NEW DIRECTIONS

Fannie Revamps DUS Guide

BY JERRY ASCIERTO

AFFORDABLE HOUSING FINANCE • DECEMBER 2007

Fannie Mae has released its new Delegated Underwriting and Servicing (DUS) guide, an overhaul of the guidelines by which its network of affiliated lenders makes loans.

The new guidelines should speed up deal cycle times by at least a week on most transactions, eliminating many of the waivers that lenders had to seek from Fannie Mae to get deals done. In the past, a typical Fannie Mae deal produced about seven or eight waiver requests, for things ranging from lower debt-service coverage ratios (DSCRs) to a reduced level of borrower documentation, lenders report.

The new guidelines call for reduced borrower paperwork and enhanced underwriting conditions for strong borrowers and strong markets. For instance, Fannie Mae’s standard DSCR was 1.25x, but as conduit lenders began sizing loans aggressively last year and early this year, DUS lenders were routinely requesting waivers to offer DSCRs closer to 1.20x.

The new DUS guide has provided a list of the nation’s stronger markets—including New York City; Los Angeles; San Francisco; Portland, Ore.; and Seattle—where lenders can routinely underwrite to as low as a 1.15x DSCR. Transactions with 30 percent equity or more can qualify for 10-year interest-only loans in strong markets. While such terms were fairly common from conduit lenders before the credit crisis, DUS lenders had to procure waivers to offer those aggressive terms.

DUS lenders applauded the move. "It takes time for us to put the waivers together, and it takes time for them to review it," said Ted Patch, senior vice president and chief production officer for DUS lender Green Park Financial. "A majority of that time is going to be eliminated, and that's going to make a huge difference in our ability to process business efficiently."

The new guidelines also give lenders more discretion as to the required level of borrower documentation.

"In the past, there would be more standard documentation, a deeper level of due diligence required," said Patch. "Now, it’s more up to the individual lenders to make the decision as to what level of due diligence is needed."

Earlier this year, Phil Weber, senior vice president of Fannie Mae’s multifamily division, said that the DUS program “has evolved into an elaborate waiver process,” and vowed to re-make the program. Many expected the new guidelines to be released earlier this year, but the turmoil in the capital markets complicated those efforts.

The volatility made it more difficult for the company to figure out appropriate standardized terms. Plus, transaction volume surged as borrowers flocked to portfolio lenders, forcing Fannie to shift resources to process the business at hand.