For both Fannie Mae and Freddie Mac, 2014 was a banner year in terms of loan origination. In terms of total volume of loan dollars, the two government-sponsored enterprises (GSE) were neck and neck to the finish, with Fannie Mae providing $28.9 billion in financing to the multifamily market during the year and Freddie Mac providing $28.3 billion. In the past year, Nova prepared 450 Fannie Mae-scope Physical Needs Assessments and 360 Freddie Mac-scope Property Condition Reports, as well as commensurate numbers of environmental site assessments.
In terms of environmental and physical due diligence requirements, while both agencies issue minor updates to their work scopes every several months, both agencies have made significant modifications to their required environmental, physical and seismic report work scopes since the beginning of 2013.
While much of the assessment information required by each agency is similar (each based on respective ASTM base scopes), essential scope items remain unique to each execution, and the format and presentation of the information certainly remain unique to each agency.
Sections 316-318 of the Fannie Mae Multifamily Selling and Servicing Guide contain the scope requirements for what has recently been renamed the Multifamily Property Condition Assessment (MPCA), while ESA requirements are contained in Section 320 and seismic assessment requirements in Section 321. Itemized scope requirements for MCPA are included in the Instructions for Performing a Multifamily Property Condition Assessment (Form 4099). This document, most recently amended in October 2014, provides specific guidance to the consultant preparing the MPCA, as well as the forms and tables to be included in and attached to the MPCA.
Specific to a MPCA, while a number of changes have been made to the Fannie Mae Multifamily Selling and Servicing Guide (Part IIIA, Base Underwriting Requirements, Section 316), the most recent version also issued in October 2014, has seen the addition of revised immediate needs categories, energy efficiency data, revised seismic report criteria, required consultant qualifications, and supplemental modules for specific property types (i.e., student housing or manufactured housing) or mixed-use property types, among others.
The most significant revisions to Freddie Mac’s PCR work scope (Seller/Servicer Guide/Chs. 12-15: Appraisal, Environmental and Engineering Requirements/Chapter 14: Property Condition Report Requirements Sections 14.1 through 14.8) took effect January 1, 2013. Similar to the Fannie Mae revisions, the Freddie Mac revisions included revised immediate needs categories, revised seismic report criteria, as well as threshold qualifications for consultants. Significant operative changes to Forms 1105 (PCR) and 1103 (ESA) were issued at that time and have required close attention to be paid by both consultants and lenders.
And, regardless of construction date, consultants should remember that Freddie Mac requires operations and maintenance (O&M) plans for suspect asbestos-containing materials, moisture management plans for most properties, as well as O&M plans for polychlorinated biphenyls (PCBs) in systems with undocumented histories of hydraulic or insulating fluids.
Let Nova Help
A number of clients, including loan originators and underwriters alike, have approached Nova in recent months for guidance or interpretation of these revised due diligence requirements. We appreciate the opportunity to have these conversations which clear up misunderstandings and answer questions, preferably at the time of loan application, rather than in the days immediately prior to submittal of Nova’s reports to the selected agency.
As far as ensuring that due diligence assessments for these lending programs go smoothly here at Nova, we’ve refocused our efforts on our project flow and have recruited our lending clients to assist. To that end, we continue to emphasize the importance of our receipt of all applicable background documents upon project initiation. Receipt of recent and projected capital improvement plans, budgets and actual repair bids, ALTA surveys, as well as historical environmental reports, are invaluable at the beginning of the project. Helping us emphasize to borrowers and property managers the importance of pre-survey questionnaire completion assists in rounding out valuable information, providing working knowledge of historical property maintenance and repair efforts as well as clarification of building components not observable during the site visit.
Timely review of these documents will eliminate delays and reduce the number of report revisions as loan closing approaches. Prior to rate lock, interest rates fluctuate and borrowers often change their mind regarding loan term options. Forwarding the most likely term scenario (resulting in nailing down a capital reserve schedule) and updating the consultant with adjusted number of years the loan terms, prior to submittal of the report to the lender, is another way to ensure a smooth deliverable to the agency.
Last but not least, determination of which agency will handle the execution is critical. We understand that, especially in property acquisition situations, quick physical access to the property and determination of immediate needs and capital reserve costs are the most urgent answers requested of lenders by borrowers. As the work scopes and required submittal forms required by each agency have continued to diverge, conversion of ESA and PCR reports from one execution to the other is more time consuming now than it has been historically.
With proper and full information in hand, Nova is able to get these deals scoped and completed in 2-3 weeks, and often sooner, if needed. We’re able to provide a preliminary snapshot of site conditions and cost expectations for the lender and borrower soon after our site visit. We have a full team of Fannie – and Freddie – qualified field managers across the country, and we keep a close eye on required credentials and certifications. We realize that our lending clients are watched closely by the agencies, and in turn, our clients rely on us to ensure that we’re fully equipped to get these projects done in accordance with all educational and professional experience requirements. We recognize the sometimes differing concerns of both production teams and underwriting teams, but also recognize their common desire to get the deal done and treat their borrower fairly with responsive action backed by technical expertise.
We look forward to working with your team.
Vice President, Capital Markets Group
Nova Consulting Group Inc.