Section 203

Refinance Risk Analysis

Requirements

You must:

  • Analyze the ability of the BorrowerBorrowerPerson who is the obligor under the Note. 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. .
  • Calculate the following:
    • 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: Property, Section 202 and the applicable products and features in Part III). for the first year following 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. Maturity DateMaturity DateDate all amounts due and owing under the Mortgage Loan become fully due and payable per the Loan Documents. (for example, using 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: Property, Section 202 and the applicable products and features in Part III). in year 11 for a 10-year Loan term); and
    • 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. , which is the maximum interest rate that could be supported based on the UPBUPBUnpaid Principal Balance 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. and 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: Property, Section 202 and the applicable products and features in Part III). for the first year following 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. Maturity DateMaturity DateDate all amounts due and owing under the Mortgage Loan become fully due and payable per the Loan Documents. .
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: Property, Section 202 and the applicable products and features in Part III). 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:

  • Year 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:  2%.
  • 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 property securing the Mortgage Loan and including the land (or Leasehold interest in land), Improvements, and personal property (as defined in 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 property securing the Mortgage Loan and including the land (or Leasehold interest in land), Improvements, and personal property (as defined in the Uniform Commercial Code). taxes at 2%. 

You must estimate the principal amount of a Choice Refinance LoanChoice Refinance LoanMortgage Loan refinancing a Portfolio Mortgage Loan using the streamlined underwriting requirement per Part III: Products and Features, Chapter 18. 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 Tier 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 Tier 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 property securing the Mortgage Loan and including the land (or Leasehold interest in land), Improvements, and personal property (as defined in 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: Property, Section 202 and the applicable products and features in Part III). 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 Tier 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: Property, Section 201. .
  • 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 property securing the Mortgage Loan and including the land (or Leasehold interest in land), Improvements, and personal property (as defined in 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: Property, Section 202 and the applicable products and features in Part III). 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 the primary decision maker of the Borrower (often the Key Principal or the Person Controlling the Key Principal). or the submarket,
  • PropertyPropertyMultifamily residential property securing the Mortgage Loan and including the land (or Leasehold interest in land), Improvements, and personal property (as defined in the Uniform Commercial Code). ’s characteristics, or
  • PropertyPropertyMultifamily residential property securing the Mortgage Loan and including the land (or Leasehold interest in land), Improvements, and personal property (as defined in 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 2% should not be used beyond year 4.
  • When improvements in market economic occupancy or sustained market rental rate increases are widely anticipated, growth trends above 2% may be supported.
  • Projections of income growth resulting from PropertyPropertyMultifamily residential property securing the Mortgage Loan and including the land (or Leasehold interest in land), Improvements, and personal property (as defined in the Uniform Commercial Code). renovations or improved operations should be limited to the first 3 years.
  • When a PropertyPropertyMultifamily residential property securing the Mortgage Loan and including the land (or Leasehold interest in land), Improvements, and personal property (as defined in 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 property securing the Mortgage Loan and including the land (or Leasehold interest in land), Improvements, and personal property (as defined in 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.