Fannie Mae’s production volume jumped significantly in the first half of 2007 as the government-sponsored enterprise (GSE) added new products and siphoned off business from conduit lenders.
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 mezzanine financing product.
Additionally, the rest of 2007 looks sunny for the company. In the wake of the subprime mortgage industry meltdown, ratings agencies have slashed ratings on commercial mortgagebacked securities (CMBS), forcing conduit lenders to grow more conservative in their underwriting. That’s made CMBS loans less attractive.
“Deals that were previously going to CMBS are now going more and more to Fannie and Freddie,” said Phil Melton, a Dallas-based director at Collateral Real Estate Capital, LLC, which agreed to be purchased by BB&T Corp. in August. “They’re beating the pants off of CMBS right now.”
Delegated Underwriting and Servicing (DUS) lenders delivered $14 billion in loan volume in the first half of fiscal 2007, a nearly 51 percent increase from the $9.3 billion delivered in the year-earlier period. The company has seen the most growth in its seniors housing area, in “small to mid-size loans” of between $3 million and $25 million, and in large portfolio acquisitions. It has also experienced continued strength in student housing and manufactured housing.
“The reason behind that increase 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.”
Interest-rate spreads for loans secured by CMBS reached more than 200 basis points over Treasuries in mid- September, while Fannie Mae is quoting anywhere from 150 to 170 basis points above Treasuries. At press time, the 10- year Treasury was at 4.45 percent.
KeyBank Real Estate Capital has seen its volume of GSE loans increase over the last few months, but the surge has been most pronounced lately, with a threefold increase in August alone, according to Todd Rodenberg, senior vice president and agency lending director for KeyBank Real Estate Capital.
Fannie Mae expects to reveal a remade DUS guide in early October that will streamline underwriting requirements and delegate more authority to its DUS lenders.
Lenders expect that the new guide will eliminate the need for 75 percent of the waivers that currently are being approved by Fannie Mae, resulting in a greater certainty of execution and faster processing.
The guide hasn’t been updated in almost a decade. “Since 1998, it’s had volumes of amendments, so it became difficult to make sure you tagged all the bases,” said Howard Smith, vice president and chief operating officer for Bethesda, Md.-based Green Park Financial. “They have taken that voluminous document and in review right now is a 56-page replacement.”
The company refused to provide any details on the new guide ahead of its official release other than to say that the new guide will shorten the process by which lenders evaluate the risk level for a property.
Fannie Mae also rolled out its acquisition- rehab mezzanine product in June, providing additional details on the long-planned offering. Dubbed the Community Investment Mezzanine- Moderate Rehabilitation program (CI Mezz-Mod Rehab), the product aims to address aging housing stock, targeting value-added workforce housing deals.
According to Smith, developers previously could rely on Wall Street to secure mezzanine money for moderate rehabilitation deals, but recent market changes have made such transactions more difficult. “Conduits were lending all this money previously in a first-trust execution, and blending the rate,” Smith said. “But they can’t do that now because spreads in the B pieces are too wide. So, once again, that void in the marketplace has been filled.”
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. Borrowers can reach 95 percent loan-to-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, Fannie revamped its 3MaxExpress small loan program at the end of March, sending debt-service coverage ratios down to 1.20x from 1.25x, and streamlining many requirements for third-party reports, like engineering, appraisal, and environmental reports, to make the program more cost-effective for borrowers.
In short, the GSE is reaping the rewards of waiting out an overly aggressive market, and is gathering steam as its chief competitors on Wall Street fizzle. “[Fannie Mae] did stay in the market even when it was crazy, but they only did things selectively,” said KeyBank’s Rodenberg. “And now, they’ve got their wallets open.”