.    Lenders who had been major players went belly up, exited the markets or just pulled their heads into their shells.   Rates stayed relatively low, but there were many small blips making borrowers feel like they have missed the boat.   The year end run up may be the real thing or just be a large blip.  However, even if rates drop back its clear that the long term trend is for higher multifamily rates.

Rates have been a big issue this year, as always, but the biggest issue was the across the board drop in values and lenders response to that drop in values.  Lenders have become more conservative.  LTVs dropped in the first part of the year and this was on top on conservative value estimated from lenders and appraisers.  Money was available and rates were good, but loan proceeds and terms seemed unrealistically conservative.   This is still the environment we are in and it’s unlikely it will change soon.  Some markets are seeing stabilization of values, but many are not.

As we enter 2010 Freddie and Fannie are still the mainstays of the market.  For loans above $5 million they are the lenders of choice with Fannie lending on a wider range of properties, but Freddie offering a better rate on high quality loans.  Freddie’s CME program is offering the best rate in the market.  However, if you are looking for maximum loan proceeds you need to check both lenders because depending on the location and borrower you don’t know who will be the most aggressive.

HUD is also making a market on multifamily properties.  HUD lenders are busier than they have ever been and are still offering great loans.  Be careful because of the long loan processing period you may not get the rate you expect.  Banks are still active, especially on the small loan side, but these are mainly 3 years or less with a few banks willing to go to 5 years.  

Life companies and Wall Street lenders are still on the sidelines.  We are seeing some activity from these lenders on other types of commercial real estate. They would be interested in multifamily if they could compete on rate with the agency lenders.

For most of the last 3 months I have focused on two themes.  The first is interest rates and treasury securities.   This will continue to be an ongoing theme as treasury rates drive multifamily mortgage rates.  The unusual Federal Reserve action to keep rates low vs. the unusually large government issuance on bonds is a tug of war that requires close monitoring.   The second theme has been Fannie Mae’s small loan program.   This has become a hot topic as numerous lenders embrace the program and market it widely.    

I encourage you to check in with my blog https://mfloan.wordpress.com on a regular basis to see updates on rates and treasury securities as well as an article I plan to publish next Friday on the Fannie Small loan program.  This will be a comprehensive description of the program, its good points and it’s bad; it’s my attempt to demystify the program.  

I hope you have all had a successful and productive 2009 and if not I hope you have at least survived.  2010 will be another eventful year with lots of challenges for commercial real estate and multifamily lending.   I hope you keep reading our newsletter and blog.  I will try to keep you entertained and informed about multifamily loan rates and programs.

Multifamily Rates*
  Loan Terms   Fixed Rate
  Min. DSC   Max. LTV   5-Year   10-Year
Freddie Mac 1.25-1.40x   65%-80%   5.00% – 6.00   5.50% – 6.50%
Fannie Mae (DUS) 1.20-1.40x   70%-80%   5.00% – 6.00   5.50% – 6.50%
FHA/HUD 1.175%   85%       5.50 – 6.75%*
Life Companies 1.30-1.50x   65%   6.00% – 7.50%   6.75% – 8.50%
Banks 1.20-1.30x   70% – 75%   6.25% – 7.50%   N/A
* FHA loans are 35 year fully amortizing and include MIP.  Data is based on informal survey of lenders.  .

To subscribe to this monthly e-newsletter please e-mail us at Update@MFLoan.com

If you would like additional information on multifamily rates or are looking for a loan on any type of apartment project please give me a call at 847-421-2217 or send me an e-mail us at Aklingher@mfloan.com

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 20th 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.


Advertisements

MFLOAN HAS MOVED

MFLoan.com and MFLoan.com Blog are no longer being hosted at this site. Please visit us at MFLOAN.COM where the site is being hosted.