GSE basics or how to find the right Freddie or Fannie loan

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You hear a lot today that, with the exception of FHA-HUD, the GSE lenders (Freddie Mac and Fannie Mae) are the best lenders in today’s multifamily market.  This isn’t really true, but its often said.  However, with the exception of a sales call, there’s very little discussion of the best way to access GSE capital.  

Let’s start with the basics. First, Freddie Mac and Fannie Mae do not make any loans.  They are not direct lenders and, by law, cannot make new loans. They buy (or credit enhance) loans or pools of loans from approved lenders. For multifamily loans these approved lenders are called DUS (delegated underwriting/servicing) lenders for Fannie Mae and Program Plus lenders for Freddie Mac. There are not many of these lenders and a list of approved lenders can be found at Freddie and Fannie’s web sites. Some lenders represent both Freddie and Fannie and some just one or the other.

Second, the two agencies are very different in how they treat their lending partners and how they underwrite their deals.  Fannie, for the most part, allows the DUS lenders to make decisions on the loans they buy and Freddie makes their own lending decisions.  Fannie lenders also take part of the risk on the loan and in exchange for taking some of the risk they are allowed to make lending decisions. Underwriting is mainly done inside the lenders company with their own staff and not with Fannie Mae staff.

Freddie takes all the risk on their loans and their lenders make loans only after receiving Freddie Mac approval.  Freddie also has a guide, but their lending partners do not make decisions, they just recommend underwriting and loan structures to the Freddie Mac regional office. The real underwriting is done in the Freddie Mac regional office with Freddie Mac staff.

Now that we know the basics, what does this all mean for how you should access these GSE lenders?  Since the GSE’s originate loans differently you really should access them in different ways.   For Fannie Mae it makes sense to talk to multiple DUS lenders about your situation while that is not the case for Freddie. For Freddie one experienced Program Plus lender is all you need.

On a Fannie loan you need to see how each DUS lender perceives a specific market/deal and how much risk they want to take.  You also need to see which lenders are busy and who has the resources to process your loan.  Only by talking to multiple lenders will you be able to determine who will give you your best Fannie Mae deal.  Pricing will generally be consistent between all DUS lenders (most rate issues are determined by Fannie), but there will be differences in underwriting based on each lenders perception of risk, how the property performs and how they like the deal. Each lender will determine a different NOI and propose different loan amounts.  I’ve seen these differences range by up to 20% in loan amount between two DUS lenders.  This is because of each lenders knowledge of the specific market and their interest in doing the specific transaction.  Unfortunately obtaining multiple Fannie quotes is time consuming, but necessary for obtaining the best quote.  If you don’t have the time or energy for getting multiple quotes I suggest using an experienced mortgage broker/banker to clear the market for you.

For Freddie the situation is totally different.   Since the underwriting and decisions are made in the Freddie Mac regional office you will, in general, get same quote from any Freddie Mac Program Plus lender.   However, all Program Plus lenders are not the same.   Some have more experience than others and some have better relationships with Freddie.   You need to deal with a lender who has experience and a good relationship with the local Freddie regional office.   That means someone who has done business in the area where your property is located and who focuses on Freddie Mac business. Only an experienced lender will know the “hot buttons issues” for each Freddie regional office and know how to present your deal to address those issues.

Both GSE lenders have a large number of programs and options. They offer floating rate loans, fixed term balloon loans and fully amortizing loans.  They lend on conventional class A and B multifamily properties, senior housing properties, affordable housing properties and for Fannie Mae mobile home parks.  LTVs are stated as high as 80%, but expect lower LTVs today.  These loans typically have transaction costs of $15,000 or more and origination fees of 1 %.  GSE loans are designed for larger properties with loan amounts over $5 million.  There are some DUS lenders who will consider loans as small as $2 million and some Fannie “small loan” lenders will focus on loans as small as $1 million.  GSE lenders provide excellent rates and a non-recourse transaction.   These loans typically take 45-60 days to close and often require tax and insurance escrows and sometimes funded replacement reserves.

In either case you do need to work with a professional who is experienced in GSE lending and is up to date with what they are doing.   Every representative of a DUS or Program Plus lender is not experienced or knowledgeable.  Before you work with a lender ask your representative about their experience and if they do not sound well informed then move on to another lender.   The GSE’s have numerous programs and you need someone who knows the programs and can tell you which program best fits your real estate strategy.