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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   January 2010

Fannie Mae: Filtering Out the Facts

Separate truth from fiction about Fannie's small-loan program for multifamily clients

Fannie Mae: Filtering Out the Facts

The number of qualified lenders offering long-term, low-cost executions for stabilized multifamily properties has decreased at a greater rate than the pool of available transactions. There are even-fewer choices for brokers who specialize in small-balance loans for multifamily properties.

There is a small-loan void, and some lenders have stepped up their small-loan initiatives to fill it by offering long-term, low-cost loans to owners of small-cap multifamily properties through Fannie Mae's Delegated Underwriting and Servicing (DUS) program for small loans.

But confusion surrounds loan guidelines when brokers transition to Fannie Mae DUS programs from other product offerings. Keep in mind that the elements crucial to Fannie Mae's small-loan-program guidelines center on the underwriting process.

To understand whether a Fannie Mae small loan may work for particular clients and properties, it's worth separating fact from myth. Here are seven common traits and misconceptions of which you should be aware.


All Fannie Mae DUS loans are created equal.

Large DUS loans have special asset classes, such as senior housing and affordable housing, that are not part of Fannie Mae's small-loan program. This program considers small loans to be less than $3 million; in a few high-cost markets, these loans could be those of less than $5 million ( see sidebar).

If a loan does not fit within the small-loan program, it likely will fit in a traditional DUS-loan program.

Fannie Mae's small loans have lower upfront costs or fixed fees than larger loans. This can amount to as much as 75-percent cost savings. Small-loan savings can be attributed to the reduced scope of third-party reports and use of standard loan documents that in turn reduce legal fees.


Small loans take less time to process.

Third-party reporting-receipt time is usually shorter for small loans than for larger loans. In addition, standard loan documents allow for a more efficient generation of closing documents. Further, small-loan transactions tend to be more homogenous than larger loans and require less structuring. All these factors mean these loans often can be underwritten in less time.


Small loans are more complex to underwrite than banks' portfolio loans.

Small mortgage loans can be underwritten in virtually the same manner as the product of a bank, a life-insurance company or other portfolio. Although jargon may obfuscate some lenders' terms or features, a Fannie Mae lender's approach to cash-flow and financial-performance trends is fairly standard and clearly stated. More important, borrower strength, property condition, market performance and trends are reviewed with similar criteria to those of a portfolio lender.


The minimum population for the location of Fannie Mae-eligible properties is 250,000.

Fannie Mae does not have a minimum-population requirement. The smaller the market, however, the more difficult it is to get current sales and rental data. It's also harder to gauge the probabilities of new competitive properties coming on the market in a smaller area because raw land often is more plentiful.

Another challenge that comes with smaller markets is the amount of analysis required to understand economic factors that may impact credit risk, including employer or industry concentration and population or seasonal trends. Small loans in small markets equal higher risks. Be prepared for more-conservative underwriting in smaller markets.

More on the Program

Fannie Mae's small-loan product is designed for multifamily loans of $3 million or less. The maximum loan amount increases to $5 million for the following metropolitan statistical areas:

  • Boston
  • Chicago
  • Los Angeles
  • New York
  • Orange County, Calif.
  • Sacramento, Calif.
  • San Diego
  • San Francisco
  • Seattle
  • Washington, D.C.

Fannie Mae also maintains a list of lenders authorized to underwrite and close multifamily loans through its small-loan program, as well as their reported lending areas.

Lender list:


Properties that meet minimum debt-service requirements also must exhibit a minimum occupancy level.

Although a property meets the debt-service-coverage minimum, it also must exhibit 90-percent occupancy for the 90 days preceding the loan-origination date. Properties that have less than 10 units may not have had more than one unit vacant for the preceding 12 months.


Local borrowers must use third-party management companies.

Generally, local borrowers with two years of property-management experience and similar numbers of units are not required to employ a third-party management company. Nonlocal borrowers, defined as those living 100 miles from the subject property or farther, typically must employ third-party management companies, however.


Small loans with an age-restricted, student or Section 8 component are eligible.

Age-restricted properties are eligible for these Fannie Mae loans as long as there are no other senior-housing elements present, such as nursing care or meal plans. Properties with a student occupancy of 20 percent or less are acceptable. But be prepared to validate the student-occupancy makeup. Affordable-housing properties with Housing Assistance Payment Contracts, tax credits or regulatory agreements are not eligible for the Fannie Mae small-loan program. Properties that are rent-controlled or rent-stabilized or that have portable Section 8 vouchers are eligible, however.

Every Fannie Mae lender has its own credit culture, requirements and sensitivities. Certain lenders may have aversions to certain markets based on experience; this can be a primary reason brokers are confused about whether particular requirements are Fannie Mae's or a lender's.

Brokers should therefore demand constant communication from their lenders so they can manage transactions affected by Fannie Mae's -- or lenders' -- guidelines.


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