As published in Scotsman Guide's Commercial Edition, August 2007.
In the past, Fannie Mae regulations required stringent financing standards that could be hard to meet. Consequently, borrowers often turned to other sources of capital.
Because of competition from other lenders, however, the government-sponsored enterprise (GSE) has become a more flexible and creative capital source. In fact, it can be the most effective source for many multifamily projects, participating in more than $34 million of multifamily financing in 2006 alone.
Brokers can benefit from understanding Fannie Mae's conventional mortgage product for delegated underwriting and servicing (DUS) for market-rate apartment projects.
Fannie Mae capital comes from more than 20 DUS lenders authorized to underwrite and close loans at the lenders' discretion. After the loans close, Fannie Mae buys the mortgages issued by the DUS lenders, provided the loans conform to the GSE's requirements.
The conventional DUS mortgage offers competitive, tiered pricing for the acquisition or refinancing of multifamily projects nationwide, including recently completed projects. Borrowers can choose between a fixed-rate and an adjustable-rate mortgage that balloons or fully amortizes. The minimum loan amount is $500,000, with terms ranging from five to 30 years. The amortization period is as long as 30 years.
Nonrecourse execution is also available, but standard carve-outs for fraud are required. Pricing is tiered and based on the risk attributes of the individual loan. Generally, higher debt-service-coverage ratios (DSCRs) and lower loan-to-value loans receive lower pricing. Loans are assumable for 1 percent subject to the lender's review and approval of the new borrower's operational and financial capacity.
Fannie Mae has reduced DSCRs from 1.25 to 1.2 to accommodate the low cap-rate environment. Interest-only terms for as long as 10 years are allowed for lower-leverage mortgages. In addition, the GSE offers supplemental financing that allows for the acquisition of additional debt after 12 months without triggering any penalties on the pre-existing mortgage. For instance, if a property's net operating income improves after one year, a DUS lender can provide additional debt on as many as two occasions without any consequences.
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