SBL May Credit Update
May 23, 2016
Thanks to all of you who were able to join us at the Small Balance Loan (SBL) credit and underwriting training we recently conducted at your offices. We enjoyed connecting with many of you personally and look forward to continuing to work closely with you.
We’re pleased to share this month’s update, which contains credit-related changes that can streamline your work. If you have any questions, please don’t hesitate to contact any member of our underwriting team.
Items in this update include:
- Streamlined Amperage and Load Test Policy
- Regional Email Addresses
- New Sample Asset Summary Report (ASR) and Metric Based Narratives
- Updated Credit Risks and Exceptions
- Program Exception Submission Timing
- Inspecting Newly Constructed or Renovated Buildings
- Due Diligence Document Reminders
- Seller/Servicer Guide Updates
Small Balance Loan Lab on June 21-22 in Chicago
Underwriters from all regions will be on hand to work with you in-person and get your deals done fast. Leave with signed commitments that you can issue to your borrower.
Our producers will also be available to screen potential transactions and discuss deal-specific requests.
We will be hosting a conference call for Sellers this Wednesday, May 25 at 3:30 – 4:30 p.m. ET to share more details. For call-in number and participant code, contact Laura Ahlbin.
We have streamlined our amperage and load test requirements in the May 9 SBL Guide Addendum update. The new requirements provide an easier way to handle properties between 60 and 40 amps. As a result of this change, a certified electrician is no longer required to conduct the load analysis. The load test can be conducted by the engineer on inspection for the Physical Risk Report — reducing cost, closing delays and borrower/tenant disruption.
The new policy is:
The minimum amperage acceptable to each unit is 60 amperes, except that 40 amperes is the minimum allowable service level in a Top Markets without a load analysis, provided all the following conditions are met:
- No washing machines or clothes dryers in units
- Heating systems, stovetops, stovetop appliances, and water heaters may not be powered by electricity
- No air conditioning units (including window units) may be used unless serviced by a separate dedicated circuit
- There may be no atypical equipment with high electricity demands (e.g., whirlpool tubs, freezer units)
- There are no units over 750 square feet
If the consultant encounters or reports service levels less than the minimum allowable service levels (60 or 40 amperes, as applicable), they must perform a load analysis for each unit type affected based on the most current National Electrical Code (NEC) guidelines or review the results of a load analysis similarly prepared for each affected unit type (as performed by a licensed electrician or electrical engineer), and make corrective recommendations as appropriate. Regardless of the service level or the results of a load analysis, the property must meet the minimum NEC requirements and all local building codes.
Overload protection for all apartments must, at a minimum, be provided by circuit breakers or tamper-proof (S-type) fuses. If S-type fuses are present, the consultant must determine the adequacy of the installation and associated components, and whether an upgrade to circuit breakers is warranted.
If aluminum wiring is present, all electrical devices must have safe, code-compliant connections that are rated to accept aluminum wiring, or corrective, code-compliant repairs must be made before the Origination Date.
As previously announced, SBL Seller communication to Freddie Mac Multifamily involving the following should be directed to the new regional mailboxes:
- Seller underwriting package submission for SBL deals in the specified region
- Any specific regional discussions or questions relating to:
- All other issues related to active loan applications
Site inspection requests should not be directed to these mailboxes and will continue to be handled by individual regional points of contact. In addition, programmatic, cross-regional and reoccurring issues should continue to be directed to your designated Freddie Mac Underwriting and/or Production contact.
We recently posted a sample SBL ASR on the SBL Originate & Underwrite page of our website, under Reference and Tools. We can provide an Excel version of the ASR upon request. The SBL ASR is an example of typical SBL content and format to guide you in the development of Seller investment briefs. It does not provide comprehensive narrative guidance. We are developing a more comprehensive SBL narrative and underwriting guide to help you populate your investment brief narratives.
A baseline premise of the template format is "Metrics Based Narrative." Narrative sections are only necessary if the data points included in the template cause reason for concern or cross certain thresholds. If the data points and values are acceptable and no unique characteristics exist, no further narrative is required. The exception will always be for "Strengths & Weaknesses," "Inspection," and "Submarke"” sections of the ASR where narrative is always required.
Example: If the sponsor owns fewer than two multifamily properties, then a narrative discussion on their experience is required. If they own more and all other experience related data points are acceptable, then no additional narrative on experience is required.
This should allow all underwriters to move faster, focus on writing about the important and unique transaction issues and not spend time unnecessarily repeating data in sentence form.
Below is the list of credit risks and exceptions that we updated in May.
- Clarification on amperage exception
- Updated tenant concentration thresholds in programmatic exceptions
- Added credit risk consideration for year over year income growth above market
- Updated submission timing for programmatic exceptions (see #5)
Exception requests must be processed prior to upload and submission of the underwriting package to Freddie Mac. SBL has provided guidance on what programmatic exceptions require pre-review, and encourages SBL Sellers to preview with an SBL Production representative in the region if there is uncertainty about submissions.
If a full underwriting package is delivered with a Programmatic Exception and an SBL Exception Form was not submitted prior to delivery of the full package, the underwriting package will not be accepted as a full package. This will delay the turnaround time and pricing, and the Seller’s performance review will be affected. In select cases, Freddie Mac Underwriting may proceed with underwriting and approval as appropriate without mandating an SBL Exception Form.
If a building was newly constructed or underwent major renovation, inspections should not be conducted until 80% of the building is occupied and all major systems and common areas are completed — no exceptions.
YTD or T-12 Statements
As of this update, YTD or T-12 statements are expected for every loan. Please remember to include the “End Date” of the statements when spreading property financials into the LST.
SBL Seller Inspection Report and SBL Form 1115
The Property Inspection and Lease Audit Form and SBL Form 1115 (Borrower and Borrower Principal Certification SBL) are enhanced and customized for SBL relative to their Conventional form counterparts. Please remind those using the reports to download the latest forms from the SBL page on the Freddie Mac website.
The SBL Form 1115 allows the signing borrower principal to certify all personal financial statements including their REO schedule and certification of the information is automatically extended through 60 days with a confirmation by the Seller of no material adverse change clause. The SBL Inspection and Lease Audit Form is already tailored to SBL properties and consolidated from the Conventional form and the new version was recently enhanced to run faster and correct some issues.
We are delivering our promise to improve transparency and add credit-oriented parameters into the Freddie Mac Multifamily Seller/Servicer Guide (the “Guide”) through two Guide updates:
- The SBL Guide Addendum content update, published May 9.
- Merging the SBL Guide Addendum into the Guide, happening this summer. The SBL Guide chapters with significant differences from Conventional loans, such as Chapter 8, 9, and 18, will have their own sub-chapter within the Guide.