Chapter 12
| Section 1201 | |
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Requirements
A SARM Loan is an ARM LoanARM LoanMortgage Loan with an interest rate that periodically adjusts based on an Index per the Note or Loan Documents. with an external Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. .
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Product Description |
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Plan Numbers |
04932 - 30-Day Average SOFR30-Day Average SOFRCompounded average of SOFR over a specified interest period of 30 days. |
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Term |
5 to 10 years |
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Funding Type |
MBSMBSMortgage-Backed Security or Cash |
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Index |
30-Day Average SOFR30-Day Average SOFRCompounded average of SOFR over a specified interest period of 30 days. |
| Rate Change Date | Date the interest rate changes based on changes in the selected IndexIndexBasis for determining the Gross Note Rate of an ARM Loan, including any required alternative index that may be determined necessary by Fannie Mae because the Index is no longer widely accepted or has been replaced as the index for similar financial instruments. . |
| Index Look-Back Period | 1 Business DayBusiness DayAny day other than a Saturday, Sunday, day when Fannie Mae is closed, day when the Federal Reserve Bank of New York is closed, or for any MBS and required remittance withdrawal, day when the Federal Reserve Bank is closed in the district where any of the MBS funds are held. before the Rate Change Date. |
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Interest Rate Floor |
Must not be less than the combined
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| Lockout Period | 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. |
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Prepayment Availability |
After the lockout period, may be voluntarily prepaid per the selected prepayment option. |
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Minimum Loan Amount |
$25 million |
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Interest Rate |
Equals the
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Interest Rate Adjustment |
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Interest Rate Cap |
Required for the entire term of the SARM Loan. |
| Interest Accrual Method | Actual/360 |
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Amortization |
Amortizes with fixed monthly principal installments based on a calculated actual/360 fixed rate payment. |
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Conversion to Fixed Rate |
Permitted, with no prepayment penalty and minimal re-underwriting, after the lockout period and before the "open period" (typically the last day of the 4th month preceding the end of 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. term). |
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Rate Lock |
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| Section 1202 | |
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Requirements
You must calculate the minimum Underwritten DSCRUnderwritten DSCRRatio of Underwritten Net Cash Flow to the annual debt service for a Mortgage Loan amount based on a level debt service payment with the applicable amortization, and calculated per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis, as adjusted for the applicable products and… based on an amortizing debt service constant.
| Minimum Underwritten DSCR | |
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Variable Underwriting Rate |
Equals:
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Debt Service Constant |
Equals
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You must ensure that the maximum SARM Loan amount is the lowest of the amount:
- calculated applying the applicable minimum 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.
per Form 4660 for both the
- Variable Underwriting RateVariable Underwriting RateRate for Structured ARM Mortgage Loans per Part III, Chapter 12: Structured Adjustable Rate Mortgage (SARM) Loans, Section 1202: Underwriting. for the adjustable interest rate, and
- Fixed Rate Test described in the Form 4660;
- calculated using the applicable maximum LTVLTVRatio of the actual aggregate UPB of the Mortgage Loan, plus any Pre-Existing Mortgage Loans, plus any Hard Preferred Equity, plus any Mezzanine Financing, to the value of the Property, expressed as a percentage. Ratio per Form 4660;
- calculated using the minimum Cap Strike RateCap Strike RateMaximum specified Index interest rate that will trigger a payment obligation by the Interest Rate Cap provider. , if set by Fannie Mae; and
- you determined is appropriate.
You must use the Fixed Rate Test interest rate to determine the UPBUPBUnpaid Principal Balance for the refinance risk analysis per Part II, Chapter 2: Valuation and Income, Section 203: Refinance Risk Analysis.
Guidance
The amortization used to underwrite the SARM Loan is different than the actual SARM Loan amortization schedule, which uses fixed monthly principal installments.
| Section 1203 | |
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Requirements
You must amortize SARM Loans on a straight line basis over the total loan term. The amount of amortization due during 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. term is the same amount that would be due, in total, for a comparable fixed rate loan. When you calculate the amortization due, you must consider
- the loan term,
- amortization schedule,
- any interest only period, and
- the Pricing and Underwriting TierPricing and Underwriting TierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). .
To calculate SARM Loan amortization, you must use fixed rate pricing with an interest rate equal to:
- an indicative MBSMBSMortgage-Backed Security investor yield; plus
- the lower of:
- the lowest 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. in the Pricing MemoPricing MemoApplicable DUS Pricing Memo or non-DUS Pricing Memo communicating pricing for various products and features. for a hypothetical actual/360 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 the same loan term and Pricing and Underwriting TierPricing and Underwriting TierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). as the SARM Loan; or
- the 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. quoted by the Deal TeamDeal TeamTeam responsible for reviewing Pre-Review Mortgage Loans, waivers, etc. 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. when you request pricing for the SARM Loan.
1. You must obtain quotes for a hypothetical actual/360 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. .
| For example, for a SARM Loan with a 10-year loan term... | |
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| Guaranty Fee quoted by Fannie Mae | 0.95% |
| Servicing Fee quoted by Fannie Mae | + 0.55% |
| US Treasury and Investor spread (quoted by Fannie Mae or Third Party MBS Investor) | + 4.00% |
| Gross Note Rate | = 5.50% |
You must use the same 5.50% annual interest rate to calculate the amortization for the 10-year SARM Loan.
2. You must calculate the fixed monthly principal installment required over the term of the SARM Loan following these steps:
Step 1: Using an actual/360 interest accrual method, calculate the aggregate amortization amount that would be collected over the term of the SARM Loan based on the:
- principal amount of the SARM Loan;
- lowest applicable interest rate for a hypothetical actual/360 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 the same loan term, and Pricing and Underwriting TierPricing and Underwriting TierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). as the SARM Loan, rounded to 3 decimal places; and
- required amortization period.
Step 2: Divide the aggregate amortization amount determined in Step 1 by the number of amortizing monthly installments in the SARM Loan term. For example, the number of monthly installments would be:
- 60, for a 5-year amortizing 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. ;
- 84, for a 7-year amortizing 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. ;
- 120, for a 10-year amortizing 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. ; or
- 108, for a 10-year 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 1 year of interest-only.
The result is the fixed monthly principal installment.
Example: Assume a 10-year TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). 2 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
- 5.500% per annum Gross Note RateGross Note RateInterest rate stated in the Loan Documents. ,
- 360-month amortization period, and
- $25 million loan amount.
Calculate the fixed monthly principal installment as follows:
Step 1: Calculate the aggregate principal amortization amount that would be collected over the term of 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. if it had a fixed rate.
Estimate the month and year in which the first full monthly loan payment would be made, based on an actual/360 amortization schedule. The total amount of amortization depends on both
- the number of days (i.e., 28, 29, 30, or 31) in the month prior to each loan payment date, and
- when the next leap year occurs.
Assuming
- a SARM Loan amount of $25 million,
- a 30-year amortization term,
- a debt service constant calculated using the Gross Note RateGross Note RateInterest rate stated in the Loan Documents. of 5.500% (6.8134680% debt service constant),
- an actual/360 interest accrual method,
- an issue date of December 1, 2018, and
- a first loan payment date of January 1, 2019,
the aggregate amount allocated to principal over 120 payments is $4,114,494.17.
Step 2: Calculate the fixed monthly principal installment by dividing the aggregate amortization amount by the total number of amortizing payments during the SARM Loan term.
| Calculate the fixed monthly principal installment... | |
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| Aggregate amortization | $4,114,494.17 |
| Divided by total payments | 120 |
| Equals fixed monthly principal | $34,287.45 |
| Section 1204 | |
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| 1204.01 | |
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Requirements
The following table describes various situations and the applicable prepayment provisions; see Part V, Chapter 2: Reporting and Remitting, Section 213: Prepayment Premium Sharing for Prepayment PremiumPrepayment PremiumFor a Mortgage Loan prepayment, amount the Borrower must pay in addition to the prepaid principal and accrued interest per the Loan Documents. calculations and sharing between you and Fannie Mae.
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Situation |
Prepayment Provisions |
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Borrower attempts to make a voluntary prepayment during the lockout period. |
BorrowerBorrowerPerson who is the obligor per the Note. may not make a voluntary prepayment during the lockout period. |
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SARM Loan is accelerated during the prepayment lockout period. |
BorrowerBorrowerPerson who is the obligor per the Note. owes a 5% Prepayment PremiumPrepayment PremiumFor a Mortgage Loan prepayment, amount the Borrower must pay in addition to the prepaid principal and accrued interest per the Loan Documents. . |
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Borrower makes a prepayment sometime after the lockout period and before the "open period" (typically 3 months before Maturity Date) for any reason other than a casualty or condemnation. |
BorrowerBorrowerPerson who is the obligor per the Note. owes a Prepayment PremiumPrepayment PremiumFor a Mortgage Loan prepayment, amount the Borrower must pay in addition to the prepaid principal and accrued interest per the Loan Documents. . |
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SARM Loan converts to a fixed rate Mortgage Loan. |
BorrowerBorrowerPerson who is the obligor per the Note. does not owe a Prepayment PremiumPrepayment PremiumFor a Mortgage Loan prepayment, amount the Borrower must pay in addition to the prepaid principal and accrued interest per the Loan Documents. . |
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Borrower makes a prepayment during the "open period" (typically 3 months before the Maturity Date). |
BorrowerBorrowerPerson who is the obligor per the Note. does not owe a Prepayment PremiumPrepayment PremiumFor a Mortgage Loan prepayment, amount the Borrower must pay in addition to the prepaid principal and accrued interest per the Loan Documents. . |
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Borrower makes a prepayment due to casualty or condemnation. |
BorrowerBorrowerPerson who is the obligor per the Note. does not owe a Prepayment PremiumPrepayment PremiumFor a Mortgage Loan prepayment, amount the Borrower must pay in addition to the prepaid principal and accrued interest per the Loan Documents. . |
Requirements
For a voluntary prepayment after the stated lockout period using Prepayment Option 1, you must use Schedule 4 of the Multifamily Loan and Security Agreement - Prepayment Premium Schedule (Graduated Prepayment Premium – ARM, SARM) (Form 6104.10) with the applicable Prepayment PremiumPrepayment PremiumFor a Mortgage Loan prepayment, amount the Borrower must pay in addition to the prepaid principal and accrued interest per the Loan Documents. percentage listed in this table.
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Loan Year |
5-Year Term |
7-Year Term |
10-Year Term |
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1 (Locked Out)1 |
N/A |
N/A |
N/A |
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2 |
4% |
4% |
4% |
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3 |
3% |
3% |
3% |
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4 |
2% |
2% |
2% |
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5 |
1% |
1% |
1% |
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6 |
N/A |
1% |
1% |
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7 |
N/A |
1% |
1% |
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8 |
N/A |
N/A |
1% |
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9 |
N/A |
N/A |
1% |
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10 |
N/A |
N/A |
1% |
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1 During the lockout period, the Borrower may not voluntarily prepay the SARM Loan. If the SARM Loan is accelerated during the lockout period, the Borrower owes a 5% Prepayment Premium. |
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Requirements
For a voluntary prepayment after the stated lockout period using Prepayment Option 2, you must use Schedule 4 to Multifamily Loan and Security Agreement (Prepayment Premium Schedule-1% Prepayment Premium – ARM, SARM)(Form 6104.11) to document the required 1% Prepayment PremiumPrepayment PremiumFor a Mortgage Loan prepayment, amount the Borrower must pay in addition to the prepaid principal and accrued interest per the Loan Documents. .
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Loan Year |
5-Year Term |
7-Year Term |
10-Year Term |
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1 (Locked Out)1 |
N/A |
N/A |
N/A |
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2 |
1% |
1% |
1% |
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3 |
1% |
1% |
1% |
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4 |
1% |
1% |
1% |
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5 |
1% |
1% |
1% |
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6 |
N/A |
1% |
1% |
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7 |
N/A |
1% |
1% |
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8 |
N/A |
N/A |
1% |
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9 |
N/A |
N/A |
1% |
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10 |
N/A |
N/A |
1% |
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1 During the lockout period, the Borrower may not voluntarily prepay the SARM Loan. If the SARM Loan is accelerated during the lockout period, the Borrower owes a 5% Prepayment Premium. |
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| Section 1205 | |
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Requirements
| Description | |
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Interest Rate Cap |
BorrowerBorrowerPerson who is the obligor per the Note. must purchase a third-party Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. . |
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Interest Rate Cap Provider |
BorrowerBorrowerPerson who is the obligor per the Note. must only obtain bids from providers approved by Fannie Mae as listed on https://multifamily.fanniemae.com. |
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Interest Rate Cap Documentation |
Must be on forms that are acceptable to Fannie Mae. |
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Minimum Interest Rate Cap Term |
5 years. The BorrowerBorrowerPerson who is the obligor per the Note. must keep an Interest Rate Cap AgreementInterest Rate Cap AgreementContract setting forth the terms and conditions of an Interest Rate Cap, Hedge, or Swap. in place continually until the earlier of the
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Replacement Cap |
You must ensure that the BorrowerBorrowerPerson who is the obligor per the Note. purchases a replacement cap if the Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. term expires before the conversion or Maturity DateMaturity DateDate all Mortgage Loan amounts become fully due and payable per the Loan Documents. of the SARM Loan. |
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Cap Cost Factor |
Equals the cost of a replacement cap divided by the initial cap term. |
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Interest Rate Cap Reserves |
BorrowerBorrowerPerson who is the obligor per the Note. must fund a cash reserve sufficient to purchase a replacement cap if the Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. term expires before the Maturity DateMaturity DateDate all Mortgage Loan amounts become fully due and payable per the Loan Documents. of the SARM Loan. |
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Cap Contract Process and Documentation |
You must deliver all cap-related documentation to Fannie Mae, including the
Fannie Mae will engage outside counsel at your expense to review all cap-related documentation. |
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Initial Interest Rate Cap Notional Amount |
Notional amount of the initial Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. throughout its term must equal the original principal amount of the SARM Loan. |
Guidance
You may require the BorrowerBorrowerPerson who is the obligor per the Note. to:
- pay Fannie Mae's costs, including legal fees; and
- fund a reserve for the payment of these expenses.
| 1205.01 | |
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Requirements
If the initial Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. expires before the Maturity DateMaturity DateDate all Mortgage Loan amounts become fully due and payable per the Loan Documents. of the SARM Loan, you must ensure that:
- The BorrowerBorrowerPerson who is the obligor per the Note. purchases a replacement Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. to cover the remaining term.
- The notional amount of any replacement cap equals the outstanding principal balance of the SARM Loan when the replacement cap becomes effective, and continues throughout the term of the replacement cap.
- The term of the replacement cap equals the remaining term of the SARM Loan, or a shorter term if previously approved and documented in the Loan DocumentsLoan DocumentsAll Fannie Mae-approved documents evidencing, securing, or guaranteeing the Mortgage Loan. .
- The Cap Strike RateCap Strike RateMaximum specified Index interest rate that will trigger a payment obligation by the Interest Rate Cap provider. of the replacement cap is equal to or less than the Cap Strike RateCap Strike RateMaximum specified Index interest rate that will trigger a payment obligation by the Interest Rate Cap provider. at 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. origination (see Part III, Chapter 12: Structured Adjustable Rate Mortgage (SARM) Loans, Section 1205.02: Determining the Cap Strike Rate).
Guidance
The BorrowerBorrowerPerson who is the obligor per the Note. may purchase an Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. in advance if
- the initial cap goes into effect on the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. , and
- the replacement cap goes into effect on the Maturity DateMaturity DateDate all Mortgage Loan amounts become fully due and payable per the Loan Documents. of the initial cap.
| 1205.02 | |
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Requirements
You must determine the maximum Cap Strike RateCap Strike RateMaximum specified Index interest rate that will trigger a payment obligation by the Interest Rate Cap provider. . The sum of the following must not be greater than the rate (calculated using an underwritten debt service constant that includes amortization) that produces the minimum required Underwritten DSCRUnderwritten DSCRRatio of Underwritten Net Cash Flow to the annual debt service for a Mortgage Loan amount based on a level debt service payment with the applicable amortization, and calculated per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis, as adjusted for the applicable products and… for the Pricing and Underwriting TierPricing and Underwriting TierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). of the SARM Loan:
- Cap Strike RateCap Strike RateMaximum specified Index interest rate that will trigger a payment obligation by the Interest Rate Cap provider. ; plus
- 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. ; plus
- 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. ; plus
- InvestorInvestorMBS Investor for an MBS Mortgage Loan, or Fannie Mae for a Cash Mortgage Loan. spread; plus
- the higher of a cap cost factor (see Part III, Chapter 12: Structured Adjustable Rate Mortgage (SARM) Loans, Section 1205.03: Including the Cap Cost Factor in the Variable Underwriting Rate) or actual Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. escrow deposits, if an interest rate cap for the full term of 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. is not purchased at closing.
You must ensure that the Cap Strike RateCap Strike RateMaximum specified Index interest rate that will trigger a payment obligation by the Interest Rate Cap provider. at which the BorrowerBorrowerPerson who is the obligor per the Note. purchases any replacement cap is not greater than the Cap Strike RateCap Strike RateMaximum specified Index interest rate that will trigger a payment obligation by the Interest Rate Cap provider. at which the initial cap was purchased.
Guidance
If the BorrowerBorrowerPerson who is the obligor per the Note. purchases an Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. with a Cap Strike RateCap Strike RateMaximum specified Index interest rate that will trigger a payment obligation by the Interest Rate Cap provider. less than the maximum rate, then any replacement cap may still be purchased at a Cap Strike RateCap Strike RateMaximum specified Index interest rate that will trigger a payment obligation by the Interest Rate Cap provider. that is less than or equal to the maximum rate.
You may calculate the initial Cap Strike RateCap Strike RateMaximum specified Index interest rate that will trigger a payment obligation by the Interest Rate Cap provider. based on an interest-only underwritten debt service constant if the approved interest-only term is greater than or equal to the initial Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. term.
Requirements
When determining the Variable Underwriting RateVariable Underwriting RateRate for Structured ARM Mortgage Loans per Part III, Chapter 12: Structured Adjustable Rate Mortgage (SARM) Loans, Section 1202: Underwriting. used to calculate the minimum required Underwritten DSCRUnderwritten DSCRRatio of Underwritten Net Cash Flow to the annual debt service for a Mortgage Loan amount based on a level debt service payment with the applicable amortization, and calculated per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis, as adjusted for the applicable products and…, you must include a cap cost factor based on the term of the SARM Loan and the term of the initial Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. .
You do not need to include a cap cost factor if the term of the initial Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. equals the term of the SARM Loan.
You must ensure that the cap cost factor equals
- the estimated cost of the replacement cap (when the term of the initial cap expires), divided by
- the term of the initial cap.
For example, to calculate the cap cost factor assuming a 5-year Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. and 7-year SARM Loan term:
- You must include an annual cap cost factor in the Variable Underwriting RateVariable Underwriting RateRate for Structured ARM Mortgage Loans per Part III, Chapter 12: Structured Adjustable Rate Mortgage (SARM) Loans, Section 1202: Underwriting. .
- If the SARM Loan term is 7 years and an initial cap is purchased for a 5-year term, the cap cost factor equals the estimated cost of a replacement cap divided by 5 (the number of years of the initial interest rate term).
- The replacement cap has a 2-year term and a Cap Strike RateCap Strike RateMaximum specified Index interest rate that will trigger a payment obligation by the Interest Rate Cap provider. equal to that of the initial cap.
- If a 2-year Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. at the initial Cap Strike RateCap Strike RateMaximum specified Index interest rate that will trigger a payment obligation by the Interest Rate Cap provider. costs 20 basis points, you must divide 20 by 5, then add the result (4 basis points) to the Variable Underwriting RateVariable Underwriting RateRate for Structured ARM Mortgage Loans per Part III, Chapter 12: Structured Adjustable Rate Mortgage (SARM) Loans, Section 1202: Underwriting. .
Requirements
You must ensure that the BorrowerBorrowerPerson who is the obligor per the Note. has a cash reserve to purchase a replacement Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. if the term of the initial Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. is less than the term of the SARM Loan.
If the initial Interest Rate Cap AgreementInterest Rate Cap AgreementContract setting forth the terms and conditions of an Interest Rate Cap, Hedge, or Swap. has a term of 5 years, the BorrowerBorrowerPerson who is the obligor per the Note. must fund the cash reserve with each monthly 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. payment during the term.
If the initial cap has a term of more than 5 years, the Borrower’sBorrower’sPerson who is the obligor per the Note. monthly reserve payments for a replacement cap must start no later than 5 years before the existing cap expires.
You must calculate the monthly reserve payments for the first 6-month period using the estimated cost of the replacement Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. .
Guidance
Assuming that a 5-year Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. is initially purchased for a SARM Loan with a 10-year term, if
- the initial cap is purchased with a 6.50% Cap Strike RateCap Strike RateMaximum specified Index interest rate that will trigger a payment obligation by the Interest Rate Cap provider. , and
- the cost of a replacement 5-year cap with a 6.50% Cap Strike RateCap Strike RateMaximum specified Index interest rate that will trigger a payment obligation by the Interest Rate Cap provider. is $250,000,
- then the monthly reserve for the first 6-month period would be $4,166.67 ($250,000 cost ÷ 60 months).
1. Cap Provider Payment
The Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. provider must make a payment directly to you if, on the 1st day of the month corresponding with the monthly loan payment date, the 30-Day Average SOFR30-Day Average SOFRCompounded average of SOFR over a specified interest period of 30 days. IndexIndexBasis for determining the Gross Note Rate of an ARM Loan, including any required alternative index that may be determined necessary by Fannie Mae because the Index is no longer widely accepted or has been replaced as the index for similar financial instruments. exceeds the Cap Strike RateCap Strike RateMaximum specified Index interest rate that will trigger a payment obligation by the Interest Rate Cap provider. for a monthly settlement.
Only disburse a provider payment to the BorrowerBorrowerPerson who is the obligor per the Note. if
- there is no 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. default, and
- you have received all payments due under the NoteNoteInstrument evidencing a Mortgage Loan obligation, including Form 6010 series, any other Fannie Mae-approved note, and all applicable addenda, schedules, and exhibits. for that month.
2. Timing
The BorrowerBorrowerPerson who is the obligor per the Note. must accept a bid for the initial Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. in writing from a Fannie Mae approved provider before you DeliverDeliverSubmission of all correct, accurate, and certifiable documents, data, and information with all applicable documents properly completed, executed, and recorded as needed, and any deficiencies resolved to Fannie Mae’s satisfaction. the SARM Loan.
You must give Fannie Mae copies of all cap-related documentation when you deliver the SARM Loan.
3. Purchase Price
The BorrowerBorrowerPerson who is the obligor per the Note. must pay the entire purchase price for an Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. to the provider when the Interest Rate Cap AgreementInterest Rate Cap AgreementContract setting forth the terms and conditions of an Interest Rate Cap, Hedge, or Swap. is issued.
4. Pledge to Fannie Mae
The BorrowerBorrowerPerson who is the obligor per the Note. must execute the applicable Interest Rate Cap Reserve and Security Agreement (Form 6442 series) to pledge its interest in the Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. and any reserve to Fannie Mae, as additional collateral for the SARM Loan.