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Improving the Cap Escrow Adjustments Process

December 2, 2016

In response to your feedback, we’re making significant improvements to the cap escrow adjustments process. Beginning in January, we’ll provide adjustments at no cost to Servicers. Furthermore, the brief we currently require from you will be replaced by a simpler form. For loans held by Freddie Mac, Servicers will only be required to obtain Freddie Mac review and approval for the initial cap escrow adjustment. For securitized loans, no Master Servicer review will be required for any cap escrow adjustments.

These changes are part of our overall efforts to make it easier to do business with us.

Register now for our training webinar on December 12 at 2 p.m. ET.

The New Process

We have contracted with Kensington Capital Advisorsand, with their expertise, we expect both Servicers and Freddie Mac to save significant man hours. We believe the new process will provide reliable results and eliminate the risk of valuation errors.

Kensington’s database will store cap escrow adjustment data and calculate adjustments on a predefined scheduled basis.

The new Kensington Cap Escrow Adjustment form will be completed first by the Servicer with basic loan and replacement cap information (see p. 1) and then by Kensington with the details of the new monthly cap escrow payment (p. 2).

Here’s how it will work:

  • Within 30 days after loan closing, Servicers submit the form along with the rate cap rider from the loan agreement or pertinent pages from the reimbursement and security agreement to Kensington.
  • Thirty days before each cap escrow adjustment is due, Kensington sends each Servicer a list of loans requiring adjustments.
  • The Servicer then provides Kensington only two things: the required notional or loan balance and the current cap escrow balance.
  • Kensington next determines the estimated cost of the replacement cap and calculates the new cap escrow payment using the initial data, then returns the form to the Servicer within two business days.
    • If this is the initial cap escrow adjustment for the loan, the Servicer must submit the completed form to Freddie Mac for review, approval and signature.
    • If this is not the initial cap escrow adjustment, no Freddie Mac approval is required.
    • In both instances, the Servicer relays the new monthly cap escrow payment information to the Borrower.
  • Freddie Mac is assuming all costs related to this mandatory process.

The Freddie Mac Multifamily Seller/Servicer Guide will be updated mid-December, and the form will be posted on our website, with the new process going into effect in January 2017. We have advised the Master Servicers for Freddie Mac’s securitizations that these changes mean that their review and approval of adjustments will no longer be required. We will begin making any necessary revisions to the securitization documents in January 2017.

If you have any questions in the meantime, please contact Steve Power, Patsy Johnson or Luke Caldow.

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