Posts Tagged 'program plus'

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.

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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.

Loans options for owners of small multifamily properties

You hear in a lot of places that the only commercial loans available today are for apartments.  Apartment loans are available especially for larger apartment project (over $5 million) where the agency lenders, Freddie Mac and Fannie Mae, and HUD are keeping the market going.  These lenders are offering very aggressive rates and in some cases aggressive loans.   HUD loans are still available up to 85% LTV and Freddie and Fannie loans are available in the 75%-80% LTV range in most markets.  However, Freddie and Fannie do not generally service the smaller loan market.  You can get a loan from them in the $3-$5 million range, but only if you find the right correspondent lender.  For loans under $3 million its very tough to get a Freddie or Fannie lender interested in talking to you at all.

 

So for smaller properties is there capital still available?  Thee quick answer is yes.  Owners of properties under $5 million still have choices.   There are fewer choices today compared to last year, but of coarse who has more choices today when compared to last year.  There are still some banks lending and some Fannie lenders are offering loans to borrower needing between $1 and $3 million.  

 

Over the last week my office called over 100 banks in the Chicago area looking to see who is lending.  We found 21 banks (about 20%) who said they were willing to consider new loans.  A slightly smaller survey earlier in the year found almost 50% of the banks we called saying that they were lending.   Additionally many of these lenders who said they were looking to make loans were offering terms so onerous that I would not really consider them in the market.   These banks were only willing to do amortization schedules of 20 years or less and/or requiring LTV’s under 60%.  The rates offered had a wide range with some offering rates slightly below 6% and others being at 7.5% or higher.  In reality fewer than 10 loans were really looking for new loans and wanted to compete for new business.

 

The good news is that the terms from these banks were pretty good.   Maximum LTV’s were typically 75% though some lenders were willing to consider 80% for the right borrower and property.  Most lenders wanted a 25 year amortization, but some were willing to do 30 years.  Terms were typically 5 years with flexible step-down prepayment premiums and low fees.    Most banks were quoting rates between 6% and 6.75%, but a couple of banks were quoting rates below 6%.   These rates are up 25 – 50 Bps from our survey performed a few months ago.  The one negative for most of these quotes were the requirement for a depository relationship, typically the operating accounts.   In general banks are looking for relationships and not just a loan transaction.

 

In addition to bank loans there are also a few lenders participating in the Fannie Mae small loan program.  These loans are only available in major markets, but they offer low fees and great rates.   Additionally, your loan really needs to be above $1 million.   These are the best deals out there for smaller properties.   The LTV’s are typically 75% or less with debt service coverage ratios of 1.25x or greater.  The loans are often quoted as recourse loans, but non-recourse is available for the right deal and/or borrower.   These are probably the only non-recourse loans available for smaller properties.  One small loan lender has fees of just 12.5 Bps ($2,000 minimum) including all lender legal and reports.   This is the kind of fee structure that makes sense for loans of this size.  Fannie small loan rates below 6%, for a 5 year loan and just over 6% for a 10 year loan.   These low rates with this cost structure should not be missed.  The one negative of this loan is the prepayment premium is yield maintenance, but at this rate the prepayment premium is probably worth it.

 

If you need assistance in finding a loan send me an e-mail (aklingher@mfloan.com).   To stay current on rates and trends in multifamily finance visit our web site MFLoan.com and subscribe to MFLoan Update, our monthly newsletter on multifamily finance.

Freddie Mac CME – A new kind of conduit loan

On June 18th Freddie Mac finalized the sale of the first securities under their new Capital Markets Execution (CME) program.    These securities were backed by over $1 billion in multifamily loans secured by 62 multifamily communities across the country.     The securities consisted of a variety of classes each having different cash flow rights and different risks.  The securities were sold to a variety of investors including large money managers, life insurance companies and pension funds.  Does this sound familiar?  It should, it’s very similar to the CMBS business that is in so much ill repute.  However, while this is similar, it’s also different in some critical ways.

 

The reasons this is not your typical CMBS is because it’s being issued by Freddie Mac with all that backing that implies and more importantly these loans were underwritten to current, relatively strict, standards.  These are all multifamily loans and most of the securities have the backing of Freddie Mac, giving them, in my opinion, the risk of a government security.     For the security holder these do not have the risk of typical CMBS, but it does have some of the same characteristics.  The issuance and acceptance in the market of these securities shows that the capital markets are still interested in securities with the cash flow peculiarities of CMBS.   This is an important first step in re-opening the capital markets to commercial real estate loans, particularly on the multifamily side.

 

While this sale is interesting, does this do anything for the borrowing public?   In the short term I am not so sure that it does anything.    Without the government backing it is unlikely this would have sold in today’s market and today Freddie and Fannie are making multifamily loans without direct capital markets funding.   In the long run this may be beneficial.  Not only does it help test the market for eventual CMBS, but it can provide another source of funds for Freddie and Fannie (though Fannie has been securitizing loans for a long time on a single loan basis).  With the pressures on Freddie and Fannie from the single family side it may be important for the multifamily groups at each GSE to have access to capital that is not just the mother company’s balance sheet.  This sale certainly shows they have that access.

 

The other real impact this has on the borrowing public relates to loan flexibility and competition.  If you have been looking at Freddie for a loan over the last few months you have already been sold a CME loan.  They started selling these loans earlier this year in order to have collateral for these recently sold securities.   The CME is another option in Freddie’s already extensive menu of loan options.  Freddie has been actively pushing this product through pricing and is offering these loans at up to a 40 Bps discount from their cash execution.   This pricing difference has pushed many fixed rate Freddie borrowers into a CME loan.   This lower CME pricing makes Freddie more competitive on their fixed rate loans, something that has been an issue for much of 2009. 

 

The main differences between the CME program and the Freddie Cash program are standardization.  This means less flexibility with modifying the documents and a harder prepayment premium.  For most borrowers this is not much, if anything, to give up in exchange for a lower rate.   I do wonder how loans originated into this program will be serviced and if they will have the same flexibility as Freddie loans that are still on their books.  It’s always nice to be able to deal with the lender who still owns your loan if and when a problem occurs in the future.  This has been a hallmark of the Freddie program for over 15 years.

 

Over the past few years Freddie has become a specialist in creative multifamily financing, particularly for larger borrowers.   As compared to Fannie they were more willing to modify loan documents and craft a loan to the borrower’s specific needs.  This was particularly true for large borrowers, but smaller borrowers also benefited from this ability.  With the CME loan this “craft work” is no longer in favor.  Freddie can modify loan documents and be flexible, but now there is a cost.   Maybe that’s how it should have been all along.

 

I wish Freddie lots of luck in further developing this program.    In today’s market any new program is welcome and one that gives the borrower a better rate is especially welcome.   If you want to know more about the CME program take a look at the Freddie term sheet (http://www.freddiemac.com/multifamily/termsheet_cme.html) or give me a call (847-421-2217).

 

If you like this article and want more information on Multifamily Finance take a look at our monthly newsletter, MFLoan Update.  It can be found at the following link http://www.mfloan.com/Update.htm.   Please take a look and, if you like it, sign up for the newsletter.

Multifamily rates -going up or down?

Over the last month the 10 year treasury rates has moved up by over 30 Bps.  At the same time spreads on Freddie and Fannie multifamily loans have dropped (more for Freddie than Fannie) easing some of that upward interest rate pressure on multifamily loans.   Where they are going from here is any ones guess but many people believe this upward pressure will continue. 

In the long run we must all agree that rates will go up.  Treasury rates are at very low levels from a historical perspective.  They have maintained this low level because of the recent credit crisis, a flight to own safe treasury securities and government intervention to keep rates low.   At some point this must end.   I maintain that rates will not increase for, at least, a few months, but I have been wrong many times in the past.

I recently read an interesting article; the history says the 10-year yields set for summer slide.    This article argues that the 10 year treasury will drop over the summer months.  OK the reasoning is a bit of “it happened before so it will happen again”.  We know this is faulty logic, but that does not mean it’s not true.   If that does happens we will see multifamily rates from Freddie, Fannie and HUD drop.   Most other lenders today are banks and they don’t allow their rates to follow the treasury curve so these rates may not move    Also, Freddie and Fannie will probably not give you the whole treasury drop, if it occurs, but will give you some of it.

What does that mean?  Well, in today’s market early rate locks are very difficult because everyone is concerned about value.   Therefore you need to be well on your way in processing, have your reports done, before you can lock rate.   So start the process now.   If you think you will be refinancing sometime in the next 6 months start the process now.  Get your appraisals done and sign up with a lender.  It’s easier to slow the process down and delay the rate lock and closing then it is to speed it up.  You have no control over the treasury markets so learn from the Boy Scouts and “be prepared”.

Today fixed rates on larger apartment properties are as low as 4.85% and floating rates start under 4%.  For smaller properties rates are in the mid 5% to mid 6% range.  These are great rates, don’t miss them.  If you want more information on multifamily lending programs or rates shoot me an e-mail at Aklingher@mfloan.com.

GSE basics or how to find the right Freddie or Fannie loan

You hear a lot today that, with the exception of FHA-HUD, the GSE lenders (Freddie Mac and Fannie Mae) are the best, maybe only, lenders in today’s multifamily market.  This isn’t really true, but its often said.  However, with the exception of a sales call, there’s very little discussion of the best way to access GSE capital. Today we will address that issue. 
Let’s start with the basics. First, Freddie Mac and Fannie Mae do not make any loans.  They are not direct lenders and, by law, cannot make new loans. They buy (or credit enhance) loans or pools of loans from approved lenders. For multifamily loans these approved lenders are called DUS (delegated underwriting/servicing) lenders for Fannie Mae and Program Plus lenders for Freddie Mac. There are not many of these lenders and a list of approved lenders can be found at Freddie and Fannie’s web sites. Some lenders represent both Freddie and Fannie and some just one or the other. 
Second, the two agencies are very different in how they treat their lending partners and how they underwrite their deals.  Fannie, for the most part, allows the DUS lenders to make decisions on the loans they buy and Freddie makes their own lending decisions.  Fannie lenders also take part of the risk on the loan and in exchange for taking some of the risk they are allowed to make lending decisions. Underwriting is mainly done inside the lenders company with their own staff and not with Fannie Mae staff.   Freddie takes all the risk on their loans and their lenders make loans only after receiving Freddie Mac approval.  Freddie also has a guide, but their lending partners do not make decisions, they just recommend underwriting and loan structures to the Freddie Mac regional office. The real underwriting is done in the Freddie Mac regional office with Freddie Mac staff.
Now that we know the basics, what does this all mean for how you should access these GSE lenders?  Since the GSE’s originate loans differently you really should access them in different ways.   For Fannie Mae it makes sense to talk to multiple DUS lenders about your situation while that is not the case for Freddie. For Freddie one experienced Program Plus lender is all you need.
On a Fannie loan you need to see how each DUS lender perceives a specific market/deal and how much risk they want to take.  You also need to see which lenders are busy and who has the resources to process your loan.  Only by talking to multiple lenders will you be able to determine who will give you your best Fannie Mae deal.  Pricing will generally be consistent between all DUS lenders (most rate issues are determined by Fannie), but there will be differences in underwriting based on each lenders perception of risk, how the property performs and how they like the deal. Each lender will determine a different NOI and propose different loan amounts.  I’ve seen these differences range by up to 20% in loan amount between two DUS lenders.  This is because of each lenders knowledge of the specific market and their interest in doing the specific transaction.  Unfortunately obtaining multiple Fannie quotes is time consuming, but necessary for obtaining the best quote.  One thing to note is that DUS lenders can register a loan with Fannie Mae thus blocking other lenders, therefore its important for you to tell any lender not to register the deal with Fannie until after you sign an application with them.  If you don’t have the time or energy for getting multiple quotes I suggest using an experienced mortgage broker/banker to clear the market for you.
For Freddie the situation is totally different.   Since the underwriting and decisions are made in the Freddie Mac regional office you will, in general, get same quote from any Freddie Mac Program Plus lender.   However, all Program Plus lenders are not the same.   Some have more experience than others and some have better relationships with Freddie.   You need to deal with a lender who has experience and a good relationship with the local Freddie regional office.   That means someone who has done business in the area where your property is located and who focuses on Freddie Mac business. Only an experienced lender will know the “hot buttons issues” for each Freddie regional office and know how to present your deal to address those issues.
Both GSE lenders have a large number of programs and options. They offer floating rate loans, fixed term balloon loans and fully amortizing loans.  They lend on conventional class A and B multifamily properties, senior housing properties, affordable housing properties and for Fannie Mae mobile home parks.  LTVs are stated as high as 80%, but expect lower LTVs today.  These loans typically have transaction costs of $15,000 or more and origination fees of 1 %.  GSE loans are designed for larger properties with loan amounts over $5 million.  There are some DUS lenders who will consider loans as small as $2 million and some Fannie “small loan” lenders will focus on loans as small as $1 million.  GSE lenders provide excellent rates and a non-recourse transaction.   These loans typically take 45-60 days to close and often require tax and insurance escrows and sometimes funded replacement reserves.

have numerous programs and you need someone who knows the programs and can tell you which program best fits your real estate strategy.GSE’s lending and is up to date with what they are doing.   Every representative of a DUS or Program Plus lender is not experienced or knowledgeable.  Before you work with a lender ask your representative about their experience and if they do not sound well informed then move on to another lender.   The GSEIn either case you do need to work with a professional who is experienced in


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