Section 1205

Interest Rate Caps

Requirements

Description

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. .

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.

Interest Rate Cap Documentation

Must be on forms that are acceptable to Fannie Mae.

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

 

  • effective date of any permitted conversion 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. , or
  • Maturity DateMaturity DateDate all amounts due and owing per the Mortgage Loan become fully due and payable per the Loan Documents. of the SARM Loan.

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 amounts due and owing per the Mortgage Loan become fully due and payable per the Loan Documents. of the SARM Loan.

Cap Cost Factor

Equals the cost of a replacement cap divided by the initial cap term.

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 amounts due and owing per the Mortgage Loan become fully due and payable per the Loan Documents. of the SARM Loan.

Cap Contract Process and Documentation

You must deliver all cap-related documentation to Fannie Mae, including the

 

  • Interest Rate Cap AgreementInterest Rate Cap AgreementContract setting forth the terms and conditions of an Interest Rate Cap, Hedge, or Swap. , and
  • Interest Rate Cap Reserve and Security Agreement (Form 6442).

Fannie Mae will engage outside counsel at your expense to review all cap-related documentation.

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

Replacement Interest Rate Cap

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 amounts due and owing per the Mortgage Loan 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 executed 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 amounts due and owing per the Mortgage Loan become fully due and payable per the Loan Documents. of the initial cap.
1205.02

Determining the Cap Strike Rate

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.

1205.03

Including the Cap Cost Factor in the Variable Underwriting Rate

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.

Operating Procedures

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. .
1205.04

Establishing Interest Rate Cap Reserves

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).
1205.05

Interest Rate Cap Contract Documentation and Delivery

Operating Procedures

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 Form 6442 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.