Tighter Fannie, Freddie Underwriting Unnerves Commercial Real Estate

Herrick Real Estate partner Neil Shapiro was quoted in the Commercial Observer in an article discussing how Fannie Mae and Freddie Mac plan tighter underwriting standards amid increased regulatory crackdowns on loan fraud, and how the commercial real estate industry is bracing for more hurdles when it comes to closing agency-backed financings.

Neil said that while combating commercial mortgage fraud is important, the multifamily borrower clients he represents have concerns around the creation of additional barriers to agency loans. He estimated that the tighter rules will add around 45 to 90 days of closing time for deals during the first six to nine months following the rules being put in place — at a time of already elongated deal closing timelines, and a time of distress for many multi-family loans due to higher interest rates.

"In the short term and maybe even in the intermediate term, it seems highly likely that these changes will result in fewer loans while they're working out the process and everyone is getting used to this, so the timing couldn't be worse in terms of impact. Borrowers will be suffering the consequences of having to learn the new process, and it’s going to be more highly scrutinized."

Neil also noted that the eventual scope of the new rules will determine the significance of their impact. He said potential new procedures and processes could also add weeks of extra time to a closing timelines, with agency lenders bulking up their own due diligence groups to tackle the changes.

With some firms effectively blacklisted by both GSEs, and Freddie Mac issuing a guide update this past April requiring additional documentation for lease audits to confirm tenant rental payments, the barriers placed on these firms give other brokers and agency lenders the opportunity to try to attract new business.

"I think that most borrowers in the short and intermediate term will look to institutions that will be perceived as the quality providers so that they’re not directed to this process," Neil said.

Read the full article in Commercial Observer. Access may require a subscription.