As first appeared in the Fall 2011 issue of CMBA Legal News:
Freddie Mac closed it fast – almost faster than a speeding bullet. What was it? A 3.97% multifamily loan.
Though some doubted it could be done, on September 1, 2011, as lender’s counsel we closed a Freddie Mac CME loan from application to recording in less than 30 days. It was a tribute to broker, borrower, borrower counsel, and lender’s in-house closing team — all rowing together, fast and coordinated. Most significant, it was a tribute to what Freddie Mac can do, and what we may expect of it during the last quarter of 2011. Expect the same from Fannie Mae.
The day before we closed, the Wall Street Journal reported that both Freddie Mac and Fannie Mae multifamily loan programs are well on a pace to exceed 2010 lending levels – both likely to fund more than $16 billion. Despite all headlines and a single Fitch rating, the multifamily product is getting strong support from the capital markets – and this at a time when investor support for CMBS has momentarily weakened.
Behind the industry news are the legal mechanics of closing Freddie Mac and Fannie Mae multifamily loans. Change has become a constant, and as lender’s counsel on Freddie Mac and Fannie Mae loans, we are required to quickly adapt to change.
Freddie Mac and Fannie Mae each have “Guides” for underwriting and closing multifamily loans. As closing lawyers on the lender’s side of the table, we are beholden to each agency’s Guide for every issue ranging from acceptable organizational structure of borrowers title, and other underwriting or closing issues. We are also working with new loan document templates – including a loan agreement as thick as any book on the closest book shelf — which Fannie Mae released June 1, 2011, and Freddie Mac released September 1, 2011. We rely on in-house counsel for each agency at times to assist in interpreting the Guide; and while we distance ourselves from authorship of the new loan document templates – good borrower counsel continue to raise issues which require agency lawyer input. However, in the case of Fannie Mae, in-house lawyers deep with experience have vacated offices (both voluntarily and involuntarily) in recent months including the lawyer architects of the new loan documents. While, great minds remain, good minds are gone, and there may be time delays in getting needed answers.
With respect to the new loan documents that Freddie Mac and Fannie Mae now require for closing, and the loan closing process, the legal realities are:
1. Freddie Mac and Fannie Mae loan closings in all respects have become CMBS-like.
2. There is little flexibility for borrower modifications to loan documents. A borrower who has a portfolio of properties and has obtained the same set of loan modifications on all its loans with either Freddie Mac of Fannie Mae, is not entitled to legacy modifications. Instead, only deal specific modifications will be considered. In the case of Fannie Mae, as closing counsel we have fairly strict limits of what may be modified without seeking Fannie Mae approval, what may be modified if approval will be granted, and what will not be modified at all. In the case of Freddie Mac, we cannot make or agree to any modification without the prior approval of Freddie Mac.
3. While Fannie Mae continues to require single asset entities (SAE) as borrowers, which tends towards a liberal approach to the requirements of a borrower’s organizational structure, Freddie Mac imposes a more restrictive single purpose entity (SPE) requirement, and if the loan is over $25,000,000, the equity holder must also be an SPE, which means double layering of SPEs.
4. Borrower counsel opinion letters for Fannie Mae remain fairly straight forward “organizational and due authorization” opinion letters unless substantive modifications to loan documents have been made in which case an “enforceability opinion” will be required. Conversely, Freddie Mac will require an enforceability opinion on all loans, and a non-consolidation opinion letter if the loan amount exceeds $25,000,000.
5. There is enhanced scrutiny by Freddie Mac and Fannie Mae of all title-related issues.
6. The “delivery process” (that is post-closing lender counsel’s delivery of loan documents to Freddie Mac and Fannie Mae in accordance with their respective policies), has required more focus and concentrated efffort by lender’s counsel.
Borrowers and their counsel need to understand that secondary market dynamics have changed the closing process of multifamily agency loans.