SMALL MULTIFAMILY LOAN MARKET FANNIE MAE’S ROLE IN THE EXECUTIVE SUMMARY

FI R S T Q UA R T E R 2011
FANNIE MAE’S ROLE IN THE
SMALL MULTIFAMILY LOAN MARKET
TABLE OF CONTENTS
EXECUTIVE SUMMARY
State of the Small Multifamily Loan Market
In the wake of the U.S. housing crisis, multifamily rental housing – especially
affordable rentals – is expected to play an increasingly important role in the
market due to stronger residential mortgage lending standards, more modest
consumer aspirations for homeownership, growth in households that tend to
rent (e.g., Echo Boomers, retiring Baby Boomers, and New Americans), and other
drivers. Within the rental housing market, loans to smaller rental properties –
which Fannie Mae defines as loans of $3 million or less in most markets and $5
million or less in high-cost markets – play a unique role.
As of June 30, 2010, the company’s $34 billion book of smaller rental properties
tend to be more affordable, a key source of housing for working families, and
concentrated in urban areas in close proximity to transportation and jobs –
lowering the cost of living there.
1
Executive Summary
3
Fannie Mae & Small Multifamily
Loans
20 Small Loan Profitability
22 Fannie Mae Has A Relevant,
Focused Role In Small Loans
MULTIFAMILY
MORTGAGE
BUSINESS
Financing a ready supply of smaller multifamily rental
fragmentation and non-standardization of financing
properties poses unique challenges, however. The lending
complicates a national solution to expanding this housing.
market is fragmented, with more than 2,600 lenders
originating an average of six small loans each1, which
Fannie Mae’s Role in the Multifamily Market
impedes standardization, efficiency, and the benefits of
Fannie Mae plays a critical role in the U.S. rental housing
securitization (e.g., greater and lower-cost funding). Smaller
market. Our original charter in 1938 provided authority to
property financing also tends to rely on a disparate range
facilitate the construction and financing of economically
of borrowers, often individual investors, entrepreneurs, or
sound rental housing projects. In 1984, Fannie Mae created
smaller commercial businesses of varying credit profiles that
a business division dedicated to purchasing multifamily
invest in a limited number of properties and operate them on
loans. Since that time, Fannie Mae has continued to provide
a thin margin with fixed costs but potentially higher income
a consistent supply of funding to the multifamily market
fluctuation risk. The disparate nature of small multifamily
through all market cycles.
property borrowers also creates financial, underwriting, and
credit issues for national investors in the loans, which limits the
Currently, amid a shortage of private investment capital and
supply of low-cost liquidity for these loans.
credit for housing finance, Fannie Mae provides more than 50
percent of all secondary market funds available for multifamily
In short, while smaller multifamily properties provide
housing finance. As of June 30, 2010, the company’s $185
an important supply of affordable rental housing, the
billion book of roughly 42,000 multifamily loans is performing
significantly better than the commercial mortgage-backed
Fannie Mae is a leader in small
loan financing, providing a key
securities market.
Fannie Mae’s Role in the Small Multifamily Market
source of affordable rental housing
Fannie Mae also has a history of providing liquidity for smaller
for working families close to
rental property loans. Over the past ten years, the company
transportation and jobs.
has developed and refined a dedicated, small-loan platform
to provide consistent liquidity to the small loan market and
financed $60 billion of small loans during that time. In 2007,
1
2
Source: 2009 Mortgage Bankers Association data.
Fannie Mae expanded its small loan team to include dedicated
acquisition, and underwriting of small loans. We have
FANNIE MAE & SMALL MULTIFAMILY
LOANS
continued funding the small multifamily loan market through
This paper describes the unique nature of the small
the current challenging market cycle.
multifamily market, the challenges of financing loans for
credit and production staff focused solely on the origination,
these properties, and Fannie Mae’s role and efforts to
support this critical source of affordable housing.
As of midyear 2010, Fannie Mae held a $34 billion book of
30,000 loans on properties with loans of $3 million or less or up
to $5 million in high cost MSAs (18 percent of total multifamily
What role has Fannie Mae played
book) or a $21 billion book of 23,500 loans on five- to 50-
in the small loan market?
unit properties (12 percent of multifamily book). Roughly 86
Fannie Mae aims to provide liquidity to the multifamily
percent of Fannie Mae’s 2009 small loan book of business was
housing sector in every market, every day. As a result, Fannie
affordable to families at or below 100% area median income
Mae’s experience, particularly in serving many of the most
and met the definition of affordable housing set forth by the
challenging segments of the multifamily market, can help
U.S. Department of Housing and Urban Development (HUD).
inform the broader discussion about our country’s housing
finance needs.
Fannie Mae’s 2010 small multifamily loan acquisitions of $2.4
billion were comparable with 2009 acquisitions of $2.2 billion.
Fannie Mae’s involvement in the multifamily market began in
1938 as part of the New Deal when the federal government
The fragmented and disparate nature of the small multifamily
decided to create its own mortgage association. The
rental housing financing market poses challenges to how the
purpose was to facilitate the construction and financing of
company can expand its support for this market segment in a
economically sound rental and for-sale housing by making
significant way. However, Fannie Mae remains committed to
direct loans secured by first mortgages insured by the Federal
supporting this critical housing segment.
Housing Administration (FHA).
Over time Fannie Mae’s mission was redirected to a
secondary market role that included the authority to
purchase mortgages on multifamily rental housing and
those with conventional financing. Fannie Mae created
FANNIE MAE’S ROLE IN THE SMALL MULTIFAMILY LOAN MARKET
3
MULTIFAMILY
MORTGAGE
BUSINESS
a business division dedicated to purchasing multifamily
How has Fannie Mae participated in the small loan
loans in 1984 and since that time, has provided liquidity
lending market?
to the multifamily market for loans of all amounts.
Fannie Mae has distinguished itself among the national
financing sources and, as the Federal Housing Finance
What is a small loan in the multifamily market?
Agency (FHFA) recognized in its proposed 2010 Housing
In general, the market defines small loans in two ways:
Goals Rule among the GSEs, for consistently providing
1.
2.
Unit Count which is defined as loans to apartment
dedicated resources and products to the small loan lending
buildings with five to 50 units
market. “Fannie Mae has a division dedicated to purchasing
Principal Balance which is defined as apartment building
mortgages on smallmultifamily properties.” (FHFA, Final 2010
loans with principal balances of $3 million or less in most
Enterprise Housing Goals Report) Highlights of Fannie Mae’s
markets, or up to $5 million in high cost MSAs.
conventional and small loan lending activity include:
Fannie Mae uses the principal balance definition, referring
»
1938: Fannie Mae is chartered with specific authority
to small loans as loans of $3 million or less nationwide and
to facilitate the construction and financing of
$5 million or less in high cost markets like New York City and
economically sound rental housing projects.
Los Angeles. Fannie Mae believes using the principal balance
»
to define small loans is a more prudent way to address risk
since it allows for easier benchmarking between small and
1985: Fannie Mae begins purchasing pools
of seasoned small multifamily loans.
»
1988: Fannie Mae starts the Delegated Underwriting and
non-small loan performance within its portfolio. Additionally,
Servicing (DUS®) model where a network of approved
defining small loans based on principal balance allows for
lenders originate, sell, and service individual loans (both
meaningful adjustments for high-cost urban areas where there
small and large) to Fannie Mae; this is known as flow
are a significant concentration of small multifamily properties.
delivery. The DUS model relies on sharing the risk of loss
with lenders to support the delegated underwriting
Note: A small loan is not always synonymous with a small property.
and align the interests of Fannie Mae and lenders.
Limiting the definition of small loans to properties with five to 50 units
results in the exclusion of larger subsidized affordable multifamily
»
properties. These larger, subsidized properties also generally benefit
from the low income housing tax credit (LIHTC) which offers below
market rents to qualified tenants and requires less debt as a result of the
subsidies they receive.
4
1998: Fannie Mae begins to accept small loan
flow deliveries from non-DUS lenders.
»
2000: Fannie Mae adopts a “5-50” unit count flow
execution that is available to all lenders. This execution
»
»
is adopted to align with the HUD housing goal
expanded its small loan team to include 10 dedicated credit
requirement and is the first attempt to streamline
and production staff focused solely on the origination,
the DUS underwriting guidelines for small loans.
acquisition, and underwriting of small loans nationwide.
2001: Fannie Mae changes the definition for its small
loan platform to focus on loans with original principal
FANNIE MAE OFFERS DEDICATED PRODUCTS. The
balances of $3 million or less ($5 million in certain
company consistently provides liquidity to the small loan
high-cost areas) rather than a unit count approach. The
market through two primary products:
product is rebranded “3MaxExpress” and is a targeted
1.
Flow Business: Fannie Mae purchases individual loans
attempt to address the needs of lenders and borrowers
originated by approved mortgage lenders who have
by further streamlining the underwriting guide for
delegated authority to sell loans to Fannie Mae which the
small loans with separate underwriting parameters.
lenders have underwritten and originated. These loans
2007: Fannie Mae expands its support for small
are underwritten and serviced by the lenders according to
multifamily loans with a larger, dedicated production
specific, published guidelines and the lenders retain a risk
and credit team. Fannie Mae includes a separate credit
position in these loans through a loss sharing agreement
underwriting chapter in the DUS selling and servicing
with Fannie Mae. Delegated Underwriting and Servicing
guide and, for the first time, incorporates more simplified
also known as DUS®, is the primary platform through which
asset management and servicing functions for small loans.
Fannie Mae provides liquidity to the multifamily market.
Within the DUS program guide, there is a dedicated
FANNIE MAE HAS A DEDICATED SMALL LOAN TEAM.
The company has historically maintained dedicated
underwriting and servicing standard for small loans.
2.
Pool Financing: Fannie Mae purchases pools of seasoned,
expertise and products for specialty lending areas like
multifamily loans from DUS and non-DUS financial
small loans and subsidized affordable housing. For more
institutions that originate and hold these loans on
than 10 years, Fannie Mae has developed and refined a
their books. By purchasing these loans in bulk, Fannie
dedicated, small loan platform to consistently provide
Mae provides a source of liquidity which enables these
liquidity to the small loan market. Fannie Mae has financed
financial institutions to make new loans. The loans
$60 billion of small loans over the past 10 years, and
purchased by Fannie Mae in these seasoned pools have
continues to provide liquidity to the small loan market
traditionally been composed mostly, but not exclusively,
during this difficult market cycle. In 2007, Fannie Mae
of small loans.
FANNIE MAE’S ROLE IN THE SMALL MULTIFAMILY LOAN MARKET
5
MULTIFAMILY
MORTGAGE
BUSINESS
FANNIE MAE PROVIDES CONSISTENT PRODUCTION.
liquidity to the market. Pool financing, on the other hand,
The company uses prudent underwriting standards and loss
has historically fluctuated depending on the level of small
sharing with DUS lenders to acquire small loans. Additionally,
loan activity among financial institutions. Fannie Mae has
Fannie Mae requires market acceptable structures that allow
focused more heavily on seasoned pool activity in years where
the loans to be securitized, in accordance with Fannie Mae’s
additional volume was needed to support the corporate
goal to maintain a liquid portfolio. This, in turn, enables Fannie
housing goals needs as seen in 2003 and 2007. The following
Mae to continue providing liquidity to the small loan market.
table shows that, regardless of the definition used (unit count
or principal balance), Fannie Mae plays a significant role in the
Flow volume has consistently averaged approximately $2.5
small loan market.
billion per year over the last 10 years, providing reliable
SUMMARY OF MULTIFAMILY ACQUISITIONS
SUMMARY OF MULTIFAMILY ACQUISITIONS
5 - 50 UNITS DEFINITION VS. $3MM ($5MM HIGH COST) PRINCIPAL BALANCE DEFINITION
5 - 50 UNITS DEFINITION
VS. $3MM
HIGH COST)
PRINCIPAL BALANCE DEFINITION
SUMMARY
OF($5MM
MULTIFAMILY
ACQUISITIONS
5
50
Unit
Definition
Principal Balance
Definition
5 - 50 UNITS DEFINITION VS. $3MM ($5MM HIGH COST) PRINCIPAL
BALANCE
DEFINITION
YEAR
DUS
Pools
Total
5 - 50 Unit Definition
186
53
239
DUS
Pools
Total
$231
$84
$315
186
53
239
322
1,824
2,146
$231
$84
$315
$605
$718
$1,323
322
1,824
2,146
5,624
227
5,397
$605
$718
$1,323
$413
$2,893
$3,306
5,624
227
5,397
301
14,530
14,831
$413
$2,893
$3,306
$591
$10,485
$11,075
301
14,530
14,831
335
2,128
2,463
$591
$10,485
$11,075
$1,660
$2,018
$3,678
335
2,128
2,463
386
6,201
6,587
$1,660
$2,018
$3,678
$1,289
$3,806
$5,095
386
6,201
6,587
558
3,101
3,659
$1,289
$3,806
$5,095
$1,207
$2,485
$3,692
558
3,101
3,659
807
10,387
11,194
$1,207
$2,485
$3,692
$2,142
$7,169
$9,311
807
10,387
11,194
737
2,939
3,676
$2,142
$7,169
$9,311
$2,684
$3,380
$6,063
737
2,939
3,676
588
230
818
$2,684
$3,380
$6,063
$1,068
$327
$1,395
588
230
818
458
87
545
$1,068
$327
$1,395
$856
$98
$953
458
87
545
$856
$98
$953
% Total
17%
% Total
3%
17%
46%
3%
7%
46%
73%
7%
17%
73%
80%
17%
33%
80%
56%
33%
20%
56%
75%
20%
22%
75%
64%
22%
17%
64%
78%
17%
20%
78%
54%
20%
17%
54%
33%
17%
7%
33%
36%
7%
9%
36%
9%
DUS
Pools
Total
% Total
Principal Balance Definition
379
68
447
32%
DUS
Pools
Total
% Total
$676
$100
$776
7%
379
68
447
32%
703
2,186
2,889
62%
$676
$100
$776
7%
$1,638
$1,577
$3,215
17%
703
2,186
2,889
62%
579
5,763
6,342
82%
$1,638
$1,577
$3,215
17%
$1,354
$3,706
$5,061
26%
579
5,763
6,342
82%
632
15,875
16,507
89%
$1,354
$3,706
$5,061
26%
$1,428
$13,201
$14,628
44%
632
15,875
16,507
89%
543
2,505
3,048
69%
$1,428
$13,201
$14,628
44%
$1,148
$2,917
$4,065
22%
543
2,505
3,048
69%
657
6,524
7,181
82%
$1,148
$2,917
$4,065
22%
$1,314
$4,546
$5,859
25%
657
6,524
7,181
82%
832
3,428
4,260
74%
$1,314
$4,546
$5,859
25%
$1,583
$3,217
$4,801
22%
832
3,428
4,260
74%
1,059
11,349
12,408
86%
$1,583
$3,217
$4,801
22%
$2,044
$9,201
$11,244
24%
1,059
11,349
12,408
86%
1,025
3,503
4,528
67%
$2,044
$9,201
$11,244
24%
$2,157
$4,553
$6,710
19%
1,025
3,503
4,528
67%
1,221
49%
886
335
$2,157
$4,553
$6,710
19%
$1,671
$581
$2,252
11%
1,221
49%
886
335
684
131
815
53%
$1,671
$581
$2,252
11%
$1,413
$217
$1,630
16%
684
131
815
53%
$1,413
$217
$1,630
16%
Total AQSN
1,435
Total AQSN
$11,200
1,435
4,698
$11,200
$19,929
4,698
7,692
$19,929
$19,386
7,692
18,465
$19,386
$33,280
18,465
4,435
$33,280
$18,793
4,435
8,747
$18,793
$23,415
8,747
5,754
$23,415
$22,302
5,754
14,406
$22,302
$46,727
14,406
6,778
$46,727
$34,678
6,778
2,473
$34,678
$19,592
2,473
1,534
$19,592
$10,325
1,534
$10,325
Data
DUS
Pools
Total
5 - 50 Unit Definition
Loan Count
4,277
19,220
23,497
BOOK
Data
DUS
Pools
Total
UPB ($M)
$7,524
$13,931
$21,456
9/2010 Book
Loan Count
4,277
19,220
23,497
Note: 9/2010
Pools also
include non-DUS
negotiated contracts.
UPB ($M)
$7,524
$13,931
$21,456
Book
% Total
56%
% Total
12%
56%
12%
DUS
Pools
Total
% Total
Principal Balance Definition
7,301
22,519
29,820
70%
DUS
Pools
Total
% Total
$13,945
$19,738
$33,683
18%
7,301
22,519
29,820
70%
$13,945
$19,738
$33,683
18%
Total Book1
42,301
Total Book1
$186,144
42,301
$186,144
YEAR
2000
2000
2001
2001
2002
2002
2003
2003
2004
2004
2005
2005
2006
2006
2007
2007
2008
2008
2009
2009
YTD 9/2010
YTD 9/2010
Data
Loan Count
Data
UPB ($M)
Loan Count
Loan Count
UPB ($M)
UPB ($M)
Loan Count
Loan Count
UPB ($M)
UPB ($M)
Loan Count
Loan Count
UPB ($M)
UPB ($M)
Loan Count
Loan Count
UPB ($M)
UPB ($M)
Loan Count
Loan Count
UPB ($M)
UPB ($M)
Loan Count
Loan Count
UPB ($M)
UPB ($M)
Loan Count
Loan Count
UPB ($M)
UPB ($M)
Loan Count
Loan Count
UPB ($M)
UPB ($M)
Loan Count
Loan Count
UPB ($M)
UPB ($M)
Loan Count
Loan Count
UPB ($M)
UPB ($M)
Loan Count
UPB ($M)
SUMMARY OF MULTIFAMILY BOOK OF BUSINESS
SUMMARY OF MULTIFAMILY ACQUISITIONS
5 - 50 UNITS DEFINITION
VS. $3MM
($5MM HIGH COST)
BALANCE DEFINITION
SUMMARY
OF MULTIFAMILY
BOOK PRINCIPAL
OF BUSINESS
5 - 50 UNITS DEFINITION5VS.
$3MM
($5MM HIGH COST) PRINCIPAL
BALANCE
DEFINITION
Principal
Balance
Definition
50
Unit
Definition
5 - 50 UNITS DEFINITION VS. $3MM ($5MM HIGH COST) PRINCIPAL BALANCE
DEFINITION
BOOK
1
Excludes Credit Enhancement Bonds Adjustments
Note: Pools also include non-DUS negotiated contracts.
1
Excludes Credit Enhancement Bonds Adjustments
What is unique about the small loan market?
What
is unique
the small
loanAssociation
market? (MBA) 2009 Survey on Multifamily Lending, small loans comprised
According
to theabout
Mortgage
Bankers
6 According
to the
Bankers
Association
2009
Survey
Multifamily
comprised
approximately
27%Mortgage
of the total
multifamily
market(MBA)
by dollar
volume
and on
81%
by numberLending,
of loans. small
Based loans
on Fannie
Mae’s
WHAT IS UNIQUE ABOUT THE SMALL LOAN MARKET?
originated an average of 32 non-small loans with an average
According to the Mortgage Bankers Association (MBA)
balance of $10 million each or an aggregate of $314 million in
2009 Survey on Multifamily Lending, small loans comprised
total non-small loan volume.
SUMMARY OF MULTIFAMILY ACQUISITIONS
approximately
of the total
multifamily
market
by dollar
5 -27%
50 UNITS
DEFINITION
VS.
$3MM
($5MM HIGH COST) PRINCIPAL BALANCE DEFINITION
5 - 50 Unit Definition
Principal Balance Definition
from these
statistics
is that non-small
% Total One conclusion
DUS
Pools
Total
% Total
Total AQSN loans
17%
379
68
447
32%
1,435
3%
$776
7%
$11,200
appear to$676
be a core$100
business
for the institutions
originating
46%
703
2,186
2,889
62%
4,698
7%
$1,638
$1,577
$3,215
17%
$19,929
them, while
loans appear
a more fragmented,
73%
579small5,763
6,342 to be82%
7,692
17%
$1,354
$3,706
$5,061
26%
$19,386
80%
632
15,875
89%
complementary
business16,507
that may support
other18,465
relationship
33%
$1,428
$13,201
$14,628
44%
$33,280
56%
543
2,505
3,048
69%
4,435
businesses
participated
in$4,065
by these institutions.
20%
$1,148
$2,917
22%
$18,793
75%
657
6,524
7,181
82%
8,747
22%
$1,314
$4,546
$5,859
25%
$23,415
64%
832
3,428
4,260
74%
5,754
17%
$1,583data$3,217
22%
$22,302
More recent
from the$4,801
Federal Financial
Institution
78%
1,059
11,349
12,408
86%
14,406
20%
$2,044
$9,201
$11,244
24%
$46,727
Examination
supports67%
this view. FFIEC’s
54%
1,025 Council
3,503(FFIEC)
4,528
6,778 June
17%
$2,157
$4,553
$6,710
19%
$34,678
1,221 FDIC-insured
49%
2,473
33%
2010 data 886
indicates335
that among
banks
and
7%
$1,671
$581
$2,252
11%
$19,592
36%
684
131
815
53%
1,534
thrifts, the
top five$217
institutions
with multifamily
loan
balances
9%
$1,413
$1,630
16%
$10,325
volume and 81%
by number Data
of loans. Based
onPools
Fannie Total
Mae’s
YEAR
DUS
Loan Count
186
53
239
UPB ($M)
2000 loan flow
$231
$315
$2.2 billion of small
production
and the$84
MBA data,
Loan Count
322
1,824
2,146
UPB ($M)
$605
$718
$1,323
Fannie Mae’s estimated market
share for227
small loans
Loan Count
5,624
5,397 in 2009
UPB ($M)
$413
$2,893
$3,306
2002
Loan Count
301
14,530
14,831
was 15%.
UPB ($M)
$591
$10,485
$11,075
2003
Loan Count
335
2,128
2,463
UPB ($M)
$1,660
$2,018
$3,678
2004
Loan Count
386
6,201
6,587
Fragmented Market:
Due
to($M)
their relative
small loans
UPB
$1,289size,$3,806
$5,095
2005
Loan Count
558
3,101
3,659
UPBof
($M)
$2,485 dollar
$3,692
2006 a quarter
constituted about
the total$1,207
multifamily
Loan Count
807
10,387
11,194
UPB ($M)
$2,142
$7,169
$9,311
2007
volume in 2009, which equaled
more than
quarters
Loan Count
737three
2,939
3,676
UPB ($M)
$2,684
$3,380
$6,063
2008
Loan Count According
588
230 same818
of the number of loans originated.
to the
UPB ($M)
$1,068
$327
$1,395
2009
Loan Count
458
87
545
MBA data, over
2,600
financial
institutions
financed
16,751
UPB ($M)
$856
$98
$953
YTD 9/2010
2001
small loans. This means that the average
financialOF
institution
accounted
for 35%
of total multifamily debt outstanding,
SUMMARY
MULTIFAMILY
BOOK OF
BUSINESS
5 - 50 UNITS DEFINITION VS. $3MM ($5MM HIGH
COST) PRINCIPAL BALANCE DEFINITION
while the remaining 65% of multifamily debt outstanding was
originating small loans in 2009 originated roughly six small
BOOK
loans of approximately
9/2010 Book
Data
DUS
$847,000
an
Loan Counteach or
4,277
UPB ($M)
$7,524
5 - 50 Unit Definition
Principal Balance Definition
Pools
Total
% Total
DUS
Pools
Total
% Total
aggregate
of $5.5
spread among
FDIC-insured
19,220
23,497
56%
7,301 almost
22,519 6,000
29,820
70%
$13,931
$21,456
12%
$13,945
$19,738
$33,683
18%
Total Book1
institutions.
42,301
$186,144
million in
total
small
loannon-DUS
volume.
Note:
Pools
also include
negotiated contracts.
1
Excludes Credit Enhancement Bonds Adjustments
The impact of such a fragmented small loan lender market is
What is unique about the small loan market?
By contrast, loans over $3 million (non-small loans) were
that small loans are more complicated and more expensive
According to the Mortgage Bankers Association (MBA) 2009 Survey on Multifamily Lending, small loans comprised
originated
by only 12227%
financial
Those
institutions
to originate
than Based
conventional
non-small
approximately
of theinstitutions.
total multifamily
market
by dollar volume
and 81%and
by underwrite
number of loans.
on Fannie
Mae’s
$2.2 billion of small loan flow production and the MBA data, Fannie Mae’s estimated market share for small loans in 2009
was 15%.
Average Firm Loan Size
$1 million or less
$1 million to $3 million
$3 million to $10 million
Greater than $10 million
Total
2009 SURVEY ON MULTIFAMILY LENDING
2009 SURVEY ON MULTIFAMILY LENDING
# of
Firms
# of Loans
Volume
($millions)
Average Loan
Size ($millions)
Average Loans
per Firm
2,124
479
97
25
2,725
11,271
5,480
2,577
1,350
20,678
$5,820
$8,373
$16,121
$22,178
$52,492
$0.5
$1.5
$6.3
$16.4
$2.5
5
11
27
54
$7.6
Source: Mortgage Bankers Association
FANNIE MAE’S ROLE IN THE SMALL MULTIFAMILY LOAN MARKET
6
FANNIE MAE’S ROLE IN THE SMALL MULTIFAMILY LOAN MARKET
7
MULTIFAMILY
MORTGAGE
BUSINESS
multifamily loans. The data indicates that a broad cross
local and regional financial institutions active in the business
section of small loan originations are made by small local and
are traditional buy-and-hold banks and have historically
regional financial institutions often doing only a handful of
been unwilling or unable to participate in a loss-sharing
transactions annually in support of local lending relationships.
arrangement.
This characteristic creates a unique challenge for Fannie Mae,
which operates exclusively as a secondary market liquidity
Fragmentation within the small loan origination network also
provider with relatively few dedicated origination partners
contributes to a more challenging economic cost structure.
(DUS lenders).
In general, since the cost to originate, underwrite, and service
a multifamily loan does not vary significantly with loan size,
The targeted geographic focus of these local lending
small loans offer little in the way of economies of scale to
institutions make them uniquely qualified to underwrite
dedicated multifamily originators. As a result, originators
and lend in these markets. As a result, expanding small loan
are less likely to focus on small loans. In addition, as a
originations beyond current DUS flow would likely require
secondary market mortgage participant, Fannie Mae does not
Fannie Mae to develop hundreds of specialty small loan
provide non-housing loan products. Contrastingly, financial
relationships with local and regional institutions.
institutions that participate in the small loan market also have
multiple product offerings that provide multiple opportunities
With a loan origination platform based on shared loss, Fannie
to touch their small loan customer and earn fees. This allows
Mae is limited in its ability to expand beyond its current
them to use small loan lending in combination with the other
origination relationships. While Fannie Mae’s small loan
products they offer, such as business lines, car loans, and
team has focused on expanding its small loan relationships,
residential mortgages.
Risk Sharing and Financial Strength: The cornerstone
Fannie Mae’s Multifamily platform of
of Fannie Mae’s multifamily platform is the loss sharing
relationship with the lenders who originate, sell, and service
loss sharing with lenders, benefits
loans. By committing to share in potential loan losses, lenders
investors, owners, and tenants.
are motivated to prudently underwrite and service loans
delivered to Fannie Mae. This heightened responsibility and
liability on the part of the DUS lenders ultimately benefits
8
investors, owner/operators, and tenants by ensuring more
limits the range of lenders who are willing and eligible to work
sustainable multifamily housing. However, for Fannie Mae
with Fannie Mae, but supports sound and responsible lending.
to accept shared loss with a DUS lender, that lender must
demonstrate sufficient organizational and financial knowledge
Small Loan Borrowers: Having financed over $60 billion of
– in the form of infrastructure and capital reserves – to make
small loans over the last 10 years, our experience has led us to
good on those loss-sharing obligations.
the conclusion that the small loan borrower is fundamentally
different than a conventional or non-small loan borrower –
Fannie Mae maintains strict financial and organizational
and our partners generally agree.
requirements to qualify for and maintain DUS selling and
servicing authority. In many cases, the minimum DUS capital
According to one of the largest multifamily real estate
and infrastructure requirements dissuade or disqualify local
brokerage firms in New York City, “the small loan borrower is
and regional lenders from participating in DUS. While Fannie
generally a small business owner, who has a small portfolio
Mae could choose to lower its counterparty credit standards
of multifamily real estate, typically a local or regional owner/
or not require loss sharing at all to expand its origination
operator that is not as financially savvy or as sophisticated
platform, our experience has shown us that maintaining
in the commercial real estate market, and may not have the
delegation and enforcing minimum capital standards is
financial strength of a large traditional multifamily borrower.
prudent and commercially reasonable.
Many borrowers have additional jobs and sources of income
and they or their relatives often live in the properties”.
To support the small loan lending market in the past, Fannie
Mae had selectively entered into lending relationships with
Based on past experience, and the experience of our
small loan lenders without loss sharing. Our experience with
partners, Fannie Mae has concluded that small loan
that showed us that the performance of these loans was
borrowers have unique characteristics. First, small loan
generally worse and asset management by the servicer was
borrowers often do not employ professional property
weaker because the lender did not have “skin in the game.”
management, but choose to maintain and manage
Based on these mixed results and the success of loss sharing
properties themselves because smaller properties may not
over the last 20 years, Fannie Mae now requires all small loan
support the cost of third party management. However,
lenders to participate in loss sharing with Fannie Mae. This
borrowers may take on this responsibility without any
significant experience or expertise. Looking at Fannie Mae
FANNIE MAE’S ROLE IN THE SMALL MULTIFAMILY LOAN MARKET
9
MULTIFAMILY
MORTGAGE
BUSINESS
acquisitions through September 2010, only 57% of small loan
portfolio indicated that 64% of all small loan delinquencies
borrowers employed professional property management
were directly related to borrower credit issues.
compared to 85% for non-small loan borrowers.
Underwrite the Borrower and the Property: Given the
Second, small loan borrowers are more like single family
importance of underwriting both the borrower and the
borrowers than traditional multifamily borrowers. Unlike larger
property in a small loan transaction, Fannie Mae requires
multifamily loans that are driven almost exclusively by cash
supplemental information regarding the borrower that
flow, Fannie Mae has observed, through analysis of its own
it may not typically require for a non-small DUS loan,
small loan delinquencies, that a small loan borrower’s ability
including credit score (FICO) and unique requirements
to repay is driven by the strength of the property cash flow, as
around net worth and liquidity. Regional and community
well as the borrower’s own financial strength and repayment
banks often have broad banking relationships with
history – much like a single family loan. In fact, Fannie Mae
their small multifamily borrowers, and as such, make
has observed that a majority of small loan delinquencies are
multifamily property loans on the security of the broader
correlated to poor borrower financial strength and experience
banking relationship, not just the rental property.
rather than poorly performing properties or slumping markets.
In essence, these institutions are relationship lenders,
This dynamic makes sense when one considers the cash
operating much closer to their borrowers and often having
flow margin for error in a small multifamily property. If a 10-
broader experience with them that allows for a lighter
unit subdivided brownstone property has one vacancy for
touch. In a recent survey of several active regional and local
more than 30 days, cash flow could drop to the point where
small loan lenders, Fannie Mae found that looking solely
there is not sufficient income to pay the mortgage. In this
at the terms for an individual multifamily property loan, its
case, a small loan borrower’s personal worth or self-liquidity
credit standards and due diligence requirements were more
becomes a critical source for debt repayment. By contrast,
conservative across the board. This narrower range of lending
one or two vacancies for more than 30 days in a 100-unit low
products and tighter credit approach has limited Fannie Mae’s
rise apartment would not significantly impair cash flow to
small loan market opportunities. However, we believe this is a
the point that debt repayment is at risk. In support of this
prudent approach to credit, especially in light of the delegated
assertion, a recent examination of Fannie Mae’s small loan
nature of the program.
10
Given the inherent risks with the typical small loan
were reconsidered. However, several remain and are
borrower, Fannie Mae has substantially enhanced the
extremely active in this space. Both Banco Santander, with
small loan underwriting criteria to address these risks in a
the acquisition of Sovereign Bank, and JP Morgan Chase,
streamlined manner. All Fannie Mae lenders comply with
with the acquisition of Washington Mutual, continue to
the same requirements. This allows this product to take a
originate and add small multifamily loans to their balance
commoditized approach and has made Fannie Mae more
sheets. These banks like the reliable returns and steady credit
successful with this market.
performance of multifamily real estate assets compared
to other commercial lending products. By contrast, while
Small Loan Products and the Secondary Market: Many
these banks’ balance sheet capacity allows them to pursue
small loan lenders take a buy-and-hold approach to the
a buy-and-hold strategy, Fannie Mae has very limited
business – holding small multifamily loans on their balance
balance sheet capacity to hold loans and, in fact, has been
sheets in lieu of selling them into the secondary market. In the
mandated to reduce its existing portfolio. This creates a
1980s, savings and loans and thrifts aggressively penetrated
significant competitive advantage for the largest banks
the small multifamily market. Credit losses that these
that Fannie Mae competes with for small loan assets.
institutions experienced in the commercial real estate crisis of
the late 1980s drove many of these small institutions out of the
So how does Fannie Mae participate in the market?
market. However, several of the larger depositories survived
Given current constraints, Fannie Mae is only able to
and continued to consolidate and grow their presence in
participate in lending activities that allow for the securitization
small multifamily lending throughout the 1990s and 2000s.
of the loans into Fannie Mae guaranteed mortgage-backed
These institutions included Independence Community Bank
securities (MBS) and the sale of those MBS to investors. For
(Sovereign Bank) and New York Community Bank in New York,
Fannie Mae to securitize loans, they must be in a standardized
Washington Mutual and World Savings on the West Coast, and
or “plain vanilla” form that is broadly acceptable to MBS
LaSalle Bank in Chicago.
investors – typically a straightforward, 10-year, fixed-rate loan
with standard prepayment term. Without that homogeneity,
With the recent mortgage market meltdown, many of
loans are difficult to securitize and unlikely to attract investors
these banks were acquired or consolidated into other
willing to purchase the security. While this is not an issue for
institutions and their small multifamily lending platforms
conventional or non-small loans, it does present challenges
FANNIE MAE’S ROLE IN THE SMALL MULTIFAMILY LOAN MARKET
11
MULTIFAMILY
MORTGAGE
BUSINESS
for the small loan market where commercial banks and small
maintenance, step-down, or based solely on a certain number
loan borrowers favor shorter term loan products with non-
of days of interest. The loan term could be 3, 5, 7, or 10 years.
traditional MBS terms.
And, there could be additional flexibility built into the product,
such as extensions at the borrower’s option, the option to
Most financial institutions like to match their asset and liability
remain in a fixed-rate period, or to convert to a variable rate
profile and, therefore, shorter duration loans align with their
of interest. These are terms, however, that Fannie Mae cannot
short-term deposit profile. Many community banks and larger
readily offer because of securitization rules and the lack of
portfolio lenders offer short-term products with flexible loan
investor demand for most of the flexible loan terms.
terms to small loan borrowers. Flexibility around loan terms,
amortization periods, prepayment options, and periods of
The variability of terms and condition for small loans is
fixed-rate or variable-rate payments are attractive to small
supported by a Fannie Mae market survey completed in
loan borrowers. The prepayment structure may be yield
September 2010 and summarized in the following table.
SMALL MULTIFAMILY LENDERS COMPARABLE TERMS AND PRODUCTS
SMALL MULTIFAMILY LENDERS COMPARABLE TERMS AND PRODUCTS
Lender
Union Bank of
California
Date: 8/18/2010
Min / Max
Loan Amount
Products
Fixed
Terms
Prepayment
3
5
7
10
15
2,1
3,2,1
4,3,2,1
5,4,3,2,1
5,4,3,2,1,1,1,1
3,2,1
5,4,3,2,1
5,5,4,4,3,2,1 or YM
YM
$400K - $5MM
Hybrid ARMs
JPM Chase
Date: 9/13/10
> $1MM
Hybrid ARMs
3
5
7
10
Capital One
> $500K
5+5
5
5,4,3,2,1
7+5
7
5,5,5,4,3,2,1
> $500K
5+5
7+5
10
5
7
10
5,4,3,2,1
5,5,5,4,3, 2,1
5,5,4,4,3,3,2,2,1,1
> $500K
5+5
7+5
5
7
5,4,3,2,1
5,5,5,4,3,2,1
Signature Bank
Date: 9/3/10
Investors Savings
Bank
Date: 9/3/10
> $500 K
5+5
7+5
5
7
5,4,3,2,1
5,5,4,4,3,2,1
> $500 K
5
7
10
5,4,3,2,1
5,5,5,4,3,2,1
5,5,4,4,3,3,2,2,1,1
Sovereign Portfolio
> $500 K
5+5
7+5
10
5-year / no
option
5+5
5-year / no
option
7-year / no
option
10-year / no
option
5
5
4.5 YM
4.5 YM
5
5,4,3,2,1
7
6.5 YM
10
9.5 YM
Date: 9/3/10
NY Community Bank
Date: 9/3/10
Dime of
Williamsburgh
Date: 9/3/10
Date: 9/3/10
Source: Market Rate Sheets (as of 9/20/10)
Fannie Mae’s most competitive product is the 10-year fixed-rate balloon with 30-year amortization and 9.5 years of yield
12
maintenance (which means that the borrower cannot prepay the loan before 9.5 years without making the investor whole).
Because of the refinance or “balloon” risk of short-term products, Fannie Mae has underwriting guidelines such as interest
rate floors and stressed interest rate exit tests to minimize this risk; as well as pricing and credit structures that favor longer
Among those surveyed, Union Bank of California is a
Additionally, products offering borrower options, such as
west coast bank and JPM Chase lends nationwide with a
ability to extend a loan term or customize prepayment
concentration on the west coast and New York. The other
premiums, may be ineligible for securitization or may
banks are based in New York. In general, these lenders
be expensive or illiquid in the capital markets.
consistently offer hybrid interest rate terms, loan terms less
than 10 years, options to extend loan term, and declining
During the Commercial Mortgage-Backed Securities (CMBS)
prepayment schedules. All these features offer borrowers
boom of the mid-2000s there were several small loan
added flexibility, but largely eliminate these loans from
securitization programs including LaSalle Bank, Washington
consideration for securitization.
Mutual, and Sovereign Bank. The loans that were securitized in
these programs were long-term products without prepayment
Fannie Mae’s most competitive product is the 10-year fixed-
flexibility and were not priced as attractively for borrowers as
rate balloon with 30-year amortization and 9.5 years of
the lenders’ portfolio programs. In short, the standard small
yield maintenance (which means that the borrower cannot
multifamily loan product originated by banks is not easily
prepay the loan before 9.5 years without making the investor
securitizable. However, Fannie Mae has identified a segment of
whole). Because of the refinance or “balloon” risk of short-
the market where borrowers will accept long-term fixed rate
term products, Fannie Mae has underwriting guidelines such
loans that can be placed into mortgage-backed securities.
as interest rate floors and stressed interest rate exit tests to
minimize this risk; as well as pricing and credit structures that
Unique Small Loan Market Limits Fannie Mae’s Role: Based
favor longer duration products. There is also a strong MBS
on Fannie Mae’s small loan flow volume of $2.2 billion in 2009,
market demand for longer-term products and Fannie Mae is
Fannie Mae estimates that our small loan market share is 15%.
able to quickly and efficiently securitize these loans.
Although this is lower than the conventional multifamily loan
market share of 40% in 2009, it is still a relevant volume and
Securities law restrictions, such as the inability to provide
provides much needed liquidity to the market.
payment relief for a borrower by modifying loan terms,
except under clearly defined conditions, or the inability
Overall, lenders, borrowers, and products are unique in the
to transfer a recourse loan, can be burdensome to a
multifamily small loan market versus the larger, conventional
borrower looking for flexibility. Portfolio lenders are able
multifamily loan market. Fannie Mae has embraced these
to meet the small loan borrower’s desire for flexibility.
differences, created a dedicated team, and partnered with the
FANNIE MAE’S ROLE IN THE SMALL MULTIFAMILY LOAN MARKET
13
MULTIFAMILY
MORTGAGE
BUSINESS
top small loan lenders to offer an effective, fixed-rate product
HOW IS “AFFORDABLE” DEFINED?
that many borrowers demand. Fannie Mae’s participation in
Housing is considered affordable if a household spends
small multifamily loans is valuable but the liquidity we can
no more than 30% of gross income for rent. However, the
provide is limited by the nature of the market.
following chart shows a different scenario that households
must routinely spend well over one-third of gross income
WHY IS THE SMALL MULTIFAMILY MARKET IMPORTANT
to be able to live in a two-bedroom apartment, especially in
TO FANNIE MAE?
high-cost areas.
It is important because small loans support affordable
housing. Fannie Mae has chosen a business model that focuses
For example, in Los Angeles, a household earning 50%
on supporting the breadth of the rental housing market,
of AMI, $34,100, must spend over 57% of income to be
with a particular focus on rental housing for working families.
able to afford the typical market rate rent for a two-
Unlike other market participants that have moved in and out
bedroom apartment of $1,627. A household earning
of the small loan multifamily space, Fannie Mae has always
$34,100 can afford to spend no more than $853 per
considered small multifamily lending an important strategic
month. Only households earning 80% to 100% of AMI can
business because a preponderance of lower income and
comfortably live in the typical market rate apartment.
working families live in small multifamily rental properties.
Small multifamily rentals are concentrated in urban areas,
What is striking in the following comparison is not the
particularly in the northeastern United States and Southern
difference in asking rents, but the difference in the estimated
California, and as such provide affordable housing in close
household income needed to afford the corresponding
proximity to transportation and jobs. Small multifamily rentals
rental rates. Based on this difference, it seems likely that
also tend to be older properties, with more than half over 30
many households in these high-cost metro areas are not
years old.
actually earning the income needed to afford the twobedroom market rate rent apartment, but rather are spending
The importance of small loans and the affordability they
more than one-third of gross income to pay the rent.
provide is demonstrated by Fannie Mae’s small loan book, 86%
of which is affordable to families earning at or below 100%
Fannie Mae and Affordable Workforce Housing: These
area median income (AMI).
three metro areas may have higher costs of living on average,
but there are still rental units affordable across the spectrum
14
of AMI. As seen in the following chart, even a city as expensive
affordable at various percentages of AMI and what percentage
as San Francisco has nearly 30,000 units renting at between
of units can be offered at market rates.
80% and 100% of AMI that were financed by Fannie Mae.
More importantly, over 67,000 units are rented at between
For example, under the LIHTC program initiated in 1986 to
60% and 100% of AMI, which is a perfect example ofworkforce
stimulate the production of new affordable housing, 20% of
rental housing.
the units in a new development under construction must be
How is “affordable” defined?
affordable to households earning no more than 50% of AMI or
Housing
is considered
affordable
if a household
spends
no more 40%
thanof
30%
grossbe
income
for rent.
However,
the following
Housing
Policy
Encourages
Development
of Mixed
Income
unitsofmust
affordable
to families
earning
no more
chart shows a different scenario that households must routinely spend well over one-third of gross income to be able to live in
Housing: Over the last two decades, affordable housing
than 60% of AMI. The remainder of the units may be offered
a two-bedroom apartment, especially in high-cost areas.
policies have shifted from supporting large-scale, urban
at the market rate. Small loans are important to Fannie Mae as
For example, in Los Angeles, a household earning 50% of AMI, $34,100, must spend over 57% of income to be able to
renewal projects in the 1950s and 1960s to supporting smaller,
they directly support affordable and workforce housing in the
afford the typical market rate rent for a two-bedroom apartment of $1,627. A household earning $34,100 can afford to
mixed-income
projects
by federal
programs
suchearninghigh-cost
metro of
areas
in which
they are located.
spend no more
than supported
$853 per month.
Only
households
80% to 100%
AMI
can comfortably
live in the typical
rate apartment.
as market
LIHTC initiated
in 1986 and HOPE VI initiated in 1990. These
types
of housing
programs
have guidelines
that
What
is strikingdevelopment
in the following
comparison
is not the difference
in asking rents, but the difference in the estimated household
income
needed
to affordofthe
corresponding
rental
rates.
indicate
what
percentage
a new
project’s units
must
be Based on this difference, it seems likely that many households in these
high-cost metro areas are not actually earning the income needed to afford the two-bedroom market rate rent apartment, but
rather are spending more than one-third of gross income to pay the rent.
San Francisco
2
New York
Housing Costs
Two bedroom at HUD determined Fair Market Rent (FMR)1
2
Income needed to afford 2 BR FMR
$1,760
$70,400
$1,420
$56,800
$1,359
$54,360
Two bedroom Market Rate Rent 3
Income needed to afford 2 BR Market Rate Rent
$2,281
$91,240
$1,627
$65,080
$3,610
$144,400
$93,400 / $2,335
$74,720 / $1,868
$46,700 / $1,168
$28,020 / $701
$68,200 / $1,705
$54,560 / $1,364
$34,100 / $853
$20,460 / $512
$78,300 / $1,958
$62,640 / $1,566
$39,150 / 979
$23,490 / $587
Area Median Income (AMI)
/ Monthly Rent Affordable4,2
Annual AMI / Monthly Rent Affordable
80% of annual AMI / Monthly Rent Affordable
50% of annual AMI / Monthly Rent Affordable
30% of annual AMI / Monthly Rent Affordable
1
Los Angeles Long Beach
“Fiscal Year 2010 Fair Market Rent provided in Out of Reach 2010” – June Update, National Low Income Housing Coalition
“Affordable” rents represent the generally accepted standard within housing policy circles of spending not more than 30% of gross income on housing.
3
Market Rate Rents based on REIS 2nd quarter 2010 data for geography based on Metropolitan Statistical Area (MSA)
4
AMI = Fiscal Year 2010 Area Median Income (HUD, 2010) as provided by Federal Housing Finance Agency (FHFA) to Fannie Mae.
FANNIE MAE’S ROLE IN THE SMALL MULTIFAMILY LOAN MARKET
15
there are still rental
units
the spectrum
of AMI.
As seen in
following
a city chart,
as expensive
there
areaffordable
still rentalacross
units affordable
across
the spectrum
of the
AMI.
As seen chart,
in theeven
following
even a
as San Francisco has
nearly
30,000has
units
renting
at between
80% and
100% of
AMI
that
wereoffinanced
by were
Fannie
Mae.
MULTIFAMILY
as San
Francisco
nearly
30,000
units renting
at between
80%
and
100%
AMI that
financed
More importantly,More
over importantly,
67,000 unitsover
are MORTGAGE
rented at
between
60% at
and
100% 60%
of AMI,
perfect
example
67,000
units
are rented
between
and which
100% isofa AMI,
which
is a of
pe
BUSINESS
workforce rental housing.
workforce rental housing.
FANNIE MAE’S
BOOK
OF
BUSINESS UNITS
IN IN
SPECIFIED
MARKETS
FANNIE MAE’S
BOOK
OF
BUSINESS
UNITS
SPECIFIED
MARKETS
FANNIE
MAE’S
BOOK
OF
BUSINESS
UNITS
IN SPECIFIED MARKETS
SEGMENTED BY AFFORDABILITY TO AREA MEDIAN INCOME (AMI)
SEGMENTED BY
AFFORDABILITY
TO
AREA
MEDIAN
INCOME
(AMI)INCOME (AMI)
SEGMENTED BY AFFORDABILITY TO AREA MEDIAN
100%
90%
Total Units:
104,440
Total Units: 104,440
100%
15,453
80%
80%
70%
29,423
60%
60%
50%
40%
38,113
40%
30%
30%
20%
20%
0%
343,000
112,244
112,244
453,813
453,813
141,755
141,755
96,042
96,042
110,527
110,527
61,510
61,510
43,979
43,979
29,423
70%
50%
10%
15,453
90%
343,000
105,076
105,076
38,113
83,308
15,088
15,088
6,363
6,363
10%
0%
San Francisco-Oakland-Fremont, CA
31,385
10,987
83,308
31,385
10,987
Los Angeles-Long Beach-Santa Ana, CA
New York-Northern New Jersey-Long Island,
San Francisco-Oakland-Fremont, CA
Los Angeles-Long Beach-Santa Ana, CA
New York-Northern New Jersey-Long Isla
NY-NJ-PA
NY-NJ-PA
Units below 50% of AMI
of AMI to 60% of50%
AMI of AMI to 60%60%
of AMI to 80% of60%
AMI of AMI to 80% of A
Units below 50% 50%
of AMI
of AMI
80% of AMI to 100% AMI
UnitsAMI
above 100
80% of AMI to 100%
Source: Fannie Mae, December 2009 Book of Business
Source: Fannie Mae, December 2009 Book of Business
Units above 100
WHAT
IS Encourages
THE
CREDIT
PERFORMANCE
OF SMALL
Small Loan
Small
multifamily
to be policies
Housing
Policy
Development
of Mixed
Income of
Housing:
OverGeography:
theHousing:
last two
decades,
housing
Housing
Policy
Encourages
Development
Mixed
Income
Over
the affordable
lastloans
two tend
decades,
affordable
have shifted
from have
supporting
urban large-scale,
renewal projects
inrenewal
the 1950s
supporting
smaller,
mixed-income
LOANS?
concentrated
in and
large1960s
metropolitan
areas,
which
traditionally
shiftedlarge-scale,
from supporting
urban
projects
in
the to
1950s
and 1960s
to supporting
small
projects
supported
by Loan
federal
programs
such
asprograms
LIHTC
1986
and
HOPE
VI initiated
in 1990.
These types
of
Fannie
Mae Small
Book
of Business:
Fannie
Mae has initiated
low
home
ownership
and
highHOPE
demand
projects
supported
by federal
such have
as in
LIHTC
initiated
in rates
1986
and
VIforinitiated
in 199
housing
development
programs
havetoguidelines
that
indicate
what
percentage
of
a new
project’stoof
units
must
beand
affordable
at
development
programs
have
guidelines
that
indicate
what
percentage
a new
project’s
units mus
a long
historyhousing
of providing
liquidity
the
multifamily
small
affordable
rental housing.
According
PPR
(Property
various percentages
of AMI
and what of
percentage
unitspercentage
can be offered
at market
rates. at market rates.
various
percentages
AMI andofwhat
of units
can be offered
loan market as demonstrated by the size of its current book of
Portfolio Research) data, New York City has the largest
business.under
As of June
30,
2010, Fannie
Mae’s
total multifamily
concentration
of small multifamily
buildings in the
US. Within
For example,
the
LIHTC
program
in 1986 to
stimulate
the production
of the
newproduction
affordable
housing,
20% of the
For
example,
under
theinitiated
LIHTC program
initiated
in 1986
to stimulate
of
new affordable
hou
book
of business
wasinapproximately
$185 billion
comprised
of
the
metropolitan
statistical
are
an no
estimated
units in
a new
development
under
construction
must
be affordable
to
households
earning
no(MSA)
morethere
than
50%
ofmore
AMIthan
or 40%
units
a new
development
under
construction
must
be affordable
to area
households
earning
50%
of units
must
be apartment
affordable
to families
than
60%
AMI.
The
remainder
ofThis
theisunits
may be
offered
at may
the
over
42,000
The
smallearning
loan book
ofmore
business
2,000,000
small
multifamily
not surprising
a units
of units loans.
must
be affordable
tono
families
earning
noofmore
than
60%
of units.
AMI.
The
remainder
offor
the
marketforrate.
loanstotaled
are
important
to Fannie
Mae(18%
as they
directly
support
affordable
and
housing
in the highthat Small
same market
period
approximately
$34important
billion
city with
aas
home
of workforce
approximately
30%.
rate.
Small loans
are
to Fannie
Mae
theyownership
directly rate
support
affordable
and workforce
ho
cost metro
areas incomprised
which
they
are located.
metro
in which30,000
they are
located.
of total book) cost
ofareas
approximately
individual
small loans (71% of total loan count).
Among other large cities, the Los Angeles MSA has
approximately 1,080,000 small multifamily units and the
Chicago MSA has approximately 632,400. From a loan
FANNIE MAE’S ROLE
IN THE
SMALL
MULTIFAMILY
LOAN
MARKET
FANNIE
MAE’S
ROLE
IN THE SMALL
MULTIFAMILY
LOAN MARKET
16
14
low home ownership rates and high demand for affordable rental housing. According to PPR (Property and Portfolio Research)
data, New York City has the largest concentration of small multifamily buildings in the US. Within the metropolitan statistical
area (MSA) there are an estimated 2,000,000 small multifamily units. This is not surprising for a city with a homeownership
rate of approximately 30%.
What is the credit performance of small loans?
Fannie Mae
Bookthe
of Business:
FannieMSA
Mae has
Among
otherSmall
largeLoan
cities,
Los Angeles
hasa long history of providing liquidity to the multifamily small loan
FANNIE
SMALL
MULTIFAMILY
market as demonstrated
by
the size
of its current
book
business. As of
June 30, MAE
2010, Fannie
Mae’s
total multifamily book
approximately
1,080,000
small
multifamily
andofthe
production point
of view, Los
Angeles
recorded units
the highest
BOBloans.
MARKET
GEOGRAPHY
of business
washas
approximately
$185
billion comprised
of over 42,000 apartment
The small
loan book of business for
Chicago
MSA
approximately
632,400.
From a loan
dollar volume of small multifamily loans financed in 2008, with
AS OF JUNE 30, 2010
that same period
totaled
$34 billion
of total book) comprised of approximately 30,000 individual small
production
point of
view, approximately
Los Angeles recorded
the(18%
highest
New
York
andof
Chicago
closecount).
behind.
Los Angeles
loans
(71%
loan
dollar
volume
oftotal
small
multifamily loans financed in 2008,
27%
with New York and Chicago close behind.
Small Loan Geography: Small multifamily loans tend to be concentratedOther
in large metropolitan areas, which traditionally have
Following
trends
to the
right,
low homegeographic
ownershipmarket
rates
and
highdetailed
demand
affordable
rental housing.39%
According to PPR (Property and Portfolio Research)
Following
geographic
market
trends
detailedfor
above,
Fannie
Fannie
Mae’sYork
multifamily
small
loan book
of business
is also
data,multifamily
New
City
has
the book
largest
of
small
Mae’s
small
loan
ofconcentration
business
is also
highlymultifamily buildings in the US. Within the metropolitan statistical
area (MSA)
there
an
estimated
multifamily
units. This is not surprising for a city with a homeownership
highly
concentrated
in the
Los Angeles
andYork
New small
York
MSAs.
concentrated
in
the are
Los
Angeles
and 2,000,000
New
MSAs.
While
ratetype
of approximately
30%.
this
geographic
concentration
would
typically
create
While
thisoftype
of geographic
concentration
would
typically
New York
concern
over
diversity
risk
in thethe
portfolio,Angeles
multifamily
small
Among
other
large
cities,
MSA
has
22%
create
concern
over
diversity
risk in theLos
portfolio, multifamily
Seattle
FANNIE
MAE
SMALL
MULTIFAMILY
loan
real
estate
has
historically
performed
well
in
these
MSAs.
4%
approximately 1,080,000 small multifamily units and the
San Francisco
small loan real estate has historically performed well in these
Chicago
BOB 5%
MARKET
GEOGRAPHY
The
chart
at
the
right
shows
the
top
five
MSAs
where
the
3%
Chicago MSA has approximately 632,400. From a loan
MSAs.loan
The book
chart shows
the top distributed.
five MSAs where the small loan
small
of business
production
point
of view, is
Los Angeles recorded the highest
Source: Fannie Mae
AS OF JUNE 30, 2010
Los Angeles
book
of business
is distributed.
dollar
volume of
small multifamily loans financed in 2008,
27% service
Small Loan Credit Statistics and Performance: Despite relatively lower loan leverage in the small loan book, debt
with New York and Chicago close behind.
Fannie Mae’s
small debt
loan serious
– loans
coverage (DSCR) – a relative measure of the amount of cash flow needed
toOther
support
service delinquencies
payments – for(SDQ)
the small
loan
39%
book
slightly
lags the
total
multifamily
book.
This
relative
underperformance
is attributable
thetounique
cash
challenges
Small
Loan Credit
Statistics
andtrends
Performance:
Despite
that are 60 days
past due – to
rose
1.01% in
theflow
second
quarter
Following
geographic
market
detailed
above,
Fannie
smaller
face,
likeloan
the
more
dramatic
effect
on highly
cash flowofthat
vacancies
ondisaggregate
small loan performance.
Mae’s properties
multifamily
small
of
business
is also
relatively
lower loan
leverage
in book
the
small
loan book,
debt
2010.
However,have
if you
the seasoned pool
concentrated in the Los Angeles and New York MSAs. While
service coverage (DSCR) – a relative measure of the amount
this type of geographic concentration would typically create
of cash flow needed to support debt service payments – for
concernLoan
over diversity
in the
portfolio, multifamily small
WAVG
to Value risk
(LTV)
at Origination
the
small
loan
book
slightly
lags
the
total multifamily
book.
loan realDebt
estate
has historically
performed
in these
MSAs.
WAVG
Service
Coverage
(DSCR) well
at Origination
business from the DUS smallNon-Small
loan business – the two
business
Total
Small Loans
Loans
Multifamily
segments that make up Fannie Mae small loan lending – the
New York
58%
68%
67%
22%
Seattle
seasoned pool book of business experienced an SDQ rate
4%
1.54
1.37
1.40
San Francisco
Chicago
Therelative
chart under
at the performance
right shows isthe
top five MSAs
where the
This
attributable
to the unique
of 1.44% compared to5%
a more favorable
0.73% SDQ rate for
3%
small
loan
book of smaller
businessproperties
is distributed.
cash
flow
challenges
face, like the more
the DUS flow small loan portfolio. These compare relatively
Data as of June 30, 2010
Source: Fannie Mae
dramatic
effectCredit
on cash
flow that
vacancies
have onDespite
small loan
favorably
to an leverage
SDQ ratein
forthe
thesmall
total multifamily
Small Loan
Statistics
and
Performance:
relatively
lower loan
loan book,book
debtofservice
FANNIE MAE’S ROLE IN THE SMALL MULTIFAMILY LOAN MARKET
15
coverage (DSCR) – a relative measure of the amount of cash flow0.80%
needed
debt service payments – for the small loan
performance.
in to
thesupport
same period.
book slightly lags the total multifamily book. This relative underperformance is attributable to the unique cash flow challenges
smaller properties face, like the more dramatic effect on cash flow that vacancies have on small loan performance.
Small Loans
Non-Small
Loans
Total
Multifamily
WAVG Loan to Value (LTV) at Origination
58%
68%
67%
WAVG Debt Service Coverage (DSCR) at Origination
1.54
1.37
1.40
Data as of June 30, 2010
FANNIE MAE’S ROLE IN THE SMALL MULTIFAMILY LOAN MARKET
FANNIE MAE’S ROLE IN THE SMALL MULTIFAMILY LOAN MARKET
15
17
standard, they can be considered conservative. Fannie Mae multifamily also outperformed the CMBS market, which registered
13.18% delinquency through Q2 2010.
MULTIFAMILY
MORTGAGE
Fannie Mae attributes this strong performance
compared to its bank and CMBS competition to be attributable directly to
BUSINESS
standardized underwriting and credit guidelines for small multifamily loans and the strength of credit delegation and shared
loss provided by the DUS lenders.
FDIC
INSUREDFINANCIAL
FINANCIAL INSTITUTIONS
FDIC
INSURED
INSTITUTIONS
LARGEST
HOLDERS
OF
MULTIFAMILY
DEBT
($000S)
LARGEST HOLDERS OF MULTIFAMILY
DEBT
($000s)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Name
JPMorgan Chase Bank, National Association
New York Community Bank
Wells Fargo Bank, National Association
Bank of America, National Association
Citibank, National Association
Sovereign Bank
Capital One, National Association
Regions Bank
U.S. Bank National Association
PNC Bank, National Association
OneWest Bank, FSB
The Dime Svgs. Bank of Williamsburgh
M&I Marshall and Ilsley Bank
Astoria Federal Savings and Loan Association
Union Bank, National Association
Total
Assets
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,568,093,000
39,788,713
1,073,280,000
1,518,957,843
1,157,877,000
72,580,147
123,523,320
131,010,846
278,464,643
251,075,292
27,898,129
4,134,786
47,530,839
19,639,969
83,842,126
Loans Secured by 5
or more family units
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
SDQ Rate
(Past 90 days)
33,236,000
16,496,224
10,061,000
8,252,307
7,251,000
5,497,587
5,036,669
4,169,070
3,756,228
2,728,760
2,476,562
2,473,551
2,442,381
2,409,258
2,335,408
3.82%
2.30%
4.03%
2.84%
5.97%
5.04%
0.69%
7.42%
5.07%
13.47%
2.26%
0.47%
1.93%
2.34%
6.27%
Source: Federal Financial Institution Examination Council as of June 30, 2010
Property Condition and Small Multifamily Loans: In addition to the increased borrower risks, property condition is a significant
factor
that
affects
small
loan performance.
More in
than
of small
rental buildings
in the
are over
30 years
old andand
much
multifamily
loans and
the US
strength
of credit
delegation
Despite
slightly
less
favorable
credit performance
the half
Fannie
of
thesmall
inventory
is in need
of substantial
repair.
Approximately
of the
Fannie
Maeby
small
loanlenders.
book was built before 1970
shared
loss
provided
the DUS
Mae
loan book
compared
to the total
multifamily
book, 57%
and faces many of the same property condition challenges as the rest of the market.
Fannie Mae’s small loans demonstrate better performance
Many
individual
small rental
owners doofnot
have
thebyresources Property
to preserve
and improve
small Multifamily
rental properties.
than the
overall multifamily
performance
loans
held
Condition
and Small
Loans:However,
In
without sufficient capital to maintain their buildings the properties deteriorate, tenants are exposed to challenging living
other lenders active in the small loan space. For example, SDQ
addition to the increased borrower risks, property condition
conditions, and vacancies increase leading to curtailed cash flow and a higher incidence of delinquency. The property condition
rates for bank portfolios through the second quarter of 2010
is a significant factor that affects small loan performance.
FANNIE MAE’S ROLE IN THE SMALL MULTIFAMILY LOAN MARKET
16
were approximately 3.88%. Since these rates are based on
More than half of small rental buildings in the US are over 30
a 90-day past due standard compared to Fannie Mae’s 60-
years old and much of the inventory is in need of substantial
day past due standard, they can be considered conservative.
repair. Approximately 57% of the Fannie Mae small loan book
Fannie Mae multifamily also outperformed the CMBS market,
was built before 1970 and faces many of the same property
which registered 13.18% delinquency through Q2 2010.
condition challenges as the rest of the market.
Fannie Mae attributes this strong performance compared to
Many individual small rental owners do not have the
its bank and CMBS competition to be attributable directly
resources to preserve and improve small rental properties.
to standardized underwriting and credit guidelines for small
However, without sufficient capital to maintain their
18
buildings the properties deteriorate, tenants are exposed
(BIP) of 800 or higher is considered to be a significant code
to challenging living conditions, and vacancies increase
violation issue. And, as the table shows, properties with less
leading to curtailed cash flow and a higher incidence of
than 50 units have higher average of violations per unit, 1.42
delinquency. The property condition of the Fannie Mae
vs. 0.32 for larger properties.
small loan book is slightly worse than the non-small loan
book. A property condition rating of “1” is the strongest,
Based on these concerns, Fannie Mae believes it is prudent
a rating of “5” is the weakest, so the lower the rating the
to apply a strict approach to property condition for small
worse the condition. The weighted average property
loans. Fannie Mae’s approach is more conservative than other
condition for small loans is 1.86 versus 1.70 for non-small.
portfolio lenders. Using the UNHP data, 5.7% of all properties
in the NYC market have BIP scores > 800 while only 3.17%
Due to the challenges related to property condition for small
of Fannie Mae’s Book of Business has a BIP score > 800. This
loans, Fannie Mae monitors this portfolio closely to assure
shows that Fannie Mae takes a more prudent underwriting
sustainable and safe housing for tenants. Fannie Mae also has
approach to property condition which helps to ensure the
strict
guidelines
related
to property
origination
safety ofloan
tenants.
of the
Fannie Mae
small
loan bookcondition
is slightlyatworse
than the non-small
book. A property condition rating of “1” is the
a rating
“5” are
is the
weakest,
soadhere
the lower
the rating the worse the condition. The weighted average property
tostrongest,
assure that
as smallofloans
delivered,
they
to this
condition for small loans is 1.86 versus 1.70 for non-small.
quality for tenants and to limit deferred maintenance issues.
Fannie Mae has also found that the credit performance of our
Due to the challenges related to property condition for small loans,
Fannie
Mae
monitors
this portfolio
closely
to book,
assure
small loan
book,
while
not as strong
as the larger
loan
sustainable and safe housing for tenants. Fannie Mae also has strict guidelines related to property condition at origination to
Consistent with Fannie Mae’s portfolio performance,
is still good relative to the market. The fact that Fannie Mae
assure that as small loans are delivered, they adhere to this quality for tenants and to limit deferred maintenance issues.
according to data from University Neighborhood Program,
has a dedicated credit team focused on this unique product
Consistent with Fannie Mae’s portfolio performance, according to data from University Neighborhood Program, UNHP, a
UNHP, a NYC nonprofit that tracks property code violations in
has served the company well. Although Fannie Mae’s credit
NYC nonprofit that tracks property code violations in the five boroughs, smaller properties (≤ 50 units) have higher incidences
the five boroughs, smaller properties (≤ 50 units) have higher
guidelines are often stricter than portfolio lenders, Fannie
of property code violations than larger properties with more than 50 units. A Building Indicator Project Score (BIP) of 800 or
incidences
of propertyto
code
than
larger
properties
believes
this istable
a prudent
approach
andwith
is consistently
higher is considered
be aviolations
significant
code
violation
issue. And,Mae
as the
following
shows,
properties
less than 50
unitsmore
havethan
higher
average
of violations
per unit,
1.42
vs. 0.32 for larger properties.
with
50 units.
A Building
Indicator
Project
Score
Total
Buildings
Units
800+ BIP
Score
800+ BIP %
Average Total
Violations per
Unit
<= 50 Units
49,010
736,136
2,904
5.90%
1.42
> 50 Units
8,847
1,212,411
396
4.50%
0.32
57,857
1,948,547
3,300
5.70%
0.73
NYC Market
Building Size
Totals
Source: University Neighborhood Program Code Violation Data for Properties in the NYC Market
Based on these concerns, Fannie Mae believes it is prudent to apply a strict approach to property condition for small loans.
FANNIE lenders.
MAE’S ROLE
IN the
THEUNHP
SMALLdata,
MULTIFAMILY
LOAN
MARKET
Fannie Mae’s approach is more conservative than other portfolio
Using
5.7% of all
properties
in the19
MULTIFAMILY
MORTGAGE
BUSINESS
calibrating issues relating to markets, property condition, and
Lender Small Loan Profitability: Thin margins and limited
borrowers in the small loan space.
profitability for the lenders prove challenging in the small loan
market. Lender income is based on a percentage of the loan
SMALL LOAN PROFITABILITY
amount via origination fees, trade premiums, and servicing
A significant challenge associated with managing the small
fees. The smaller the loan size, the harder it is to be profitable.
multifamily loan business is the high fixed costs at origination
Many lenders have created economies of scale that allow them
and sustained costs after closing for servicing, asset
to enter into this business. Based upon an informal survey
management, and special asset management for both Fannie
of Fannie Mae’s small loan lenders we have summarized the
Mae and the lenders. Both the lender and Fannie Mae work to
origination and servicing cost and profitability to illustrate some
streamline these costs and create economies of scale in order
of the challenges associated with managing this business.
to sustain a profitable ongoing business.
Origination Costs: The cost to originate and service a small
Fannie Mae has streamlined the upfront underwriting
in relation
the loan
and generated
Origination Costs: Theloan
cost is
to high
originate
and serviceto
a small
loan isamount
high in relation
to the loan amount and genera
As shown in the following sample profit and loss statement (“P&L”) below, the expense ratio for a $1 million loa
requirements to make these loans less expensive for lenders
revenue. As shown in the sample profit and loss statement
7.5% vs. 3.2% for a $3 million loan and 3.5% for a $10 million loan. As shown in the following chart, Fan
streamlined the origination
coststhe
to make
small ratio
loans less
to originate
therefore profitable for lend
to originate. While the asset management and servicing
(“P&L”),
expense
forexpensive
a $1 million
loan isand
roughly
costs are less for a $2 million loan than for a larger loan, fixed
costs associated with managing these small loans cause the
profitability to be greater for the larger loans. Additionally, loss
severity for small loans is higher than for larger loans; it takes a
comparable level of effort and expense to “work out” a $2 million
dollar loan in foreclosure as it does a $20 million dollar loan, thus
driving up the percentage amount lost on each small loan.
Through our current small loan strategy and pricing, Fannie
Mae has established a model where both the lenders and
Fannie Mae are targeting profitable small loan business. We
are constantly monitoring this profitability to assure that we
are structured and priced effectively.
20
Assumed Deal Terms
Sample P&L
Deal Terms
Loan Amount
Origination Fee
Loan Term
Purchase Price
Income Analysis *
Premium (net)
Origination Fee
Ancillary Income (0.35%)
Borrower Reimbursed DD Expenses
Application Fee
TOTAL REVENUE
Due Diligence Expenses **
Salaries and Incentives
Origination Fee
Capital Reserve
Operating Expenses
TOTAL EXPENSES
NOI
1,000,000
1.0%
10
103.50
3,000,000
1.0%
10
102.00
10,000,000
1.0%
10
102.00
35,000
10,000
3,500
N/A
5,000
$53,500
60,000
30,000
10,500
N/A
5,000
$105,500
200,000
100,000
35,000
27,400
12,500
$374,900
9,000
32,700
10,000
1,160
22,250
75,110
9,000
32,700
30,000
3,480
22,250
97,430
39,900
125,000
100,000
11,600
70,000
346,500
(21,610)
8,070
28,400
** Average
income
anddata
expense
databyabove
provided
a DUS
Average income
and expense
above provided
a DUS lender
currentlyby
active
in small balance lending for Fannie Mae
** See the following chart for details
lender currently active in small balance lending for Fannie Mae.
** See the following chart for details
7.5% vs. 3.2% for a $3 million loan and 3.5% for a $10 million
Assuming the same loan amount terms, the Sample Asset
loan. As shown in the P&L chart, Fannie Mae has streamlined
Managment/Servicing chart highlights the net present value
the origination costs to make small loans less expensive to
breakeven cost of servicing fee income for the expenses of
The chart to the right is a sample of typical application
originate and therefore profitable for lenders.
servicing a loan. The breakeven servicing fee to service aSmall
$1 Loan
$1MM
fees and due diligence costs associated with underwriting a
DUE
DILIGENCE
COSTS:
million loan is 25 basis points annually versus 8 bps and 4 bps
$1 million small loan and a $10 million loan:
Appraisal:
$2,500
PNA:
$1,200
The chart to the right is a sample of typical application fees
for $3 million and $10 million loans, respectively. Therefore,
Phase 1:
$0
Servicing Costs: On average, the cost to asset manage and
and due diligence costs associated with underwriting a $1
sustaining profitability for servicing smaller loans
is much
Seismic
$0
service a small loan is lower than that of a larger loan.
Legal & Docs:*
$4,250
million small loan and
a $10 million
challenging.
Title Insurance**
$0
According
to loan.
a DUS lender experienced inmore
small
balance
Other (credit score):
D
$50
lending, the average cost to service a $1 million loan is
Processing:
$1,000
The chart to the right is a sample of typical application
TOTAL:
Small Loan DUS Loan $9,000
themanage
cost to service a $10 million loan
Servicing Costs: Onroughly
average,$2,200
the costwhile
to asset
* Legal for DUS loans includes lender legal fees, UCC Searche
$10MM
fees and due diligence costs associated with underwriting a
Survey of $4,000 $1MM
to $10,000 and borrower
legal fees of $10,00
is approximately $3,600. However, the loss severity
for small COSTS:
includes opinion letter.
DUE
DILIGENCE
and service a small loan is lower than that of a larger loan.
** Title insurance costs for small loans range from $4,000 to $1
$1 million small loan and a $10 million loan:
Appraisal:
$2,500
$5,500
loans is higher than for larger loans. It takes the same level
are paid by the borrower. This includes UCC Searches which a
PNA:
$1,200
$2,000
by the
borrower. For large
loans the average
cost of title is $17
According to a DUS lender experienced in small balance
of
effort
and
expense
to
work
out
a
$1
million
dollar
loan
in
Phase
1:
$0
$2,000
Servicing Costs: On average, the cost to asset manage and
Seismic
$0
lending, the average cost to service
a $1
million loan
is
as it
does
million
dollar loan, thus driving
service a small loanforeclosure
is lower than
that aof$10
a larger
loan.
severities
up for
theinmillion
small
roughly $2,200
the
cost toexperienced
service
a $10
loan
is
According
to awhile
DUSloss
lender
smallloans.
balance
lending,
the average
cost
to service
$1 million
loan is
approximately
$3,600.
However,
thesame
lossaseverity
for small
Assuming
the
loan amount
terms above,
Legal & Docs:*
Title Insurance**
Other (credit score):
the following chart Processing:
highlights
TOTAL:
$4,250
$0
$50
net$1,000
present
$9,000
$29,350
$0
$50
value$1,000
breakeven
$39,900
the
cost o
roughly $2,200 while the cost to service a $10 million loan
* Legal
DUS loans includes
lenderfee
legalto
fees,
UCC Searches
of $850, loan is 25 b
feelarger
income
for Itthe
expenses
of level
servicing a loan.
Theforbreakeven
servicing
service
a $1 million
loans is higher than for
loans.
takes
the same
Survey of $4,000 to $10,000 and borrower legal fees of $10,000, which
is approximately $3,600. However, the loss severity for small
includes
letter.
versus
bps and
4 bps
andopinion
$10 million
loans, respectively. Therefore, sustaining profi
of effort and expenseannually
to work out
a $18million
dollar
loanfor $3 million
** Title insurance costs for small loans range from $4,000 to $11,000 and
loans is higher than for larger loans. It takes the same level
are paid by the borrower. This includes UCC Searches which are also paid
servicing smaller loans is much more challenging.
by the borrower. For large loans the average cost of title is $17,500.
foreclosure
as it does
$10 out a $1 million dollar loan in
ofineffort
and expense
to awork
million dollar
thus
driving
loss dollar loan, thus driving
foreclosure
as loan,
it does
a $10
million
loss
severities
up the
for small
the small
severities
up for
loans.loans.
SAMPLE ASSET MANAGEMENT / SERVICING
Assumed Deal Terms
Deal Terms
Assuming the same loan amount terms above,
the following chart highlights the net present
value breakeven
cost of10,000,000
servicing
Loan Amount
1,000,000
3,000,000
fee income for the expenses of servicing aS-Fee
loan.toThe
breakeven
servicing
a bps
$1 million 0.55
loanbps
is 25 basis0.55
points
lender
(per pricing
memo) fee to service
0.60
bps
Estimated
per $10
loan million
cost to service
$2,200
$2,200profitability
$3,600
annually versus 8 bps and 4 bps for $3 million
and
loans, respectively. Therefore,
sustaining
for
Loan Term / Amortization
10 / 30
servicing smaller loans is much more challenging.
10 / 30
10 / 30
Net Present Value (NPV)
Servicing Fee Income / Expenses
SAMPLE ASSET MANAGEMENT / SERVICING
Minimum servicing fee required
Assumed Deal Termsto break even
0.25 bps
0.08 bps
NPV servicing income based on break
Deal Terms
even s-fee
$19,78610,000,000
$18,966
Loan Amount
1,000,000
3,000,000
NPV
Servicing
Expenses
$19,274
$19,274
S-Fee to lender (per pricing memo)
0.60 bps
0.55 bps
0.55 bps
/ (Loss)
Estimated per loan costProfit
to service
$2,200
$2,200 $512
$3,600($308)
Loan Term / Amortization
10 / 30
10 / 30
10 / 30
Net Present Value (NPV)
Servicing Fee Income / Expenses
Minimum servicing fee required
0.04 bps
$31,610
$31,540
FANNIE MAE’S ROLE IN THE SMALL MULTIFAMILY LOAN MARKET
$70
21
MULTIFAMILY
MORTGAGE
BUSINESS
FANNIE MAE HAS A RELEVANT,
FOCUSED ROLE IN SMALL LOANS
CONTACTS
Fannie Mae’s 2010 small multifamily loan acquisitions are
loans, please visit eFannieMae.com. For a list of our small
expected to be comparable with 2009 acquisitions of $2.2
loan lenders, https://www.eFannieMae.com/mf/refmaterials/
billion. The company estimates this will be consistent with our
lenderinfo/smloanlenders.jsp.
For more information about Fannie Mae small multifamily
2009 small loan market share of 15%. This makes Fannie Mae
one of the largest providers of financing for small multifamily
Opinions, analyses, estimates, forecasts and other views of Fannie
Mae’s Multifamily Mortgage Business Economics and Market Research
loans in the country and one of the only secondary market
Group (MRG) included in these materials should not be construed
participants buying small loans. While several of the large bank
as indicating Fannie Mae’s business prospects or expected results,
portfolio lenders, such as JP Morgan Chase and Sovereign
are based on a number of assumptions, and are subject to change
without notice. How this information affects Fannie Mae will depend
Bank, have entered and exited the small multifamily market in
on many factors. Although the MRG bases its opinions, analyses,
the past few years, Fannie Mae has been a consistent source
estimates, forecasts and other views on information it considers
of liquidity with a $34 billion book of 30,000 loans on small
multifamily properties as of midyear 2010.
reliable, it does not guarantee that the information provided in
these materials is accurate, current or suitable for any particular
purpose. Changes in the assumptions or the information underlying
these views could produce materially different results. The analyses,
opinions, estimates, forecasts and other views published by the MRG
Fannie Mae continues to have a dedicated team of people
represent the views of that group as of the date indicated and do not
committed to providing liquidity for strong, small loan
necessarily represent the views of Fannie Mae or its management.
properties and focused on borrowers who want long-term,
fixed-rate financing. With over 25 years of history in small
multifamily lending, Fannie Mae plans to maintain this
leadership role by supporting our DUS lenders and non-DUS
small loan lenders.
22