Deerfield, IL – April 6, 2011 – (RealEstateRama) — If you have not already heard Fannie Mae is in the process of changing their loan documents. This is the first major rewrite of Fannie docs in about 10 years and this is a substantial change from previous documents, both in form and content. Since Fannie is one of the largest multifamily lenders and anyone financing a property is, or should be, getting a Fannie quote, you need to understand these changes.
Ok, before you fall asleep or click off this article because this is legal stuff and that’s your attorney’s responsibility and you really don’t care, take a moment. While this stuff is a little dry, it’s important. Anyone refinancing a small or larger property should be looking at a Fannie loan as a possibility and you need to understand the terms you are getting before you start the loan process. If you wait until your attorney gets involved it’s too late, you have already spent your due diligence funds and may even have already signed a commitment tying you to the deal. So take a minute and continue reading.
Fannie Mae is the largest GSE lender and the only one really covering the full range of multifamily loans from small properties owned by local owner/operators to large ones owned by institutional investors. These new loan documents affect all of these borrowers and, at least for now, these are one size fits all documents.
Fannie Mae documents are available on the Fannie web site at https://www.efanniemae.com/mf/loandocs/index.jsp Finding the documents is a bit daunting, because Fannie has so many different programs and there are many versions of each document, but be patient and look around and you will find all the documents. They were scheduled to go into effect on April 1, 2011 (could this have been an April fool’s day joke), but their adoption has been proponed till June 1st. Hopefully to address some of the negative issues we will discuss below.
So what are the changes? Well I am not an attorney and have not compared the documents side by side, but I have been at a couple of presentations by attorneys and DUS lenders who specialize in Fannie lending and these comments are the results of their comments. If you want to know the full scoop please consult with your attorney. The biggest change in the documents is structural. Instead of signing a bunch of separate documents where the business terms are hidden thought they have streamlined the documents. You still have to sign a note and security instrument (that’s a legal necessity) but these are stripped down and the main terms of the loan are in a new document which is a exhibit to the multifamily loan and security agreement.
The loan agreement, covers the basic business terms of the loan and how it works. This is a better approach and much more consumer friendly allowing anyone to read and understand the document and determine the terms of the loan. While the documents are still legal speak, they are more understandable then older documents and the Schedule 2 listing the terms is very easy to read and understand. Also, by using this approach Fannie Mae has eliminated many of the documents that were previously signed and incorporated them into this document. There is no longer a separate repair or replacement reserve agreement. It’s a much simpler approach and one which I would hope other lenders follow.
This is nice for privacy reasons given the loan agreement is not a recorded document so it’s private between you and your lender. Of course many terms of your loan are still available because most agency loans are securitized and some information on securitized loans is in the public domain. However, that information is harder to find than information recorded at the local title office.
These structural changes are interesting, but what has really changed. One big change is in defaults where Fannie has identified different types of defaults and assigned different cure periods. They have the “automatic events of defaults” sort of the big items like nonpayment, failure to maintain insurance, etc. which you can’t do under any circumstance and other types of defaults which you can’t do, but which have a 30 day notice and cure period as well as an extended discretionary cure period. This gives you some flexibility and time if you inadvertently do break one of these covenants.
Other items on the positive side relate to certain items which were considered “standard” or easy to request modifications to the old documents. As someone who is not scrutinizing the documents you now get the benefit of these items without asking. You can now convert the borrowing entity type for tax or estate purposes, certain transfers are now allowed without Fannie approval (mainly to and between existing partners) and some commercial leases can now be negotiated and renewed without lender approval. I bet you did not know you needed their approval for any new commercial lease you sign. Also, the borrower now has a 60 day cure period for certain liens on the property and there is also more flexibility with settling small insurance claims. Borrowers, in most cases, can now settle an insurance claim under $50,000.
On a negative side Fannie has modified and increased some of the non-recourse default provisions. The non-recourse loan is now full recourse for environmental items, claims related to the repair or replacement escrow and other indemnifications given by the borrower on the loan. Additionally, recourse springs if there is fraud, willful misconduct, etc, by not just the key principal (as has been standard for 20 years), but by officers, directors, members or shareholders. If you are signing a springing guarantee you are now responsible for your partners’ acts so make sure you know who they are. As a guarantor you also have additional, but more limited, liability for loss or damage relating to failure to maintain proper insurance, complying with reporting requirements, misappropriation f rents as well as some other items. These changes are not unusual and I am told are in line with Freddie Mac documents, but they are still more stringent than current documents.
Other notable changes you will see as negative relate to mezzanine debt which is now banned whether it’s secured or not and more concerning to me, reporting requirements. The new documents call for not only annual reporting of the properties performance and borrower financial condition, but now any key principal or guarantor can be asked for their financial reports on an annual basis. This is new and can be intrusive, especially for smaller owners. The documents also give pre approval for the lender to obtain credit reports, whenever they want, on any borrower, key principal or guarantor. I understand there may be some blanket waivers of some of these reporting items for small loan borrowers, but for now its part of the new docs.
While these changes are interesting the reality is you probably will accept any documents they require to get the loan as long as the business terms are what you want. With the exception of payment and some other items you really don’t concern yourself with loan documents. If you make your payments then most non-monetary defaults will never be found or addressed. However if for some reason you do go into default and need a workout or you want to ask the lender for a favor such as an assumption or release of minor collateral, these non-monetary defaults might be found and effect your situation. Therefore it’s important to know and understand the full terms of the loan so you can make sure you don’t run afoul of their covenants and restrictions. Or, at least if you do, you understand the limitations and risks you are taking.
If you looking for more informaion on multifamily finance please visit us at www.mfloan.com.