Freddie Mac has changed 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.
Additionally, the government-sponsored enterprise (GSE) has rolled out changes to its standard interest-only (IO) product, while introducing a new product for acquisitions and more yield maintenance flexibility to the IO program.
The changes are seen as a response to heated competition from a variety of capital sources such as conduit lenders, industry watchers said.
“These moves are an aggressive reaction to the competition and should position Freddie Mac well to win more market share,” said Steven Heller, a senior vice president at ARCS Commercial Mortgage, which agreed to be purchased by PNC Financial Services Group in May.
What’s more, as conduit lenders face pressure from Wall Street to tighten their underwriting standards, that pace of competition appears to be slowing. “The turmoil in the CMBS marketplace is great for the GSEs,” said Heller.
Getting quotes faster
Freddie Mac’s early rate lock program sets an interest rate early in the mortgage approval process, eliminating interest-rate and credit-spread risks. About 60 percent of the loans purchased by Freddie Mac are delivered through this option. Earlier this year, the GSE streamlined the program while making it easier on developer’s wallets.
The company 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 streamlined template is allowing lenders to get quotes faster, and the faster turnaround positions the GSE “more in line with some of the other really dynamic players in the market who have a pretty standardized package,” said Phil Melton, a director 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 oftentimes put a quote out in a day and a half,” Melton said.
Significantly, 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 the time Freddie Mac purchases the loan.
The change is important because it means the developer needs to produce far less money in advance—on a $20 million deal, it gives borrowers a $200,000 savings.
Freddie Mac has also 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.
“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.
Additionally, 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, and this recent change allows lenders to relay quotes to their borrowers more quickly.
Introducing interest-only standards
Freddie Mac has instituted an IO program for the first time, rolling out aggressive terms programmatically. In the past, such loans were reviewed and processed on a deal-by-deal basis. In addition, Freddie Mac introduced a new IO product for acquisition deals, and created an alternative yield maintenance pricing feature.
The standard product includes a minimum amortizing debt-service coverage ratio (DSCR) of 1.15x and a maximum loan-to-value (LTV) ratio of 70 percent (amortizing here means that for loan-sizing purposes, Freddie Mac computes the IO loan amount based on an amortizing loan).
The new IO product is aimed at conventional acquisition transactions that exhibit above-average sponsorship, market, property, and rent-growth prospects. Freddie Mac is basically translating its decreased risk in such transactions into favorable terms for the borrower.
“So long as real hard equity is going into the deal, they will reduce their DSC requirement,” said Heller. “They’re looking for 65 to 75 percent loan-to-purchase price deals, but this is a recognition that if the buyer’s aggressive, as a lender they should be aggressive too, as there is tremendous equity behind them.”
For full-term IO loans, the new product features:
- A 1.10x amortizing DSCR for loan terms of seven to 10 years;
- A maximum LTV ratio of 70 percent for loan terms of seven to 10 years;
- A 1.15x amortizing DSCR for loan terms of less than seven years; and
- A maximum LTV ratio of 75 percent for loan terms of less than seven years.
Freddie Mac also is offering borrowers more flexibility when it comes to possible exit strategies by allowing them to modify the assumed reinvestment rate in their yield maintenance formula. Borrowers can add up to 100 basis points to the yield on the Treasury security designated at origination.
Yield maintenance is a type of prepayment penalty that allows the lender to get the same yield on a prepaid loan as if the borrower made all payments until maturity. The fee is based on interest rate movement—if rates are down when the borrower seeks prepayment, the fee is higher than it would be if interest rates were flat or had risen. In essence, this new option allows the borrower to pay more up front to make prepayment easier later on.
“By increasing the Treasury yield you are in essence decreasing the potential prepayment penalty,” said Heller. “So, if the borrower wants to sell their property in three or four years, there’s a greater likelihood that the prepayment penalties will be less.”