SBL Update: Loan Production and Delivery
March 16, 2016
As we near the end of the first quarter, we are on a steady path to another great year for our small loans offering, thanks to all of our Small Balance Loan (SBL) Seller/Servicers.
We believe open, two-way communication is an important part of our mutual success. This update addresses recent changes to our loan production and delivery processes and policies. Likewise, we welcome your feedback on how we can continue to raise the bar on delivering both a highly-competitive offering to the marketplace and a high-quality borrower experience.
If you have any questions or comments to share with us, please contact David Cardwell or a Freddie Mac SBL production representative.
Topics in this update:
- Borrower Principal Review
- Processing Exceptions
- Interest Rate Hold
- Operational Repair Letter No Longer Required
- Modified SBL Collateral Requirement
- Third-Party Cost Reporting
- Upcoming Events
Borrower Principal Review
Freddie Mac takes seriously the review of borrower principals for prior Freddie Mac loan performance issues. For this reason, we are highly unlikely to purchase a loan with a borrower that has caused Freddie Mac any prior losses of any amount or other material performance issues.
We conduct borrower principal review using the information that our Sellers provide, in accordance with the Multifamily Seller/Servicer Guide (Guide). We encourage each Seller to provide borrower principal information on a timely basis as part of the due diligence process. Due to potential delays associated with finalizing the Borrower and Borrower Principal Certification Form (Form 1115), SBL Sellers should provide the appropriate Regional Producer or Analyst with borrower information as early as possible in the process for our review. If we do not receive the information prior to the underwriting package delivery and we discover any past performance issues related to a borrower principal associated with a prior Freddie Mac loan(s), the loan will be rejected without exception. It is our policy that we do not provide information on current and past loan sponsors, so your timely provision of such data is essential.
We encourage each SBL Seller, if not already in place, to update your loan application language to require disclosure of prior Freddie Mac loan history and any performance issues (losses suffered by Freddie Mac).
Be sure to upload the approved Exception Form into DMS or attach it to your narrative when submitting the final underwriting package. If a full underwriting package is delivered with a Programmatic Exception and an SBL Exception Form is not submitted prior to delivery of the full package, the loan turn time, pricing and Seller’s performance review will be impacted. However, Freddie Mac Underwriting will continue to underwrite and approve the loan as appropriate and not mandate an SBL Exception Form be submitted at that point.
Interest Rate Hold
Freddie Mac will not extend interest rate holds beyond 45 days. Due to volatility in the capital markets, the interest rate at the time of full underwriting package submission may be lower than the rate at the time of the SBL Seller application. We will not adjust the interest rate when the full underwriting package is submitted if, at that time, the interest rate is lower than the posted rate at time of application. This includes mortgage interest rates that include an approved discount at time of application.
Freddie Mac does not charge the SBL Seller and borrower for the 45-day rate hold. We honor the hold for 45 days in a rising rate environment; likewise, we expect the SBL Seller and borrower to honor the rate hold during times of declining rates.
Operational Repair Letter No Longer Required
To streamline our processes and make working with Freddie Mac Multifamily even easier, we are eliminating the requirement for the Operational Repair Letter. Instead, the loan surveillance group will rely on the source information in the Form 1104 to determine whether the borrower has addressed operational repair matters.
This applies to all loans closing on or after March 15, 2016. The SBL Guide Addendum and Delivery Table of Contents will be updated soon to reflect this change. Until the update, Sellers may mark the Operational Repair Agreement in the Delivery Table of Contacts for applicable loans as “N/A.”
We are fully committed to improving our processes with our Sellers, and we appreciate your feedback that producing this letter for every loan was a time burden and a duplication of information. Please continue to share your ideas for improving the loan process.
Modified SBL Collateral Requirement
We have modified the collateral requirements (“Modified SBL Collateral Requirement”) to a flat $5,000,000. This replaces the requirement of nine percent (9%) per SBL (for cash SBL Collateral as set forth in the Guide, Section 46.8.c.1) and $1,000,000 for every $10,000,000 of SBLs delivered to Freddie Mac (for Letter of Credit SBL Collateral as set forth in the Guide, Section 46.8.c2). Moreover, Sellers have all agreed to the removal of the following fees as a condition for implementing the Modified SBL Collateral Requirement:
- Aggregation Period Servicing Fee; and
- Delayed Excess Servicing Fee.
For SBL Sellers who have been notified in writing by Freddie Mac, on the Delivery Table of Contents, the Collateral Certificate for loans delivered under the Modified SBL Collateral Requirement should be marked "N/A."
Third-Party Cost Reporting
Thank you for assisting with the collection of third-party and legal cost data. This data helps determine average price for items like appraisal, physical risk report, and SBL single counsel. More importantly, we use this data to help you determine how your cost for these items compare to the average.
To reduce the data collection requirements, we will only collect the monthly data for June, September, and December of 2016. Before the end of this year, we will determine if we will continue the collection of third-party cost data in 2017.
The upcoming Regional Seller Workshops are focused on our conventional loan business and not recommended for SBL Seller/Servicers; however, members of our production staff will attend the meetings to answer questions about the SBL offering.
To keep you up-to-speed on our business processes, we are meeting with each Seller/Servicer individually to review changes to credit policy and the loan production process.