Posts Tagged 'multifamily loans'

June Rate Survey

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May MFLoan Update Newsletter

See the recently published May issue of MFLoan Update; a monthly publication on Multifamily Finance.

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.

HUD Update

I just heard some feedback from a recent HUD Lenders Conference.  The big issue was the proposed underwriting changes that have kicked around since late January. The word is that HUD lenders will receive information sometime near the end of June. No word for the actual changes, but it’s expected to be in line what was previously discussed (HUD discusses changes in their program). They did indicate that they would give at least 60 days notice before instituting the new rules and would grandfather deals already in process. If you have a deal that fits HUD, now is the time to get it in, before the new rules go into effect.

One other interesting thing that I hear was about HUD timing. We are all hearing terrible stories about how long it is taking to process a loan. Evidently HUD gave out some data which shows that nationwide average processing time for 223 (f) deals has stayed relatively flat. Processing times for deals once they get to HUD were about 4 months for a commitment and another 2-3 months for a closing during 2008 and 2009. In 2010 times actually dropped some to just over 3 months for a commitment and 2 months to close. Remember this does not include the processing time in the lenders shop before getting the package to HUD. My surprise in these numbers is not the 2010 data which shows 5 months from submission to close, but the 2008 data. Maybe my recollection is wrong, but it feels like things have slowed down not speeded up. Either way the current data does fit my expectations of total timing of 6-9 months. It typically takes about 2 months to submit a package to HUD, 3-4 to get a commitment and 1-3 to close. Of course this depends on the office and lender you deal with.

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.

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.  .

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

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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.


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