- Fannie leader’s top goals
- Offering a better way to work with lenders
- Lenders cautious about underwriting in slowing economy
The slowing economy did nothing to reduce permanent loan demand during 2001, at least not for Fannie Mae. The secondary market giant and its Delegated Underwriting and Servicing (DUS) lenders were closing deals at a record-breaking pace in 2001 thanks to historically low interest rates as well as changes in loan programs and processing.
The firm’s record-breaking pace was due in large part to favorable interest rate climate in 2001, said Kenneth J. Bacon, Fannie Mae’s senior vice president in charge of multifamily programs. However, Fannie Mae has made changes under Bacon’s leadership that will hold up in any economic climate. Since he took over the top multifamily job at Fannie in 2000, Bacon has concentrated on providing better, faster service by streamlining operations and granting more authority to field staff and DUS lenders.
DUS is Fannie’s principal product line for purchasing individual multifamily loans. It has more than $32 billion of DUS multifamily mortgage in its portfolio. There are 26 DUS lenders who have correspondent relationship with more than 200 other lenders. In 2000, it participated in financing $13.5 billion in multifamily, up from $12.4 billion in 1999.
Fannie leader’s top goals
For 2001, Bacon’s goal was to provide better service with lower costs and higher values. His focus on customer service included an effort “to push down more decisionmaking, give people who cover accounts more power to make decisions and reduce the number of steps to make decisions,” he said. For example, he said Fannie had cut the length of its appraisal form by half.
Bacon has worked hard to increase the ability of DUS lenders to make decisions on their own, with less red tape to cut through at Fannie Mae. “We had a lot of internal process that were slowing down our responsiveness,” he said. “Some deals might have taken six signatures, and I am getting it down to two or three.” The firm also is developing a Web-based application that DUS lenders can use to submit requests for waivers of Fannie Mae’s rules.
Prior to taking the multifamily housing post, Bacon had run Fannie Mae’s American Communities Fund, a special program intended to funnel investment into community and economic development projects in low- and moderate-income areas. Before that, he was in charge of Fannie Mae’s Northeastern region.
Before joining Fannie Mae, Bacon was director of the Office of Securitization of the Resolution Trust Corp. He spent eight years on Wall Street with Kidder, Peabody and Morgan Stanley & Co., serving as an officer at both firms.
Bacon has a master’s degree in business administration from the Harvard Graduate School of Business, a master’s degree in international relations from the London School of Economics and a bachelor’s degree from Stanford University.
Offering a better way to work with lenders
Fannie Mae recently set up a system of national account managers so that lenders can work with one person who knows their whole line of business instead of various regional offices. This has helped improve the consistency of decisions on waiver requests and sped up the process tremendously, said Todd Rodenberg, chief underwriter for Key Corp Real Estate Capital Markets. “The service is just fantastic. It can make a big difference if a deal needs Fannie Mae approval. Instead of waiting a week or two, we are getting 24-hour turnaround.”
At the same time, Bacon has presided over substantial change in the composition of the DUS lender network. Several small entrepreneurial lenders have been acquired by major financial institutions. Washington Mutual, a major West Coast thrift institution, became a DUS lender recently as well.
Among the most significant program changes recently are a new supplemental loan program, approval for borrowers to use secondary financing with Fannie Mae first mortgages and a new streamlined program for small projects. The firm also had success in 2001 with its basic 10-year, 30-year amortization program, as well as an early rate lock option and an adjustable rate version that can be converted to fixed. Other new initiatives include a manufactured home loan program.
In 2001, Fannie announced the consolidation of the Fannie Mae 5-50 Streamlined Mortgage Loan Product with the DUS Small Loan Product. This new product is called 3MaxExpress Streamlined Mortgage Loan Product and replaces all existing Fannie products targeting small multifamily loans and has not restriction on affordability.
The program is for loans of less than $3 million. Through mid-year 2001, Fannie had financed $1 billion in DUS small loans.
Many conduits and banks have competed with Fannie Mae on the basis of service, saying they make decisions faster than Fannie Mae does in many cases. However, that advantage may be less compelling now that Fannie has streamlined its procedures.
Borrowers are very attracted by Fannie Mae’s second mortgage program, according to many of the lenders surveyed. While initial loan amounts are based on current rent rolls, borrowers can go back for a Fannie Mae second loan as soon as 12 months after the original loan closes.
Fannie Mae’s second loan program is “the biggest selling point” for its first mortgage program, since pricing between Fannie Mae and Freddie Mac loans is pretty close, said Rodenberg. “Freddie Mac has a supplemental loan program too, but in its official form, it is less attractive,” he said. Freddie Mac’s rules say borrowers must wait two years before taking a second loan and can only take one such loan over the life of the loan. Fannie Mae allows borrowers to do one per year.
“The future availability of supplemental loans is probably the single most attractive feature of the conventional DUS product line,” said David E. Queen, executive vice president of AMI Capital, Inc. “Despite some late-breaking modifications, the DUS ARM product is now a fully competitive alternative, especially for borrowers who like to combine the flexibility and economy of the floating rate mode with ready convertibility to a desirable fixed rate.”
Lenders cautious about underwriting in slowing economy
As 2001 drew to a close, Fannie Mae lenders were concerned about the slowing economy, but not too concerned. They said most markets were healthy. While it’s true that rents may not rise as much as they have in recent years, that’s not a major issue since Fannie Mae underwriting is based on a project’s rent roll at the time of underwriting (without accounting for projected increases).
Rising operating costs were a greater cause for concern. “The days of simply inflating last year’s controllable operating expenses by 3% or 4% are long gone. The California energy crisis merely highlighted the issue,” said John M. Cannon, senior vice president and managing director of GMAC Commercial Mortgage.
“With signs of economic weakness, we are assuming that growth of rental rates will be limited but operating expenses will continue to increase at a reasonable rate. Attention to debt service coverage ratios is critical, said Rodrigo Lopez, president of AmeriSphere Multifamily Finance, LLC.
“We have some markets where we are definitely seeing a slowdown, including Houston, Silicon Valley, some Texas markets and Las Vegas, and we are using higher vacancy rates in our assumptions,” said Charles Frischer, vice president of Capri Capital. “The main adjustment is higher vacancy assumptions and to take a hard look at concessions. In some markets, we can go as low as 3%, but we are seeing markets where 8% or 10% is common.”
Continental Wingate Capital is paying more attention to a project’s positioning in its marketplace as well as the strength of sponsorship and management, said Michael Berman, president. “Our lending decisions are based on a review of downside risk scenarios as well as the exit strategy for our loans.”
GMAC Commercial Mortgage is taking a much closer look at effective versus “street” rents and market occupancy levels, said Cannon. But, he added, “apartments are still most lenders’ preferred property type, and competition is fiercest among all of us for this property type. As long as the supply of money is there, and assuming long-term fixed rates stay below 8%, the demand for these loans should remain stable.”