Fannie Mae cuts lenders loose to snag small deals

by Yasmin Tong

Several of Fannie Mae's 26 Delegated Underwriting and Servicing (DUS) lenders have jumped at the chance to propose customized programs for processing loans of $3 million or less. Fannie's decision to allow such programs marks another addition to its arsenal of tools for serving the needs of small property owners.

Currently, DUS lenders can deliver small loans to Fannie Mae under 3MaxExpress^SM, a streamlined version of standard DUS loan processing and underwriting that imposes uniform procedures. But now, DUS lenders with a demonstrated expertise in small-loan underwriting and delivery have the option of customizing a small-loan program with Fannie Mae.

"This [announcement] will allow [Fannie Mae's] small-loan platform to benefit from each lender's way of doing business," said Dan Ross, vice president and production manager of HomeStreet Capital, a long-time DUS lender headquartered in Seattle. "It's not a revolutionary new way of doing things, but it leads to continued improvement in process and delivery that makes things more efficient." HomeStreet Capital plans to further customize their small-loan program to take advantage of the new freedom, he added.

Fannie Mae's multifaceted strategy for providing mortgage capital to the small-loan marketplace evolved to fulfill its mission and to grow its multifamily business. "The DUS product is effective competition for properties with 100 or more units with professional management," said John Powell, Fannie Mae's vice president of customer management in multifamily. "Opportunities for growth are in small loans."

This explains why Fannie Mae has rolled out multiple versions of the small-loan program in the last few years, including Small Loan Pilot, 5-50^SM Streamlined Mortgage, and 3MaxExpress for multifamily loans of $3 million or less.

Fannie Mae took its boldest step in the small-loan arena in 2001 with MFlex^TM, which resulted in new partnerships with seven small-loan specialists that deliver loans on a flow basis. MFlex lenders generated $2 billion in small loans for Fannie Mae in the first half of 2003. During the same period, DUS lenders did $400 million through the 3Max Express program.

The relatively low activity level under the DUS 3MaxExpress program comes in part from the fact that some lenders feel the required application and processing steps are still too cumbersome. Allowing DUS lenders to customize small-loan programs to suit their existing processes enables them to achieve more streamlining and bring their Fannie Mae lending practices more in line with their portfolio lending.

The 3MaxExpress program continues to remain in effect for lenders that occasionally pursue small loans. Meanwhile, DUS lenders with a more concentrated focus on the small-loan sector enthusiastically welcome the possibility of customized small-loan programs.

"This is an exciting announcement," said Jerry Anderson, senior vice president of Washington Mutual, a DUS lender. "DUS small loans can use our portfolio loan process that offers savings on third-party reports [environmental and appraisal], legal, and closing costs, while offering the tremendous Fannie Mae pricing."

Named WaMu Plus, the customized program generating small loans on Fannie Mae's behalf could offer customers pricing as much as 50 basis points lower than a comparable loan remaining in Washington Mutual's portfolio.

This difference in pricing results from Fannie Mae's role as a AAA-rated government-sponsored enterprise that guarantees the timely payment of principal and interest on the mortgages it sells and securitizes. Ultimately, Fannie Mae's AAA rating enables borrowers to obtain some of the most competitive pricing available on the market. At press time, a DUS 3MaxExpress loan with 10-year, fixed-rate financing was priced at roughly 150 basis points over a matched-maturity U.S. Treasury instrument.

Fannie Mae's request for proposals for small-loan customization is not the last word on this market sector. Still more improvements are expected for 3Max Express. Lenders anticipate a restructuring of prepayment premiums or yield maintenance, away from the Fannie Mae standard currently applied to larger loans. Fannie Mae yield maintenance requires borrowers to pay the present value of interest cost remaining on a loan. Relaxing the deductible levels for property insurance for small loans is another highly anticipated change for small loans generated by DUS lenders.

Small loans are big market

While Fannie Mae's dynamic approach to small loans has proven to be good for business, it also comes at a critical time for the industry.

Small properties with between five and 99 units comprise roughly 25% of the nation's 35 million rental housing units, but financing for them "is one of the most significant gaps in the mortgage industry … [because of] the lack of economies of scale in underwriting, servicing, and securitization," according to the Millennial Housing Commission's 2001 Housing Finance Task Force.

Until recently, small multifamily property owners could access only adjustable-rate mortgages or short-term bullet financing. The entry of Fannie Mae and others into the small-loan marketplace has enabled property owners to access fixed-rate financing at highly competitive rates with terms of up to 30 years.

Despite a bottoming out in multifamily markets this year and a surge in first-time homebuyers, Fannie Mae's multifamily group posted mid-year loan volume of $10.6 billion, 30% higher than last year at the same time.

Small loans accounted for nearly 20% of the loans generated on Fannie Mae's behalf. Low interest rates offer some explanation for the strong loan volume, but Fannie Mae's gradual but steady enhancement of its lending programs and products has played a key role in its success.

"The developments in small loans are illustrative of how I see the next 12 months unfolding," said Fannie Mae's Powell. "We strive to be the most efficient, effective, and competitive in products and pricing. That's our focus."

In a separate move, Fannie Mae has made it easier to finance new construction or rehabilitation of low-income housing tax credit (LIHTC) properties.

It is now offering unfunded forward-commitment rate locks at close of construction for 30 months with no negative arbitrage, letter of credit or funding agreement. The financing has up to a 90% loan-to-value ratio and a 1.15 debt-service coverage ratio, with 30-year amortization and a minimum 18-year term.

Coming this fall, sources said, are early rate-lock enhancements that will enable borrowers to lock interest rates for more than 120 days with greater cost efficiency.

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