MORTGAGE LENDING: FANNIE MAE

APARTMENT FINANCE TODAY • FEBRUARY 2008

Small Loan Revolution

Looser underwriting and competitive interest rates help Fannie Mae compete for small loans.

By Bendix Anderson

The guidebook for Fannie Mae’s small loan program just got a lot lighter. “The guide itself used to be 300 pages long,” said John Barbie, vice president for PNC ARCS, a Fannie Mae lender.

In January, Fannie Mae began using a new 30-page rulebook for the program. The streamlined rules, along with competitive interest rates, are helping Fannie Mae expand its program in the face of heavy competition from commercial banks, according to the Mortgage Bankers Association.

“We are committed to growing this business,” said Richard Wolf, vice president with the Housing and Community Development Division at Fannie Mae.

The rules in the new guidebook put more decision-making power in the hands of the lenders that originate Fannie Mae’s small apartment loans. The move to simplify the rulebook is part of a larger Fannie Mae effort to delegate more authority to its lenders and streamline its underwriting processes.

For example, lenders can now originate small apartment loans with a debtservice coverage ratio as low as 1.15x without getting Fannie Mae’s approval. “Before the standard was 1.20x,” Barbie said.

Lenders can also use a property’s current rent roll to compute the income from a property, rather than looking at the last three months. Lenders can use their own estimate of how much expenses are projected to increase, rather than a percentage based on rent increases in Fannie Mae’s portfolio of properties. Lenders can use a 3 percent estimate when figuring what share of its income a property will pay in property management fees, as opposed to the 4 percent that Fannie Mae used to require. Plus, lenders can require a less detailed appraisal.

Fannie Mae’s loosened underwriting requirements will help its lenders compete with banks that can make loans from their own balance sheets and that have autonomy over underwriting requirements, said Barbie.

M&T Bank, a Baltimore-based Fannie Mae lender, expects streamlined underwriting and competitive interest rates to help it originate $159 million to $200 million in small apartment loans in 2008, up from $130 million in 2007.

In early January, M&T offered small, 10-year Fannie Mae loans with interest rates 185 to 195 basis points over the yield on Treasury bonds. That’s up from 130 basis points in the summer of 2007, before the credit crisis hit. Borrowers are better able to swallow those widening spreads thanks to the falling yield of 10-year Treasury bonds, which slid more than 100 basis points over the same period.

The spreads Fannie Mae lenders can offer over Treasuries are much lower than the spreads of 250 to 300 basis points offered by conduit lenders for small loans since the credit crisis. Fannie Mae’s spreads are also 50 to 75 basis points below the spreads offered by commercial banks, said Barbie.

Competitive rates and streamlined rules are making Fannie Mae small loans very attractive to borrowers. “We have capacity issues,” said Barbie. “There is too much business for the manpower.”