Freddie Mac has made adjustments to its early rate lock program to speed up deal cycle time and reduce the amount of money a developer has to put up in advance.
The early rate lock program, a popular alternative to standard loan delivery, helps to eliminate interest-rate and credit-spread risks by locking in an interest rate early in the mortgage-approval process. About 60 percent of the loans purchased by Freddie Mac are delivered through this option.
In response to the heated competition that has emerged over the last several years from a variety of capital sources such as conduit lenders, the government-sponsored enterprise (GSE) has streamlined the process and made it easier on developers’ wallets.
“We got some feedback that it’s still a great product but the competition has kind of caught up,” said Mike May, senior vice president of Freddie Mac’s multifamily sourcing division. “What we’ve been trying to do is sharpen it up a bit so we’re more out in front on that product.”
Freddie Mac has introduced a standardized electronic preliminary loan submission template—the form used to get early rate lock quotes—to speed up response times by allowing it to begin pro-forma underwriting and preparation of the investment brief more quickly than before.
In the past, lenders used different formats to send the preliminary quote submission to Freddie Mac. Each submission included a hardcopy narrative giving a general background on the property and a description of the requested loan structure.
“In some cases that meant Freddie Mac didn’t get all the information they wanted, and they would have to do more work internally,” said Mark Ragsdale, senior vice president of originations at PNC MultiFamily Capital. “And that slowed the whole system down.”
The new template is allowing lenders to get quotes faster, “and the questions we get back are much more on point,” said Ragsdale.
The streamlined turnaround process positions the GSE “more in line with some of the other really dynamic players in the market, conduits in particular, who have a pretty standardized package,” said Phil Melton, a director responsible for affordable housing permanent debt transactions at Collateral Real Estate Capital.
While lenders still have to submit a more detailed early rate lock application later in the process, the new template will help Freddie Mac lenders compete more effectively with conduits “who can often times put a quote out in a day and a half,” Melton said. “My guess is Freddie is then hoping that they can compete in that sort of timeframe.”
Good faith deposit
Freddie Mac also has reduced the good faith deposit from 3 percent to 2 percent on immediate delivery deals, defined as deals allowing six months or less between the time the rate lock is issued and Freddie Mac purchases the loan.
“That’s a good move for them,” said Melton. “You’ve got conduits out there doing it anywhere from 1 to 2 percent, so this brings them more in line with where the conduit CMBS market has been.”
The change is significant if for no other reason than it’s far less money the developer needs to produce in advance—on a $20 million deal, it’s a $200,000 savings. While the 3 percent figure wasn’t an explicit deal-breaker in the past, the change may push more developers toward the early rate lock option.
“It’s less of a mental barrier for the client,” said Ragsdale. “It might encourage some people who are willing to do a standard process to say, ‘I should do an early rate lock.’”
Early rate lock application
Freddie Mac also has shortened the early rate lock application form—used after the quote is submitted to the lender—to reduce the amount of time spent processing the application.
The new application requires far less narrative than the old form. “They’re looking for relevant comments, almost in a bullet-point structure, so that you can get the strong deal points across and move on,” said Ragsdale. “The real benefit is that you’re diminishing the amount of time for data entry and information gathering.”
What’s more, Freddie Mac has sped up its response time on early rate lock requests. The GSE will send out the application outlining its proposed loan terms and interest rate earlier in the process, before the entire required preliminary package information is received. The application will authorize the rate lock to occur as soon as the outstanding items are provided or the outstanding conditions are satisfied.
In the past, Freddie Mac usually wanted to see a high percentage of the information before it issued a rate lock.
The change allows lenders to relay quotes to their borrowers more quickly, “which is of course an incentive for them to finish providing the requirements necessary to actually execute the rate lock,” said Ragsdale.
In all, the changes are meant to increase competitiveness in a time of increasingly heated competition. “With the new CDO products on the market and a strong CMBS market, the agencies are having to adapt, and the more fine-tuning they do, the better it becomes for the borrower,” said Melton.