Responding to Market Conditions with Floating-Rate Mortgage Enhancements
March 31, 2014
It’s no secret that the multifamily market is quite competitive today. Regionally, we’re experiencing good inflow, but it is taking time to get deals under application.
With such a competitive market, I wanted you to have information about the adjustments we’ve made to our floating-rate program over the past few months. It is important for you to take note of the three main changes we’ve made to ensure our floating-rating product is different and more competitive:
- Updated our sizing methodology
- Expanded our cap options and changed our internal approval process
- Revised our floating-rate pricing strategy
Our sizing methodology is based on the underwriting of a 7-year fixed-rate term. You only have to meet one LTV and DCR test.
We have also greatly expanded our interest rate cap options. There’s even an uncapped option with a LTV ratio less than 60 percent and a minimum 1.05 DCR at a 7 percent interest rate.
Regardless of whether the loan maturity is 7 years or even 5 or 10 years, borrowers have increased flexibility to respond to cap market pricing. Let’s review some examples based on a 7-year term.
- The initial cap term can be 3 years or longer, but 3 years is the minimum term required for the initial cap. For a 7-year mortgage, the initial cap can have a term of 3, 4, 5, 6 or even 7 years.
- The replacement cap term can go to the maturity date or be as short as 1 year. If the initial cap is for 3 years, the replacement cap can have a term of 1, 2, 3 or 4 years. Keep in mind that if a cap term is shorter than the mortgage maturity date, a cap fee escrow is required until a new cap is purchased that extends to maturity. The cap escrow fee is calculated on 125 percent of the cost of the replacement cap for the remaining term of the mortgage.
- If the replacement cap terminates prior to the mortgage maturity, the replacement cap can be as long as the maturity of the mortgage or as short as 1 year. With an initial cap of 3 years and a replacement cap of 1 year, the next replacement cap can have a term of 1, 2 or 3 years.
I encourage you to download and use our new examples of Interest-Rate Cap Options for Floating-Rate Cash Mortgages with a 7-Year Term. You’ll also find a new cap provider on our Approved Counterparties List. This is due to our new process we have for adding cap providers. Please work with your Freddie Mac Producer to discuss your preferred cap providers and
5-year, 10-year or Targeted Affordable Housing (TAH) Floating-Rate Cash Mortgages.
Pricing is a work in progress, but you should have already noticed lower quotes on floating-rate transactions. We continue to fine tune the price of adders, but I encourage you to always discuss the quote with your Freddie Mac Producer. A conversation may help to expand access to credit for appropriate properties in certain circumstances, which may not be obvious to us until we talk.
I hope you’ve also noticed some other recent changes made by our credit decision makers to respond more to pricing and structure. The latest Refinance Test takes into account the current market and interest rate information.
Our new loan documents have streamlined the entire origination process. The ICT (Insurance Compliance Tool) automation feature saves you time when providing your insurance coverage and waivers.
It’s also worth mentioning some new features on our products webpage. We’ve started featuring some of our latest deals, which include information from both the Seller and the borrower.
I look forward to seeing many of you during Regional Seller Training to continue this discussion and talk about more planned enhancements.