Section 702

ARM Loan and SARM Loan Conversions

702.01

Governing Documents

Requirements

For interest rate conversions, you must comply with the following documents and order of priority:

  • Interest Rate Conversion AgreementInterest Rate Conversion AgreementDocument describing the terms and conditions when a Mortgage Loan interest rate may convert from an adjustable rate to a fixed rate. ;
  • Loan DocumentsLoan DocumentsAll Fannie Mae-approved documents evidencing, securing, or guaranteeing the Mortgage Loan. ; and
  • this Chapter.
702.02

Minimum Conversion Debt Service Ratio

Requirements

To convert... You must...
A Mortgage Loan to a fixed rate Confirm the Minimum Conversion Debt Service Ratio (per the Interest Rate Conversion AgreementInterest Rate Conversion AgreementDocument describing the terms and conditions when a Mortgage Loan interest rate may convert from an adjustable rate to a fixed rate. ) is met.
A Supplemental Mortgage Loan to a fixed rate

Confirm the Minimum Conversion Debt Service Ratio is met using the sum of

 

  • the current annual combined debt service of all Pre-Existing Mortgage LoansPre-Existing Mortgage LoansMultifamily residential real estate loan secured by Liens against the Property having higher priority than the Lien securing the Subordinate Loan purchased by Fannie Mae. (using the maximum interest rate for any variable rate Pre-Existing Mortgage LoanPre-Existing Mortgage LoanMultifamily residential real estate loan secured by Liens against the Property having higher priority than the Lien securing the Subordinate Loan purchased by Fannie Mae. ), plus
  • the annual debt service of the converted fixed rate Supplemental Mortgage LoanSupplemental Mortgage LoanMortgage Loan purchased by Fannie Mae that is subordinated to, and has a Mortgage Loan Origination Date after, the Senior Mortgage Loan that is also owned by Fannie Mae. .
702.03

Conversion Criteria

Requirements

You must comply with the following table.

Criteria You must...
DUS Gateway Enter delegated and non-delegated conversions in DUS GatewayDUS GatewayMultifamily pre-acquisition system, or any successor systems, recording deal registration, Pre-Review and/or waiver tracking, Mortgage Loan Commitments, and decision records. .
Effective Date Ensure the conversion is effective on a payment date (i.e., the 1st day of the month).
Conversion Timeline
  • For an ARM LoanARM LoanMortgage Loan with an interest rate that periodically adjusts based on an Index per the Note or Loan Documents. , exercise the conversion
    • after the 1st Loan YearLoan YearPeriod beginning on the date of the Note and ending on the last day of the month that is 12 full months after the date of the Note, and each successive 12-month period thereafter. , and
    • up to, and including, the last day of the 5th Loan YearLoan YearPeriod beginning on the date of the Note and ending on the last day of the month that is 12 full months after the date of the Note, and each successive 12-month period thereafter. .
  • For a SARM Loan, exercise the conversion
    • after the 1st Loan YearLoan YearPeriod beginning on the date of the Note and ending on the last day of the month that is 12 full months after the date of the Note, and each successive 12-month period thereafter. , and
    • up to, and including, the 1st day of the 3rd month before the Maturity DateMaturity DateDate all Mortgage Loan amounts become fully due and payable per the Loan Documents. .
Loan Term

Convert to a fixed rate Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. with a loan term

 

  • greater than or equal to 7 years, and
  • less than or equal to 10 years.
Underwriting

Underwrite the conversion as follows:

 

  • Base actual DSCRDSCROn an annual basis or any specified period, the ratio of Net Cash Flow to the total of:  principal, interest, and required Mezzanine Financing or Hard Preferred Equity payments. on the trailing 12-month period from the most recent supportable actual operations per the Borrower’sBorrower’sPerson who is the obligor per the Note. PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). financial statements.
  • Ensure actual DSCRDSCROn an annual basis or any specified period, the ratio of Net Cash Flow to the total of:  principal, interest, and required Mezzanine Financing or Hard Preferred Equity payments. meets the minimum required DSCRDSCROn an annual basis or any specified period, the ratio of Net Cash Flow to the total of:  principal, interest, and required Mezzanine Financing or Hard Preferred Equity payments. for a fixed rate Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. at the same Pricing and Underwriting TierPricing and Underwriting TierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). as the original ARM LoanARM LoanMortgage Loan with an interest rate that periodically adjusts based on an Index per the Note or Loan Documents. or SARM Loan.
  • Comply with the Loan Documentation RequirementsLoan Documentation RequirementsLoan Documents listed in Form 6000 applicable to the particular Mortgage Loan execution and/or product and features. (Form 6000).
702.04

Guaranty Fee and Servicing Fee

Requirements

You must calculate the Gross Note RateGross Note RateInterest rate stated in the Loan Documents. using the current Guaranty FeeGuaranty FeeFee retained by Fannie Mae for credit enhancing a Mortgage Loan or assuming credit risk on a Mortgage Loan, and which may be expressed as a percentage. and Servicing FeeServicing FeeFee a Servicer receives for collecting payments, managing operational procedures, and assuming your portion of credit risk for a Mortgage Loan, and which may be expressed as a percentage. for a fixed rate Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. in effect at Rate LockRate LockAgreement between you and the Investor containing the terms of the Lender-Arranged Sale or Multifamily Trading Desk trade of the Mortgage Loan and the MBS terms and conditions relating to the underlying MBS, if applicable, which may be documented via a recorded telephone conversation. .

702.05

Interest-Only

Requirements

If an interest-only ARM LoanARM LoanMortgage Loan with an interest rate that periodically adjusts based on an Index per the Note or Loan Documents. or SARM Loan converts during the interest-only period and the new loan term is less than the original term, you must ensure

  • the interest-only period does not carry over, and
  • fixed rate amortization begins immediately.

Guidance

If an interest-only ARM LoanARM LoanMortgage Loan with an interest rate that periodically adjusts based on an Index per the Note or Loan Documents. or SARM Loan converts during the interest-only period and the new loan term is greater than or equal to the original term, you may allow the remaining interest-only period to carry over to the fixed rate Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. .

702.06

Fixed Rate Amortization

Requirements

You must comply with the following table.

For ARM Loans and SARM Loans with... The fixed rate amortization term will be...
Full-term interest-only 360 months.
  • Partial interest-only or amortization,
  • a fixed rate term greater than or equal to the original ARM Loan or SARM Loan term, and
  • a most recent Property condition rating of 1 or 2
 360 months.
Other characteristics

equal to

 

  • the original ARM LoanARM LoanMortgage Loan with an interest rate that periodically adjusts based on an Index per the Note or Loan Documents. or SARM Loan amortization term (in months), minus
  • the number of monthly payments (P&IP&IPrincipal and interest or interest-only) since the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. .
702.07

Fixed Rate Debt Service Payments

Operating Procedures

To calculate the fixed rate monthly P&IP&IPrincipal and interest payments, you must:

  1. Determine the amount required to repay the Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. UPBUPBUnpaid Principal Balance .
  2. Divide the amount into equal monthly installments.
  3. Include interest accrued at the fixed rate over the amortization term perPart IV, Chapter 7: Variable Rate Conversions and Renewals, Section 702.06: Fixed Rate Amortization.
  4. Use a 30/360 interest accrual method, regardless of whether the Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. uses a 30/360 or an actual/360 interest accrual method.
702.08

Fixed Rate MBS Trade Premium

Requirements

For premiums on fixed rate MBSMBSMortgage-Backed Security trades, you must comply with the Pricing MemoPricing MemoApplicable DUS Pricing Memo or non-DUS Pricing Memo communicating pricing for various products and features. .

702.09

New Property Condition Assessment (PCA)

Requirements

For any non-MAH PropertyMAH PropertyProperty encumbered by a regulatory agreement, land use restriction agreement, extended use agreement, or similar restriction that limits rents that can be charged to tenants, or imposes income limits on tenants. , you must obtain a new full PCAPCAAssessment of the Property's physical condition and historical operation. per Form 4099 if the conversion extends the term of the fixed rate Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. beyond the original term of the ARM LoanARM LoanMortgage Loan with an interest rate that periodically adjusts based on an Index per the Note or Loan Documents. or SARM Loan.

You must obtain a full PCAPCAAssessment of the Property's physical condition and historical operation. every 5 years for an MAH PropertyMAH PropertyProperty encumbered by a regulatory agreement, land use restriction agreement, extended use agreement, or similar restriction that limits rents that can be charged to tenants, or imposes income limits on tenants. per Part V, Chapter 4: Asset Management: Loan Document Administration, Section 408.04E: New Property Condition Assessments.

You must obtain the PCAPCAAssessment of the Property's physical condition and historical operation. by the earlier of

  • the final Loan YearLoan YearPeriod beginning on the date of the Note and ending on the last day of the month that is 12 full months after the date of the Note, and each successive 12-month period thereafter. of the ARM LoanARM LoanMortgage Loan with an interest rate that periodically adjusts based on an Index per the Note or Loan Documents. or SARM Loan if it had not been converted, or
  • Loan YearLoan YearPeriod beginning on the date of the Note and ending on the last day of the month that is 12 full months after the date of the Note, and each successive 12-month period thereafter. 10.