A quirky dynamic is at play these days at the government-sponsored enterprises (GSEs)—borrower scrutiny is at an all-time high, even as credit conditions begin to loosen.
In the past few months, interest-only loans re-emerged at the GSEs and are now being routinely offered. Meanwhile, Fannie Mae has lowered the underwriting floor on certain executions, and Freddie Mac has added some flexibility to its Capital Markets Execution (CME) program. Yet even though GSE loans are generally non-recourse, the focus on the sponsor has become the be-all and end-all.
“There are clearly signs that credit is loosening up, but the due diligence on borrowers has never been higher,” says John Cannon, who runs the mortgage origination business at Horsham, Pa.-based Berkadia Commercial Mortgage. “I’ve seen a lot more Interest-Only (IO) loans being done, and that would not have been the case even three months ago. But the scrutiny has gotten worse.”
The first question confronting any potential borrower is “where’s your schedule?” Lenders are increasingly picking apart a borrower’s entire portfolio of maturing loans to get a handle on just how much liquidity a borrower has—and how much they’ll need in the future. This focus on “global cash flow” wasn’t much of a consideration during the height of the last boom period. After all, there was so much credit available on the market that lenders didn’t stress out too much about whether a borrower’s existing loan could get refinanced.
Today, the scrutiny is not just on a borrower’s multifamily portfolio but on their entire business. “The one thing you look at a little closer is what their liquidity will look like relative to their maturing portfolio over the next few years” says Vince Toye, head of GSE production at San Francisco-based Wells Fargo. “That’s what we’re digging into a little more: Not just their multifamily portfolio, but their overall maturity portfolio.”
While most of the scrutiny is forward-looking, Fannie Mae is also drawing a hard line on the past. In Fannie Mae’s small loan program, a borrower’s FICO score is a key consideration. Last year, the company upped the minimum FICO score to 680 from 650. Before that change, borrowers could get waivers for the requirement if their score was as low as 620.
Those days are long gone, as even one point can now tip the scales. “We had a guy at 679 and we could not get that deal done,” says Jerry Anderson, executive vice president and principal of Alliant Capital’s Anaheim, Calif.-based small loan program. “They are not willing to budge.”
In general, if your deal’s narrative strays even slightly from the GSEs’ requirements, it can easily get turned down. For instance, the GSEs generally aren’t fond of dorm-like student housing deals; they prefer deals with kitchens. But even if you’ve got a great dorm-style deal in all other respects, it’s much easier for the GSEs to turn you down than to make changes to the program and reinvent the wheel.
“There’s greater flexibility to get IO and some waivers on things, but if the deal has some structural flaw to it, it’s tougher to get done,” Cannon says.