Posts Tagged 'multifamily mortgage'

Freddie Mezzanine launches

Freddie finally launched their mezzanine program.  This program was announced earlier this year, but was delayed by the needed approval of the government.     This program initially sounded like a possible solution to the mountain of over-leveraged properties out there, but after carefull review it will only help a select few of those loans.

The base program is well designed, it allows mezzanine loans up to 90% LTV behind a Freddie first of up to 75%.  DSCR on the combined can be as low as 1.0x and both the first and mez are non recourse.  Given the low first mortgage rates charged by Freddie even a high mez rate will blend out to be pretty good.  Also, the program is designed to serve the whole multifamily community, not just existing Freddie loans.   They will refinance any existing loan as long as it fits the program parameters.

However, the program has a few limitations that make this a niche product.   First the program is open only to existing Freddie Mac customers or major owner/operators.     This limits the program greatly as the majority of borrowers don’t fit this criteria.  There may be some wiggle room on this, but I suspect the borrower with only 2 or 3 properties will not fit this mold.  

The real limiting factor on the program are the mez. lenders themselves.   There is a select group of 4 mez lenders who are really driving this bus.  They will determine how aggressive they want to be on an individual deal as well as the structure and cost of the deal.  This makes perfect sense from a risk perspective, but I think it will limit the loans that fit the program.  These lenders are all multifamily owners who typically focus on major market and class A properties.  They will have a strong bias for these type of properties.   One lender I spoke with commented that they will b looking for properties they would be willing to own and that fit into their portfolio.

I suspect those deals in coastal supply constrained markets will get aggressively serviced by these lenders, but properties in less attractive or harder to understand markets will be left out of the program.   That’s unfortunate because the real problem we have is not in the major market class A properties. 

This program will help Freddie and the Mez lenders make some good loans and profits and it will help some borrowers.  But for the majority of over-leveraged multifamily properties and borrowers this will be of no help. 

However, if you do have a property that is in a major market this program might be your solution to a slightly over-leveraged property.  If you have a loan maturing in the next year or that is open to prepay today you should discuss this program with a Freddie lender.  It’s the only program available that can get you 90% financing with a low rate agency first mortgage.

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June Rate Survey

Continue reading ‘June Rate Survey’

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.

Notes from CREF – Commercial Real Estate Finance Confrence

This week commercial lenders and brokers got together in Las Vegas to discuss the state of the commercial real estate business and to convince each other to do business.   The meeting was well attended and optimism was in the air.  Everyone thought business would be good this year, well at least in comparison to last year.   But how could it have been worse given in 2009 lending was way down and real estate values collapsed.   While this meeting was focused on all types of commercial real estate, but a large part of the focus was on apartment lending. 

There were not many new announcements from Freddie or Fannie.  Both lenders stressed that they will continue to support the market and that they do not expect government action to change their structure  or focus during 2010. 

HUD was one of the big topics of the conference.  Over the last year this has been a main lender for many brokers/mortgage bankers.  For years HUD has been seen as a process oriented lender and one that does not really look at risk in the same way as the rest of the market.  It looks like that might change.    As mentioned in previous postings, HUD is planning on changing their underwriting criteria.   Based on comments made at the MBA it also seems that they will change their focus to a more market oriented approach.  Only time will tell.

Life Companies and  Conduits were abuzz about lending again.  Most Life companies were back in th market and a bunch of conduits were also back, at least for larger deals.   However, these lenders all indicated that they would not compete with Freddie and Fannie on apartment rates and therefore were focusing on other areas of commercial real estate.  It’s good that these lenders are back, but for now that won’t really effect the multifamily lending market.

There were no big announcements or sunrises at the meeting, but based on the tone and vibe at the event most professionals think commercial real estate lending may be ready to emerge from its cocoon.   I am not as optimistic and think we have another year or so before we start to see significant lending activity.    However, you have to walk before you run and I think we will be at least walking  (or crawling) this year.


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