As the dust of its accounting scandal settles, Fannie Mae heads into the new year hoping to bolster its lagging multifamily division through process improvements and new product design.
After an uneven first half that saw multifamily volume decline over the first half of 2005, Fannie Mae appears to be steadying its ship. It expected to hit its full-year goals while refocused on developing competitive multifamily products for rollout in 2007.
“We’re having a very strong second half of the year and I think we’ve got some terrific momentum going into 2007,” said Phil Weber, senior vice president in charge of multifamily programs.
Specifically, “preserve” is the word for 2007. While preservation in the affordable housing industry has been a historical focus for Fannie Mae, “In 2007, it’s going to be an even higher priority for us,” Weber said.
To that end, Fannie plans to extend one of its market-rate products, mezzanine financing for acquisition rehab deals, to the affordable housing industry for the first time next year. The product is tentatively slated for rollout in early February.
“We’ve been doing a lot of work in the acquisition rehab space, and one of the new features that we’re going to be unveiling early in 2007 is some additional acquisition rehab mezzanine financing,” Weber said. “We’re very excited about that.”
While details of the new product were not available at press time, the product was partly developed in conjunction with Fannie’s Community Investments Group, which is headed by Richard Lawtch, former multifamily division chief.
Acquisition rehab mezzanine financing
Delegated Underwriting and Servicing (DUS) lenders who originate loans under Fannie Mae’s programs view the as-yet unreleased mezzanine program as further evidence that the multifamily division’s ship is turning in the right direction.
The product looks to provide developers with a new mechanism for acquisition rehabilitation funding, good news for the affordable housing industry, especially in a market where land and construction costs make production of new housing a challenge.
“This is going to revitalize some old stock,” said Todd Rodenberg, senior vice president and national agency lending director for KeyBank Real Estate Capital, and a member of Fannie’s DUS Advisory Council.
“With skyrocketing land prices for new construction, value-added plays have become more popular,” said Douglas Westfall, a Vienna, Va.-based senior vice president with Bulls Capital Partners. “More institutional players are moving into this space.”
In the past, developers looking for acquisition rehab mezzanine financing on affordable housing deals had limited choices, Rodenberg said. Borrowers typically couldn’t procure such financing through commercial mortgage backed securities (CMBS) loans, since CMBS loans don’t allow for major work to be done to a property once the loan is made—the property typically has to be a stabilized asset. “It’s not a product really made for that,” he said.
The only other choice has been a short-term bank loan, “but you don’t lock your interest rate long-term doing that,” Rodenberg said. “This is a way to lock up your long-term interest rate and put on some mezzanine financing. There really isn’t a comparable product out there.”
Responding to lender concerns, another focus for 2007 will be on process improvements, particularly eliminating the need for lenders to use some waivers.
“We’re really working hard on streamlining our acquisition process—it has evolved into an elaborate waiver process,” said Weber. “But the strength of our program is the delegation to lenders. We’re trying to enhance the delegation, which is a competitive strength that we have.”
Lenders have complained about Fannie’s conservative standard loan terms, which required many lenders to procure waivers just to offer competitive loans. “On debt service, the market has moved somewhat off of our traditional underwriting, and we need to make sure that we’re being as flexible as we can,” Weber said.
So, Weber is heading a task force looking at how many waivers can be labeled “normal business” and therefore rendered redundant. “In some instances, we require the lender to formally write their waiver application on something they have the delegation to waive,” he said. “In effect, they’re asking themselves for permission to waive something. It’s really a process issue.”
Weber cited the November release of a single-asset substitution product as part of a trend to increase borrower flexibility.
That product, aimed more at the market-rate multifamily industry, gives a borrower looking for a mortgage exit strategy the ability to replace the original mortgaged property with another property while keeping the existing loan in place. Previously, asset substitution was only available for a pool of loans of more than $50 million, but this product is aimed at the average borrower and a single property.
When combined with Fannie’s Supplemental Loan program, and the as-yet unreleased acquisition rehab mezzanine program, flexibility can be seen as Fannie’s chief differentiator. “Now, a borrower can do a supplemental (loan) on a Fannie Mae loan; they can do a substitution on a Fannie Mae Loan; and we’re working hard on the acquisition rehab mezzanine program, which will have some flexibilities that you can’t get from other capital sources,” Weber said.
DUS lenders: changes afoot
Herman Bulls, president and CEO of Fairfax Station, Va.-based Bulls Advisory Group, believes that the new single-asset substitution product can be seen as the beginning of a trend. “What that product shows is that there will be a continuing evolution of competitiveness and creativity to be responsive to the needs of the market,” Bulls said.
In the past year, Fannie Mae’s products may not have been the most competitive from a price perspective, but “that competitiveness is certainly coming back now,” he says. “We’re looking at 1.20x, 1.15x and even in some instances with very strong sponsorship, 1.10x debt-service coverage (ratios),” Bulls said. “So, the selective ability to be competitive is there.”
Other DUS lenders agree. “I think there is a renewed focus and certainly a commitment to be the most active player that they can be,” said Joseph Mosley, executive managing director and co-head of Fannie Mae DUS production for Greystone Servicing Corp. “Fannie Mae has been helpful from the perspective of discussing creative ways to get deals done.”
The single-asset substitution product “could have a big impact on the multifamily marketplace,” Mosley said. “It’s an example of what they’re trying to do—it’s a creative approach to multifamily lending.”
Several lenders said that the second half of 2006 has been much kinder than the first. “Most of our new business has come in the latter part of the year,” said Howard Levine, president and chief executive officer at Calabasas Hills, Calif.-based ARCS Commercial Mortgage Co., LLP. Levine expects “aggressive competitiveness for both government-sponsored entities” in 2007, to help sustain that momentum.
Fannie Mae says there’s more to come in 2007. “We have a rich pipeline of ideas that we’re working on in product development,” Weber said.