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Fannie Mae Tweaks Underwriting

By Jerry Ascierto

Fannie Mae recently made some significant adjustments to its credit standards.

In April, Fannie Mae moved to a standard 1.25x debt-service coverage ratio (DSCR), and down to 1.20x in strong markets such as New York, Los Angeles, and Seattle.

Last year, Fannie Mae had lowered that threshold to a standard 1.20x and down to 1.15x in strong markets. The move was a reaction to the aggressive underwriting by conduit lenders who were stealing much market share from Fannie Mae.

The change back to the historical norm of 1.25x DSCR is a reflection of the reduced competitive environment, as conduit lenders continue to wait on the sidelines. It’s also partly a reflection of concern for the overall economy.

In addition, Fannie Mae has tightened its underwriting standards on short-term loans. Last year, five-year deals could be sized up to an 80 percent loan to value (LTV) ratio, but Fannie Mae changed the LTV ratio on five-year deals to 75 percent in the first half of 2008.

But it’s not all bad news. Fannie Mae has also made some borrower-friendly changes to its criteria for underwriting acquisition deals.

In the past, lenders used a rigid, formulaic approach to sizing loans on acquisition deals. Lenders would look only at a property’s historical data—the trailing three months of net rentable income, and the trailing year of expenses—and develop a “baseline” net operating income from which to size the loan.

But lenders couldn’t take into account the potential buyer’s projections of income and expenses, which limited the amount Fannie Mae was willing to lend. Lenders would need to seek waivers from Fannie Mae to increase the loan size, a process that increased deal cycle time significantly.

new formula, which went into effect this spring, allows lenders to take the buyer’s projections into account when sizing the loan, which reduces deal cycle time and ultimately increases the loan amount.