Clarifying Yield Maintenance Premium Calculations for Assumed Reinvestment Rates of Zero or Negative Numbers
February 2, 2012
Changes to Yield Maintenance Premium Calculation in Fixed Rate Notes
We're adding new provisions in the Multifamily Multistate Fixed-Rate Notes related to the calculation of the yield maintenance premium. We want to ensure that Seller/Servicers are familiar with these new provisions and use them when calculating a prepayment premium in the refinance of an existing Freddie Mac loan. In addition, the Seller/Servicer staffs supporting loan payoffs need to understand and use these new provisions.
Minimum Prepayment Premium Calculation and Negative or Zero Values in the Assumed Reinvestment Rate
In the current rate environment, it's possible that the calculation of the Assumed Reinvestment Rate (ARR) can result in a negative number or in zero as the ARR when determining a loan payoff amount. The language presently describing the yield maintenance premium calculation in the Freddie Mac Multifamily Multistate Fixed-Rate Notes does not specifically address how to calculate a yield maintenance premium with a zero or negative ARR.
When the ARR is zero, the yield maintenance premium calculation in the Freddie Mac Multifamily Multistate Fixed-Rate Notes produces an error due to algebraic constraints. As a result, some Servicers have defaulted to using the minimum 1% prepayment premium to avoid any errors created by our yield maintenance formula. While the calculation produces a sound result when the ARR is negative, there has been confusion as to whether the result is correct. The yield maintenance formula is designed to ensure that in a falling rate environment the loan is accurately prepaid. This does not occur when the minimum 1% collection is misapplied.
To avoid these errors and mathematical constraints in our yield maintenance formula, we have revised a section in our Fixed-Rated Notes. The changes to the Multifamily Multistate Fixed-Rate Note for both CME and Portfolio can be found on our Multifamily Mortgage Documents webpage. These new processes will also apply to all refinances and payoffs.
Multifamily Multistate Fixed Rate Note Changes
Instead of changing our yield maintenance formula, you will find the following new provisions in the Fixed-Rate Notes. Using these new provision for current refinances and pay-offs will avoid inaccurate quotes, delays in payoff, and clarify any question about calculating the yield maintenance premium in existing loans.
- A negative ARR can and should be used instead of reverting to the minimum 1% of the UPB as the prepayment premium. If the ARR results in a negative number, the negative number must be used in the yield maintenance premium calculation.
- If the ARR is zero, the yield maintenance premium must be calculated twice. Once using positive one basis point and a second time using negative one basis point. The two results must be averaged for that actual yield maintenance premium.
- The minimum 1% prepayment premium should be used only if the final calculation of the yield maintenance premium results in a prepayment premium of less than 1%.
Effective Date and Procedure
The updated Multifamily Fixed Rate Notes are effective as of February 2, 2012. The revised Notes must be used for any loan for which a commitment is issued or any Early Rate-Lock Application is accepted after that date. The procedure set forth in the revised Notes will also apply to all payoffs.
In addition, all yield maintenance premium waivers will now require that the yield maintenance premium be calculated at rate-lock to clearly track what amount is being waived. Yield maintenance will be calculated at payoff as long as there is no additional waiver or buy up.
If you have any questions about these clarifications to calculating yield maintenance or ARR, please contact your Freddie Mac representative.