Fannie Mae’s production volume jumped by nearly a third in the first half of 2007 as the government-sponsored enterprise (GSE) improved its loan offerings, added new products, and siphoned off business from conduit lenders.

Delegated Underwriting and Servicing (DUS) lenders delivered $14 billion in loan volume, a 31 percent increase from the $9.3 billion delivered in the first six months of 2006, said Fannie Mae. The company has seen the most growth in its seniors housing area, in “small to mid-size loans” between $3 million and $25 million, and in large portfolio acquisitions, as well as continued strength in student housing and manufactured housing.

“They’re more competitive than they’ve been in the past,” said Howard Smith, chief operating officer of Green Park Financial, a DUS lender.

Now that Fannie Mae has returned to timely financial statement filing, resources used for its massive restatement effort have been freed up, allowing the company to overhaul some of its products to make them more attractive to borrowers and introduce a new rehab product.

The agency made changes to its small loan program to make it more borrowerfriendly and rolled out a moderate-rehabilitation mezzanine product aimed at workforce housing.

Fannie Mae’s business has also been buoyed by the continuing meltdown in the subprime mortgage industry, which has created a favorable chain reaction. Ratings agencies have slashed ratings on commercial mortgage-backed securities (CMBS), forcing conduit lenders to grow more conservative in their underwriting. That’s made CMBS loans less attractive and steered borrowers to the GSEs.

“The reason behind that increase [in DUS lending] has been the increasing volatility and uncertainty in the conduit market and the flight to certainty of execution,” said Heidi McKibben, Fannie Mae’s vice president and head of multifamily production. “We’re seeing a shift back in the market on credit; we’ve seen conduits pull back on aggressive structuring. We’ll see likely continued volatility on the pricing side.”

The company committed $620.5 million in equity investments that qualify for low-income housing tax credits (LIHTCs) in the first half, a nearly 38 percent decline from $1 billion in the year-earlier period. The company said its appetite for those investments diminished—several large investors pulled back as yields fell last year.

Shrinking small-loan volume

Fannie Mae’s small loan volume slid 25 percent in fiscal 2006 to $3.9 billion from $5.2 billion a year earlier. The agency defines small loans as those up to $3 million for market-rate properties, and up to $5 million in high-cost metro areas like Boston, New York, and Chicago.

To regain lost ground, the agency has revamped its 3MaxExpress small loan program. Fannie Mae reduced the debt-service coverage ratio (DSCR), fees, and required documentation in an effort to fight off increased competition from smaller regional banks that have historically dominated the market, as well as larger financial institutions with securitization programs.

The most notable change was the move to lower the DSCR to 1.20x from the traditional 1.25x. Fannie Mae also streamlined many requirements for third-party reports, such as engineering, appraisal, and environmental reports, to make the program more cost-effective for small loan borrowers, who tend to be cost-sensitive.

“We’ve looked at the underwriting requirements and said, ‘Is this the appropriate level of due diligence for a small-balance loan’?” said Rick Wolf, who manages Fannie Mae’s small-balance multifamily loans. “Small-loan borrowers are almost more willing to increase the spread that they pay on the loan than they are to write a check to pay for third-party costs.” The engineering report requirements, for example, were scaled back. “There’s no longer a requirement for the physical needs assessment for properties that are well-maintained,” said Kevin Williams, executive vice president and chief operating officer for DUS lender Greystone Servicing Corporation, Inc. “Previously, regardless of our assessment of condition, we were required to do a certain report that added to the due diligence costs.” Additionally, the GSE loosened the standards on economic vacancy rates. In the past, properties with 10 or fewer units had to be underwritten using the assumption that their vacancy rate would be, at the lowest, 10 percent. Fannie Mae has now lowered that threshold to 5 percent, allowing borrowers to get incrementally higher loan proceeds.

Mezzanine-moderate rehab

Fannie Mae also rolled out its acquisition rehab mezzanine product in June, providing additional details on the longplanned offering (see Back in the Game? AHF January 2007).

Dubbed the Community Investments Mezzanine-Moderate Rehabilitation program (CI Mezz-Mod Rehab), the product aims to address the aging affordable housing stock, targeting value-added workforce housing deals.

The program is designed for properties undergoing renovations of $5,000 or more a unit. The loan minimum is $500,000, and its ceiling is $50 million for single assets, and $150 million for multiple- asset portfolios. The loan is secured by a pledge of the borrower’s ownership interest.

DUS lenders applauded the move. “We’ve seen a lot of interest there,” said Green Park’s Smith. One of the product’s key features is its ability to fund in stages, “so you’re not paying interest on money that’s not drawn,” said Smith. “You’re not getting a whole bunch of money that you can’t spend right away.”

Borrowers can reach 95 percent loanto- value leverage when combining the mezzanine loan with a DUS loan. And once a certain level of interest reserves is reached, the combined debt service coverage ratio can dip below 1.0x, the company said. Additionally, borrowers can use a Fannie Mae supplemental loan to pay off the mezzanine debt. “It really does provide the borrower with a lot of flexibility in that you can build in your takeout with the supplemental,” said McKibben.

The mezz-mod rehab loans feature a declining prepayment schedule after a oneyear lockout period, with the prepayment premium schedule starting at 2 percent and declining by half a percentage point per year.