FINANCE

FANNIE MAE

Fannie Streamlines DUS Guide

BY JERRY ASCIERTO

AFFORDABLE HOUSING FINANCE • JANUARY 2008

What’s old is new again. Fannie Mae has revamped its Delegated Underwriting and Servicing (DUS) guide, the first major update since the DUS program began about 20 years ago.

The new guide gives the DUS network of lenders greater authority in determining some standard loan terms, and reduces the documentation required to process a loan.

The underwriting guidelines will speed up deal cycle times by 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 averaged about five waiver requests for things ranging from lower debt-service coverage ratios (DSCRs) to longer amortization terms, lenders reported.

This process defeated the program’s intent of giving lenders the authority to originate Fannie Mae loans without seeking prior approval. “After reviewing the deals that were coming in, we were approving the waivers 90 percent of the time anyway, so why have it as a policy?” said Michele Evans, vice president of multifamily corporate affairs at Fannie Mae.

The original guide was written for conventional multifamily loans but evolved as lenders expanded to serve niches like affordable housing, seniors housing, and manufactured housing. Over the years, the guide had so many amendments tacked on to it that it became a convoluted document of nearly 400 pages. The new guide is about 50 pages long.

“There was a point recently where you really couldn’t figure out what they wanted you to do because there were so many lender memos that overlaid the guide,” said Chris Tawa, a senior vice president who heads the affordable housing lending division of MMA Financial, LLC. “This new guide really puts more authority in the lenders’ hands.”

The re-worked guide also streamlines many of Fannie Mae’s documentation requirements, allowing lenders greater discretion in the types of appraisal documentation and borrower credit forms used to process loans.

While the streamlined guide is more of a cleanup than a radical restructuring of the old guide’s credit standards, affordable housing developers will notice some better terms and pricing on standard Fannie Mae deals.

In the past, DUS lenders would often have to ask Fannie Mae to waive certain standard loan terms, such as DSCRs below 1.20x, to compete against conduit lenders, which until recently offered aggressive terms and pricing.

Now the guide provides 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 without seeking prior approval.

Additionally, DUS lenders can now offer 35-year amortization schedules for bond credit-enhancement deals, as opposed to the standard 30-year term under the old guide. “The 35-year amortization for bond deals was a big ask from the borrowers and lenders,” Evans said.

Although bond credit enhancements are the only types of deals where that term has been made standard in the new guide, Fannie Mae has been open to 35-year amortization for many types of deals in the past 18 months. The term has practically become standard. For Fannie Mae, “35 is the new 30,” said Paul Weissman, a director at DUS lender Credit Suisse/Column Financial.

Fannie Mae also modified the minimum term for loans made to lowincome housing tax credit (LIHTC) developments. In the past, permanent loans for LIHTC deals featured a minimum 18-year term (if more than 20 percent of a project’s units were LIHTC units), but that has now been reduced to 15 years. The reduced term could translate into slightly lower interest rates for developers, said Tawa.

Interest-only deals should be easier to procure now as well. Under the new guidelines, transactions with 30 percent or more equity can qualify for 10-year interest-only loans in strong markets. Interest-only terms were fairly common from conduit lenders before the credit crisis, but DUS lenders had to procure waivers every time they wanted to offer interest-only in the past, Evans said.

Faster quotes

Fannie Mae’s Evans said the typical DUS loan origination averaged five waiver requests. The requests took time to process, complicating a lender’s ability to quote a deal up front.

“If [DUS lenders] have to do five waivers, you could see it taking an extra 48 hours to being able to quote a deal,” she said. “Today, it would be instantaneous; they’d be able to deliver the quote at the table with the borrower.”

In the past, Green Park Financial averaged about seven or eight waivers on each deal, which could add up to a week to a deal’s timeframe.

But the company now expects to go through the waiver process in just two out of every 10 deals, instead of nearly every deal.

“There are now very few instances where we need to reach out to Fannie Mae to receive waivers,” said Ted Patch, senior vice president and chief production officer for DUS lender Green Park Financial “Probably 80 percent of the decisions we make now are our decisions to make.”

The revamped guide was rolled out in October, and lenders were given a two-month transition period to get used to the new rules. Starting Jan. 1, all new commitments will be required to use the new guide.

As under the old guide, all multifamily DUS loans of up to $25 million can be originated through DUS lenders; anything above that amount must get prior approval from Fannie Mae.

What’s next?

In 2007, Fannie Mae revamped its small loan program, 3MaxExpress, by reducing the DSCR, fees, and required documentation to fight off increased competition for loans of up to $5 million. The 3MaxExpress restructuring was the first of a planned series of program improvements, with the new DUS guide being the second.

Next on Fannie Mae’s plate is restructuring the servicing portion of the DUS guide. Improvements around such “back-end” processes as asset management, property inspection, and required financial documentation will complete the DUS guide’s overall new look.

“All of those pieces of the servicing section of the guide are going to be looked at,” said Evans. “We’ll roll that out sometime in 2008.”