Using Refinance Test at Underwriting
June 30, 2011
In response to your requests to have access to our Refinance Test prior to the loan submission and underwriting process, we’ve made the test available for your use as of July 15, 2011. As part of the underwriting process, the test evaluates the borrower’s ability to successfully refinance the balloon balance of their loan at maturity. You can enter the proposed parameters for the current loan, including loan terms and property income and expense, and the test will evaluate them in relation to forecasts for future rents, vacancies, cap rates, mortgage rates, and expenses. We’re giving you access to this tool to make the test results transparent to you early in the underwriting process. The test will give a clear pass or fail result for the loan, providing you with early feedback when proposed loan parameters will need additional assessment from your underwriter.
Fail Doesn’t Mean Stop
Now that we’re providing you direct access to the test, we want to emphasize that it is not intended for you to use to screen which loans you submit to your Freddie Mac Multifamily production or underwriting representative. We’re making the Refinance Test available to you to help streamline the underwriting process. Whenever you receive a failing result from the test, we encourage you to contact your Freddie Mac Multifamily underwriter. The underwriter will work with you to assess the individual characteristics of your deal in relation to the test results. You are not required to use the Refinance Test, however, we encourage you to use it to determine which deals will require additional evaluation.
The Refinance Test is a benchmark that can also help you gauge what size loan is acceptable for your deal. You will receive a pass result with a DCR of greater than 1.20 and with LTV less than 85 percent at balloon maturity. A failing result will also provide you with the amount of the loan balance that would pass the refinance test, eliminating the need to iterate on loan size.
Additionally, while you are not required to submit the results from your Refinance Test to your underwriter, we encourage you to include them for comparison with our results. We will perform a refinance analysis regardless of the loan type.
Transparency of Analysis Characteristics
Market condition inputs in the Refinance Test are updated quarterly, to keep the rental growth rates, expense growth rates, note rates, and cap rates current. Rent and vacancy are metro driven and trended with REIS forecasts. Expenses are consistent with historical growth rates of 3 percent. Interest rates are forecasted with the forward curve. Payments are calculated on the forecasted 10-year Treasury rate plus 200 basis points.
Test Training Schedule
To provide you with additional guidance on the use of the test and evaluation of its results, we have scheduled Web-based training. The training provides detailed information on the test data inputs, forecasts used, and test results. Please register for the following sessions:
Date: Wednesday, July 13, 2011
Time: 1:30 p.m. EST
Session number: 718 233 905
Date: Wednesday, August 3, 2011
Time: 1:30 p.m. EST
Session number: 713 065 351