Freddie Mac recently rolled out a new streamlined acquisition - financing product aimed at new borrowers seeking acquisition loans of Freddie Mac-financed properties.
The government-sponsored enterprise (GSE) is hoping to retain properties already in its portfolio by offering advantages to the new buyers for sticking with Freddie Mac. Whereas most lenders offer incentives for repeat customers, this effort looks at repeat properties.
“Most of the time, mortgage bankers look at retention of existing borrowers,” said Phil Melton, a director responsible for affordable housing at Collateral Real Estate Capital, LLC, which agreed to be purchased by BB&T Corp. in August.
“Freddie Mac’s taken that a step further and said, ‘Let’s make it more attractive for that acquirer to continue using Freddie Mac.’”
Benefits for the new borrowers include reduced documentation requirements. Borrowers won’t have to provide appraisals, engineering reports, or environmental reports, lowering the cost of the transaction and speeding up the cycle. The third-party report waivers are the same that Freddie Mac extends to existing borrowers for a refinance.
“Since [Freddie Mac is] already familiar with the property, the costs go down because you don’t have to order some of the reports and you don’t have to wait for them, either,” said Todd Rodenberg, senior vice president and agency lending director for KeyBank Real Estate Capital. “The acquisition can happen a lot faster this way.”
The GSE said this streamlined process could result in transactions being completed in half the time it takes to originate most new loans. In the past, a typical acquisition deal could be turned around in 45 to 60 days. This new process could result in a three- or four-week execution, lenders said, because many due diligence requirements are eliminated.
“For both the buyer and seller, it really takes away the financing contingency associated with the transaction,” said Melton. “It means cheaper pursuit costs for the buyer and more certainty of execution for the seller, so it’s a plus on both sides.”
In addition to transaction speed, Freddie Mac is also offering an economic incentive equal to up to 1 percent of the unpaid principal balance on the current, existing loan. The borrower has a choice between receiving that incentive in cash, when Freddie Mac buys the loan from the lender, or through a lowered cost on the new loan.
Freddie Mac-affiliated lenders applauded the move, saying it would help borrowers achieve significant savings. “I’d equate that 1 percent savings to 10 to 15 basis points on the rate side. That’s pretty sizable,” said Rodenberg. “I’ve seen deals move from one source to another for a lot less than that.”
Eligible properties include garden, mid-rise, and high-rise apartments and cooperatives with minimum occupancies of 90 percent for 90 consecutive days. The program features a minimum debt-service coverage ratio of 1.25x, and a maximum loan-to-value ratio of 80 percent (75 percent for loans of less than seven years).
Lenders in Freddie Mac’s Program Plus delegated network expect the company to test a new approach to small loan production through a pilot program that seeks to offer better terms and quicker deals by delegating more authority to lenders.
The program should get under way early in 2008 at a few of the larger lenders in Freddie Mac’s network. Large banks are natural partners in the pilot, since local bank branches typically dominate the small loan industry.
The company is looking to transform its small loan business by delegating more authority to lenders, much like Fannie Mae’s 3MaxExpress small loan program. The current process sees Freddie Mac buying a bundle of small loans through commercial mortgagebacked securities. The new process would have a lender promising to deliver a certain amount of small loans in a certain timeframe, and Freddie Mac would specify the pricing up front.
“When we think about the delegated work that we’re doing for targeted affordable, we’re approaching that with the understanding that we’re going to leverage that for small loans,” said Mike May, Freddie Mac’s senior vice president of multifamily sourcing, earlier this year.
“So we’re building the lender network, building the underwriting process, delegating the underwriting to the lenders, and building the control process to produce more small loans.”
Freddie Mac lenders believe that the pilots will lead to a permanent product rollout in 2008.
“It should jump-start their small loan production,” said Rodenberg. “They’ll do it on a flow basis, like what they did on the single-family side.”