Freddie Mac published last Thursday an update to the Freddie Mac Guide, which included a discussion of various underwriting, fraud detection and loan document changes. Here's what you need to know.
Loan Documents/Legal Matters
Most of the changes to the loan documents, including Loan Agreement and Guaranty, are minor and ministerial in nature but widespread.
The biggest change is to incorporate the provisions of splitting the note riders to the Loan Agreement and Guaranty directly into the bodies of the documents. This allows Freddie Mac to cut the note up into multiple pieces or pools but, to the Borrower, the Loan will still function as a single note with one regular payment. Most of the documents have a phase-in date requiring use for loans committed on or after March 25 but certain documents related to unfunded forwards require immediate use.
Freddie Mac also, for the first time, has explicitly stated a long-held standard practice to not accept an unsubordinated ground lease when the Ground Lessor is affiliated with the Borrower.
Underwriting
Key Borrower Principals: Freddie Mac is requiring enhanced due diligence for any Key Borrower Principal with ultimate Control of the Borrower or any Guarantor who are determined to be “rapid growth sponsors” – that is, sponsors who control 15 or more multifamily properties where at least 50% of those properties were acquired within the past three years.
First Time, Limited Experience or Rapid Growth Sponsors must have their REOs verified based on a sample approach of 10 assets, with a focus on those where the Sponsor has Control.
Optigo Lenders must make their liquidity verifications based on bank or brokerage statements. Lenders must consider the cash needed to close the subject transaction. Additionally, Form 1116 has been updated to capture additional information related to LTV and DSCR numbers at the properties.
TAH Forward Requirements: Freddie Mac no longer requires Optigo Lenders to provide final plans, specs and executed construction contracts. Construction documentation requirements for TELs are being harmonized with the requirements for 9% Forwards and Bond Credit Enhancement Transactions. This includes a requirement for submission of a pre-construction analysis and narrative summary from the Chief Architect/Engineer.
Refinancing of Existing Freddie Mac Debt: Freddie Mac requires Optigo Lenders to provide the most recent annual inspection report for new originations if the Optigo Lender originated and services the existing loan(s).
Appraisals: Beginning June 2, the scope for appraisals must include:
- final selection and adjustment of land, rent, expense and sale comparables
- final development of appraisers pro forma and capitalization rates in the income approach
- final reconciliation and value conclusion
The Optigo Lender must provide a summary of any revisions from the initial appraisal provided to the Optigo Lender and the appraisal provided to Freddie Mac. Optigo Lenders must complete all required appraisal training by June 2.
Assumptions/Transfers: Additional information and certifications must be provided regarding insurance on any ownership transfer.
Flood Insurance: Optigo Lenders must maintain copies of the FEMA Special Flood Hazard Determination Form (SFHDF) and Notice to Borrower of SFHDF in their servicing file. Optigo Lenders must include a summary of estimated building and business income/rental value coverage amounts for buildings in a SFHA in the ICT records.
Fraud
Freddie Mac is continuing the trend of the GSEs cracking down on potential mortgage fraud in the multifamily market. As of April 2, Freddie Mac is requiring Optigo Lenders to upload to DMS any Adverse Action Notice (i.e., a declined mortgage application or assumption request) within five business days of issuance to the Borrower along with certain supporting documentation.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
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