Section 203

Refinance Risk Analysis

Requirements

You must prepare an exit strategy analyzing the Borrower'sBorrower'sPerson who is the obligor per the Note. ability to refinance 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. in the year after the Maturity DateMaturity DateDate all amounts due and owing per the Mortgage Loan become fully due and payable per the Loan Documents. (e.g., use the projected NCFNCFOn an annual basis or any specified period, the total Net Operating Income, minus the full amount underwritten for Replacement Reserve expense, regardless of whether deposits will be made (per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis and the applicable products and… in year 11 for a 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 10-year term), by calculating a:

  • “reversion” cap rate, which is the expected capitalization rate that could be supported based on the projected NCFNCFOn an annual basis or any specified period, the total Net Operating Income, minus the full amount underwritten for Replacement Reserve expense, regardless of whether deposits will be made (per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis and the applicable products and…; and
  • Refinance Interest RateRefinance Interest RateMaximum interest rate that could be supported based on the UPB, required DSCR, and projected Net Cash Flow for the first year following the Maturity Date. .
203.01

Base Assumptions

Requirements

You must derive proforma NCFNCFOn an annual basis or any specified period, the total Net Operating Income, minus the full amount underwritten for Replacement Reserve expense, regardless of whether deposits will be made (per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis and the applicable products and… for 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. as follows:

  • 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. 1:  Underwritten NCFUnderwritten NCFNet Cash Flow as adjusted by the Lender per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis and the applicable products and features in Part III. .
  • Income Growth Rate for subsequent Loan YearsLoan YearsPeriod 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. , use: 
    • 2% for a
      • Student Housing PropertyStudent Housing PropertyA multifamily residential rental property in which 40% or more, but less than 80%, of the units are leased to either undergraduate or graduate students. , 
      • Dedicated Student Housing PropertyDedicated Student Housing PropertyMultifamily rental Property in which 80% or more of the units are leased to undergraduate or graduate students. ,
      • Seniors Housing PropertySeniors Housing PropertyMultifamily residential rental property with any combination of Independent Living, Assisted Living, Alzheimer’s/Dementia Care, or Skilled Nursing units. ,
      • Multifamily Affordable Housing PropertyMultifamily Affordable Housing 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. ,
      • Structured Transaction, and
      • 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. secured by multiple PropertiesPropertiesMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). ; or
    • for all other Mortgage LoansMortgage LoansMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. , use the rent growth published in DUS GatewayDUS GatewayMultifamily pre-acquisition system including deal registration, Pre-Review and/or waiver tracking, decision records, or any successor systems. for the Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). submarket.
  • Economic Vacancy:  hold underwritten economic vacancy level for 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.
  • Expense Growth Rate: 
    • 3%; and
    • for real estate taxes,
      • 3% (or 2% for California acquisitions), or
      • increase PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). taxes if an abatement expires or taxes are expected to rise during the loan term followed by 3% trending, or
      • for refinance transactions in California only, no trending is required until the year in which the actual tax bill would surpass the underwritten taxes, then trend PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). taxes at 2%. 

You must estimate 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 at the Maturity DateMaturity DateDate all amounts due and owing per the Mortgage Loan become fully due and payable per the Loan Documents.  as follows:

  • Amortization:  30 years or the amortization for the applicable product or features.
  • 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. :  The minimum TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). 2 DSCR for the applicable product or features, per Form 4660Form 4660Multifamily Underwriting Standards identifying Pre-Review Mortgage Loans and containing the minimum underwriting requirements (e.g., debt service coverage ratio, loan to value ratio, interest only, underwriting floors, etc.) for all Mortgage Loans. .
  • 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.  :  The maximum TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). 2 LTV for the applicable product or features, per Form 4660Form 4660Multifamily Underwriting Standards identifying Pre-Review Mortgage Loans and containing the minimum underwriting requirements (e.g., debt service coverage ratio, loan to value ratio, interest only, underwriting floors, etc.) for all Mortgage Loans. .

Guidance

Since these base assumptions are indicative only, you may use more conservative estimates if warranted by circumstances particular to the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). .

In most cases, the combined effect of principal amortization and NCFNCFOn an annual basis or any specified period, the total Net Operating Income, minus the full amount underwritten for Replacement Reserve expense, regardless of whether deposits will be made (per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis and the applicable products and… growth should result in a refinancing at the 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. and 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.  for TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). 2, using a reasonable interest rate.

You should consider the following refinance parameters:

  • A target reversion capitalization rate at least 2.0% greater than the initial capitalization rate used for determining Underwriting ValueUnderwriting ValueValue of the Property determined by the Lender to size the Mortgage Loan per Part II, Chapter 2: Valuation and Income, Section 201: Market and Valuation. .
  • A Refinance Interest RateRefinance Interest RateMaximum interest rate that could be supported based on the UPB, required DSCR, and projected Net Cash Flow for the first year following the Maturity Date. at least 2.25% greater than the current 10-year Amortizing Nationwide Underwriting Floor rate, per Form 4660Form 4660Multifamily Underwriting Standards identifying Pre-Review Mortgage Loans and containing the minimum underwriting requirements (e.g., debt service coverage ratio, loan to value ratio, interest only, underwriting floors, etc.) for all Mortgage Loans. .
203.02

Alternative Assumptions

Guidance

If you determine that the base assumptions do not appropriately estimate the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). ’s NCFNCFOn an annual basis or any specified period, the total Net Operating Income, minus the full amount underwritten for Replacement Reserve expense, regardless of whether deposits will be made (per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis and the applicable products and… over 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, you may undertake an alternative risk analysis using assumptions that deviate from the base assumptions.

You should specifically identify and support any deviations with reliable evidence and historical and projected market trends.  You should state your conclusions and discuss any mitigating factors, such as the

  • strength of the SponsorSponsorPrincipal equity owner and/or primary decision maker of the Borrower (often the Key Principal or the Person Controlling the Key Principal). or the submarket,
  • PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). ’s characteristics, or
  • PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). ’s operating history and performance.

Income and Expense Growth Rates:  Income and expense trending should incorporate projected market rates based upon general economic, market, and submarket conditions from reliable sources.  For example:

  • Rents on recently signed leases should only be used for estimating income growth in years 1 and 2.
  • Rent projections greater than the Base Assumption Income Growth Rate should not be used beyond 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. 4.
  • When improvements in market economic occupancy or sustained market rental rate increases are widely anticipated, growth trends above the Base Assumption Income Growth Rate may be supported.
  • Projections of income growth resulting from PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). renovations or improved operations should be limited to the first 3 years.
  • When a PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). is subject to a scheduled reassessment or a tax abatement phase-in period, tax expense should be adjusted appropriately.
  • When you expect to incur costs for tenant improvement allowances and leasing commissions, or to realize rent increases from the rollover of tenants, commercial income should be adjusted appropriately.

Economic Vacancy:  PropertiesPropertiesMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). in submarkets that are experiencing depressed economic conditions due to temporary demand or supply issues may be modeled to reflect the economic vacancy projected by a reliable source.  If you expect a decrease in vacancy to achieve stabilized levels, you should consider

  • the anticipated timing, and
  • effect of decreased economic vacancy on projected income growth over the same time period.