New Loan Documents and Requirements Reduce Borrower Costs
August 1, 2014
Every time we purchase a loan, we take the time to hear from our Seller/Servicers and borrowers about their experience. This feedback has been instrumental in helping us continually improve our process. The latest improvement is a new set of loan documents, which are effective today. We've also made some changes to document requirements for large loans that make it much easier to do business with us by eliminating costly and time-consuming requirements. We expect borrowers will find that the following changes make the Freddie Mac Multifamily execution more competitive than ever.
Waiver of Nonconsolidation Opinion for Low Leveraged Loans
We will waive a nonconsolidation opinion for properly structured borrowers without prior bankruptcy issues with low leveraged loans at no additional cost to the borrower. We define "low leverage" as loans with a minimum debt coverage ratio of 1.35x and maximum loan-to-value ratio of 65 percent.
We recognize that nonconsolidation opinions can be costly and often cause closing delays or disruptions because the opinion can't be given until all loan document negotiation is over, and all other borrower documentation is final. We also recognize that substantive consolidations are exceedingly rare. Most importantly, we've determined that even if a low leveraged loan were to be involved in a substantive consolidation, the lien would not be disturbed and ultimately the investors should receive complete repayment of principal.
Instead of obtaining a nonconsolidation opinion, prior to rate-lock borrowers with low leveraged loans who request this waiver will be asked to complete a Due Diligence Checklist. The Checklist looks long, but it is actually only the Special Purpose Entity provisions in Section 6.13 of the Loan Agreement set out in short, simple yes or no questions. Until it is posted on our website, the Checklist will be available upon request from your regional production representative. The Checklist will be reviewed by us to determine at the beginning of the transaction whether the borrower structure creates any additional risk.
A properly structured borrower in a low leverage loan should be able to obtain a waiver of the nonconsolidation opinion without any additional cost. Even a borrower with a low leveraged loan that has structural issues may be able to obtain a waiver of the nonconsolidation opinion for a lower pricing spread increase than was previously charged for the waiver. Depending on the waiver issue, there might not be a price increase at all.
Cash Management Agreements
A Cash Management Agreement will no longer be automatically required for loans $50,000,000 and over. This is a departure from the Commercial Mortgage-Backed Securities market, but it is one that we think makes the most sense for our borrowers.
We've determined that Cash Management Agreements, especially soft, springing cash management agreements such as we have, are not for the most part worth the cost to the borrower to establish two accounts. There may be instances that warrant us requiring a Cash Management Agreement, but these will be rare and will typically be based on specific credit related issues.
Transfer of Limited Partnership Interests
The transfer of more than 50 percent of the limited partnership interests or non-managing member interests in a borrower or Designated Entity for Transfer will now automatically be a conditional transfer.
Currently, borrowers can request the Rider to our Loan Agreement - Limited Partner or Non-Managing Member Transfer - that allows up to 100 percent of the passive beneficial ownership interests to be transferred without payment of the one percent transfer fee. However, borrowers that fail to request this Rider could end up paying a transfer fee for a transfer that does not result in a change of management or control.
We've determined that borrowers making this type of transfer should not be subject to a different standard merely because they did not ask for a Rider that is freely granted. Therefore, we are changing our Loan Agreement to allow transfer of up to 100 percent of the passive beneficial ownership interests by right upon payment of the standard $15,000 processing fee if any one person or entity acquires 25 percent or more of the interests. Until the Loan Agreement is updated at the end of the year, we will automatically allow you to attach the Rider to the Loan Agreement.
The Intrafamily Transfer provision in the Loan Agreement has been changed to bring it into line with the Limited Partner or Non-Managing Member Transfer. Although the review fee has been changed to a $15,000 processing fee, the processing fee will not be charged unless one person or entity obtains a 25 percent or more interest. In addition, a processing fee will not be charged at all for a change in the trustee of a trust. Therefore, we expect that many Intrafamily Transfers will fall into the category of transfers for which no fee is charged.
The new loan documents are effective for loans documented on Commitments or Applications generated on or after August 1, 2014. These documents also include changes related to the evolution of our Servicing Standard announced in the July 1, 2014, Guide Bulletin.
All of our legal documents are available on our Legal Documents page. At this time, Seller/Servicers and their counsel can download the documents to your systems and circulate them to borrowers with deals scheduled to commit in August or later.
Please contact your Freddie Mac representative with any questions about the loan documents.