U.S. Department of Housing and Urban Development
 

Office of Policy Development and Research
 

Study of Multifamily Underwriting and the GSEs’
 

Role in the Multifamily Market
 

Final Report 

August 2001 
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Study of Multifamily Underwriting and the GSEs’ Role in the
 

Multifamily Market 

Prepared For 

U.S. Department of Housing and Urban Development
 

Office of Policy Development and Research
 

Prepared By 

Kimberly Burnett
 

Linda B. Fosburg
 

Abt Associates Inc.
 

August 2001
 
 

Acknowledgements 

This report was prepared by Abt Associates Inc. under a contract with the U.S. 

Department of Housing and Urban Development. The Department acknowledges with 

thanks the work of the study’s authors, Kimberly Burnett and Linda Fosburg, as well as 

the contributions of Abt Associates staff members Carissa Climaco, Laura Dueñes, and 

Meryl Finkel, who participated in the work; James Wallace and Jill Khadduri, who 

reviewed manuscripts of the study; and a consultant, Richard Ritter, who contributed the 

legal analysis in chapter 5. Thanks are also extended to staff members from Fannie Mae 

and Freddie Mac who provided information on their multifamily activities, to the lenders 

and other industry experts who participated in the interviews reported in chapter 7, and to 

Dr. William Segal, who served as the Department's Government Technical Monitor for 

the study and made valuable substantive contributions based on his expertise in 

multifamily housing finance. 

The Department routinely discloses past or current relationships that authors of its funded 

studies have had with Fannie Mae or Freddie Mac. Kimberly Burnett disclosed that she 

was briefly employed by Freddie Mac prior to joining Abt Associates. Linda Fosburg 

disclosed that she previously served as project director in a Freddie Mac-funded study 

and as a researcher in a Fannie Mae-funded study, both while she was employed by Abt 

Associates. 

The contents of this report are the views of the contractor and do not necessarily reflect 

the views or policies of the U.S. Department of Housing and Urban Development or the 

U.S. Government. 
Foreword 

During the past twenty years the secondary multifamily mortgage market has expanded 

from a largely local market to a broad national market. During this period, and 

particularly since the passage of the Federal Housing Enterprises Financial Safety and 

Soundness Act of 1992, Fannie Mae and Freddie Mac, the two large Governmentsponsored enterprises that function in this market, have increased their involvement in 

multifamily housing finance. The efficient functioning of this market is important from a 

public policy perspective, because of the major role of multifamily properties in the 

provision of affordable housing in the United States. 

In the 1992 legislation Congress assigned to the Department of Housing and Urban 

Development two important regulatory roles that bear on Fannie Mae’s and Freddie 

Mac’s activities in the secondary multifamily market, related to the magnitude of their 

purchases of mortgages for lower-income households and their conformance to fair 

lending standards. The Department is required to establish numerical affordable housing 

goals for the two enterprises and periodically to review and comment on the underwriting 

and appraisal guidelines of each enterprise to ensure their consistency with fair lending 

laws. 

This report supports the Department’s fulfillment of both of these statutory mandates. It 

provides an analysis of credit availability for affordable multifamily properties, credit 

gaps in segments of the market, and Fannie Mae and Freddie Mac’s position in the 

market. In addition, it discusses the applicability of fair lending laws to the multifamily 

activities of the two enterprises, and it makes recommendations for the Department’s 

regulatory approach. It should be of value to policy-makers, researchers, financial 

institutions, and members of the general public interested in multifamily housing finance 

and the role of the Government-sponsored housing enterprises. 

Lawrence L. Thompson 

General Deputy Assistant Secretary for Policy

 Development and Research 
Table of Contents
 

Executive Summary................................................................................................................ x
 

Overview of the GSEs’ and HUD’s Responsibilities...................................................... x
 

Study Approach.............................................................................................................xii
 

Findings........................................................................................................................xiii
 

The GSEs’ Leadership ...................................................................................xiii
 

Affordable Lending........................................................................................ xiv
 

Credit Gaps ..................................................................................................... xv
 

Fair Lending................................................................................................... xvi
 

Recommendations ......................................................................................................xviii
 

Chapter One – Project Description and Background ......................................................... 1
 

1.1 The GSEs’ and HUD’s Responsibilities................................................................ 2
 

1.2 GSEs’ Response to HUD Housing Goals.............................................................. 5
 

1.3	 Policy and Analytic Issues..................................................................................... 9
 

Policy Issues and Questions.............................................................................. 9
 

Analytic Issues................................................................................................ 11
 

1.4 Overview of the Remainder of the Report .......................................................... 13
 

Chapter Two – Overview of Multifamily Mortgage Market ............................................ 15
 

2.1	 Developments in the Multifamily Mortgage Market Since the Late 1970s ........ 15
 

Federal Reserve Board Actions: October 6, 1979 .......................................... 15
 

Economic Recovery Act of 1981.................................................................... 16
 

Tax Reform Act of 1986................................................................................. 16
 

Financial Institutions Reform, Recovery and Enforcement Act of 1989........ 17
 

Creation of the Resolution Trust Corporation ................................................ 18
 

Commercial Real Estate Recession ................................................................ 19
 

Commercial Real Estate Recovery through the Present ................................. 20
 

2.2 Key Types of Mortgage Lenders and Secondary Market Players....................... 22
 

Chapter Three – GSEs’ Underwriting Requirements, Policies, and Programs.............. 27
 

3.1 Underwriting Requirements and Standards......................................................... 28
 

3.2 GSEs’ Appraisal Requirements and Standards ................................................... 33
 

3.3 Comparison of GSEs’ Multifamily Mortgage Programs..................................... 35
 

Chapter Four – The State of the Multifamily Primary and Secondary Markets ........... 41
 

4.1	 Multifamily Losses by the GSEs......................................................................... 41
 

Fannie Mae...................................................................................................... 42
 

Freddie Mac .................................................................................................... 43
 

4.2 Special Challenges in Multifamily Financing ..................................................... 44
 

4.3 Volatility in the Multifamily Market................................................................... 47
 
Chapter Five – Policy Issues in the Multifamily Market .................................................. 53
 

5.1 Affordable Lending ............................................................................................. 53
 

5.2	 Credit Gaps.......................................................................................................... 55
 

Literature on the Existence of Credit Gaps..................................................... 55
 

Small Multifamily........................................................................................... 58
 

Multifamily Properties with Significant Rehabilitation Needs....................... 60
 

Housing for Seniors ........................................................................................ 61
 

5.3	 Fair Lending ........................................................................................................ 61
 

Fair Lending Regulation ................................................................................. 61
 

Factors Relating to Older Properties............................................................... 68
 

Factors Relating to Market Strength............................................................... 70
 

GSE Performance in Segments of the Multifamily Market............................ 71
 

Chapter Six – Background on Lender Interview Sites and GSE Activity....................... 77
 

6.1 Atlanta ................................................................................................................. 81
 

6.2 Boston.................................................................................................................. 82
 

6.3 Chicago................................................................................................................ 83
 

6.4 Dallas................................................................................................................... 85
 

Chapter Seven – Findings from Interviews with National Experts and Multifamily
 

Lenders in Four Markets ..................................................................................................... 95
 

7.1 Multifamily Market Segments and Availability of Loans on Affordable
 

Properties............................................................................................................. 96
 

Market Segments ............................................................................................ 96
 

GSE Leadership in the Multifamily Market ................................................. 102
 

Inferences on Multifamily Market Segments ............................................... 103
 

7.2	 GSE Underwriting Requirements: Impacts on Credit Availability................... 104
 

Any Presence of Credit Gaps........................................................................ 105
 

Presence of Credit Gaps by Locality............................................................. 106
 

Flexibility in GSEs’ Underwriting Requirements......................................... 107
 

Inflexibilities in GSEs’ Underwriting Requirements.................................... 111
 

Flexibilities in the GSEs’ Competitors’ Underwriting Requirements .......... 112
 

Inferences on Credit Availability.................................................................. 114
 

7.3 GSE Underwriting and Appraisal Standards: Fair Lending Issues ................... 116
 

Chapter Eight – Monitoring Recommendations.............................................................. 117
 

8.1 Fair Lending Monitoring ................................................................................... 117
 

8.2 Pilot Programs ................................................................................................... 120
 

8.3 Small Multifamily Properties ............................................................................ 120
 
Appendix A – Bibliography 

Appendix B – Research Methodology 

Appendix C – Summaries of Fannie Mae’s and Freddie Mac’s Multifamily Programs 

and Guidelines 

Appendix D – Features of Selected Multifamily Finance Programs 

Appendix E – Acronyms 
 

Executive Summary 

The U.S. Department of Housing and Urban Development (HUD) contracted with Abt 

Associates Inc. to conduct an exploratory qualitative study to examine the multifamily 

underwriting requirements and standards of the Government Sponsored Enterprises 

(GSEs)—Fannie Mae and Freddie Mac—and their role in the conventional secondary 

multifamily mortgage market.1 

The purpose of this study is to aid HUD in understanding the significance of the GSEs’ 

underwriting practices in relation to three issues being examined by the Department: 

•	 The availability of loans on properties affordable to lower income people and in 

underserved areas; 

•	 GSE capability to help fill identified credit gaps in the affordable segment of the 

multifamily mortgage market; and 

•	 The possibility that the GSEs’ underwriting standards or practices could have a 

disproportionate adverse impact2

 on one or more groups statutorily protected 

against discrimination, or that the GSEs’ underwriting standards or practices 

involve consideration of the age or location of the dwelling or the age of the 

neighborhood or census tract where the dwellings is located in a manner that has a 

discriminatory effect. 

This study addresses the role of the GSEs in providing funding for affordable multifamily 

properties and the development of liquidity in the multifamily market, thereby reducing costs 

to lenders, borrowers, and ultimately tenants. 

Overview of the GSEs’ and HUD’s Responsibilities 

The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan 

Mortgage Corporation (Freddie Mac) were established as government-chartered private 

enterprises in 1968 and 1970, respectively. Fannie Mae and Freddie Mac are shareholderowned corporations, with the following responsibilities: 

1	 Multifamily properties are defined as rental property containing five or more units. The multifamily segment of the 

entire rental market represents approximately 41 percent of the total number of rental units; the subsegments are five to 

19 units (24 percent) and 20+ units (17 percent). The other major segment of the rental market is in single-family 

properties (59 percent); including detached and attached one-unit single-family, two- to four-single-family units, and 

manufactured housing units (1993 American Housing Survey data). 

2	 See Chapter 5, Exhibit 5-5 for a discussion of the concept of “disproportionate adverse impact.” 

x Executive Summary 
 

•	 Provide stability in the secondary market for residential mortgages; 

•	 Respond appropriately to the private capital market; 

•	 Provide ongoing assistance to the secondary market for residential mortgages 

(including activities relating to mortgages on housing for low- and moderateincome families involving a reasonable economic return that may be less than the 

return earned on other activities) by increasing the liquidity of mortgage 

investments and improving the distribution of investment capital available for 

residential mortgage financing; and 

•	 Promote access to mortgage credit throughout the Nation (including central cities, 

rural areas, and underserved areas) by increasing the liquidity of mortgage 

investments and improving the distribution of investment capital available for 

residential mortgage financing.3 

HUD was assigned a role to regulate Fannie Mae in 1968 and Freddie Mac in 1989. 

Motivated in part by concern about the GSE’s financial safety and soundness, Congress 

passed the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 

(FHEFSSA). This act:4 

•	 Established an independent financial regulator within HUD, the Office of Federal 

Housing Enterprise Oversight, to be responsible for the financial safety and 

soundness of the GSEs, under Section 1321; 

•	 Provided the Secretary of HUD with general regulatory power (other than for 

financial safety and soundness) with respect to the GSEs and the responsibility for 

making rules and regulations to ensure that the purposes of FHEFSSA and the 

Fannie Mae and Freddie Mac Charter Acts are carried out; 

•	 Directed the Secretary of HUD to establish three separate housing goals for the 

GSEs’ mortgage purchases of: 

- housing for low- and moderate-income families; 

- housing located in central cities, rural areas, and other underserved areas; and 

- special affordable housing to meet unaddressed needs of very low-income 

families and low-income families living in low-income areas; 

3	 Sections 301(b) of the Freddie Mac Act and 301 of the Fannie Mae Charter Act. 

4 12 U.S.C. 4501-4641. 

Executive Summary xi 
 

•	 Required the GSEs to submit loan-level data to HUD about their mortgage 

purchases, including detailed borrower, census tract, and other mortgage 

characteristics; 

•	 Established new fair lending responsibilities under FHEFSSA Section 1325; and 

•	 Required HUD to review and comment periodically on the underwriting and 

appraisal guidelines of Fannie Mae and Freddie Mac for consistency with the Fair 

Housing Act and with specific requirements that they refrain from prohibited 

discrimination in their mortgage purchases. 

The 1995 Final Rule5 further articulated the fair lending requirements, related to the Fair 

Housing Act6 and FHEFSSA section 1325(1), that bear on HUD and the GSEs. 

The following three sections describe the approach used in undertaking this study, our 

findings, and our recommendations to HUD for monitoring the GSEs. 

Study Approach 

The study relied on a combination of review of printed materials and interviews with key 

players in the field. 

Sources of information about the GSEs’ business practices in the secondary market used in 

this study included: published underwriting requirements and standards, as well as policies 

and practices as implemented by Fannie Mae’s Delegated Underwriting and Servicing (DUS) 

lenders and Freddie Mac’s Program Plus lenders. Various source materials were available 

for the study, including: selected underwriting and appraisal requirements and brochures on 

the programs offered by the GSEs and FHA. Information on how GSE underwriting 

requirements were implemented and interpreted were gathered from market participants and 

from the GSEs themselves. 

Two sets of interviews were conducted in April and May 1998. The interviewees included 

26 individuals selected as national industry experts, including GSE staff, and 24 lenders who 

are representatives of various segments of the multifamily financing market and active in one 

or more of four specific local markets: Atlanta, Boston, Chicago, and Dallas. The interviews 

examined the informants’ impressions of the segments of the multifamily market, the 

dominant or key players in each of the segments, the GSEs’ underwriting requirements’ 

5	 HUD, 1995, pp. 61,847-61,848 . All references in this report are included in the bibliography in Appendix A. 

6 42 U.S.C. 3605 

xii Executive Summary 
 

impacts on credit and fair lending, and the GSEs’ reputation in the secondary market. 

Findings from these interviews were updated with two additional interviews in April 2001. 

In addition to the interviews, an exploration of the location of loans purchased by Fannie 

Mae and Freddie Mac in 1993 through 1999 was conducted for the same four sites where the 

interviews were conducted. 

Findings 

The following sections summarize the findings of the study based on the fieldwork with 

national experts and lenders in four markets, supplemented by a review of relevant literature 

and analysis of data on the GSEs’ mortgage purchases, both nationwide and in the same four 

markets. This information forms the basis for the discussions regarding the GSEs’ leadership 

role in the multifamily mortgage market, affordable lending, credit gaps, and fair lending. 

The GSEs’ Leadership 

The GSE presence in the multifamily mortgage market is less significant than their presence 

in the single-family mortgage market. At the end of 1999, the GSEs’ direct holdings and 

guarantees were $63.1 billion, representing 16.9 percent of $373 billion in outstanding 

multifamily mortgage debt.7 In single-family mortgage markets, the GSEs held or 

guaranteed 39 percent of $4.8 trillion in outstanding mortgage debt as of the end of 1999. 

According to the informants who function in the primary financing (i.e. origination) market, 

the GSEs’ leadership in the multifamily market is recognized principally in terms of setting 

the standards for underwriting and financing multifamily properties. In most multifamily 

segments, however, neither GSE is viewed as “leading the market” especially in improving 

lending for affordable housing in the multifamily market. Instead, banks and thrifts are 

viewed as being more flexible in underwriting originations. 

Interpreting “leadership” in the context of the multifamily secondary market is complicated. 

In one sense, the GSEs lead the market by virtue of their volume, size, experience, range of 

products, and widespread emulation of their underwriting guidelines, which has had a 

positive effect on standardization. Both GSEs are recognized for their work on common 

multifamily loan documents. However, the GSEs’ underwriting requirements and standards 

are considered conservative and fairly inflexible, especially with regard to affordable 

properties. Lending consortia and portfolio lenders have been more innovative with this 

segment of the multifamily market. In another sense of “leadership,” Fannie Mae has more 

influence than Freddie Mac because of its size, expertise, and track record. Between the two 

7 Federal Reserve Bulletin, March 2001, A 35 

Executive Summary xiii 
 

GSEs, Fannie Mae is seen as easier to work with and as having a stronger commitment to the 

affordable market. 

Affordable Lending 

In the context of the multifamily market, affordable lending can be considered lending for 

multifamily housing that is affordable to low-income tenants.8 Both GSEs have been 

attaining the housing goals set by the secretary of HUD, including the special affordable 

housing goal, since 1996 when the 1995 Final Rule (HUD, 1995) became effective. 

Underlying the GSEs’ success in attaining the housing goals has been their mortgage 

underwriting requirements and standards. 

According to the national industry experts and lenders whom we interviewed, both GSEs 

have adjusted their underwriting standards and practices to support the development of a 

secondary market for multifamily mortgage loans. These adjustments have sustained the 

GSEs’ progress in increasing their contributions to affordable lending in the multifamily 

market. The GSEs have also expanded their programs that target the affordable segment of 

the multifamily market. Fannie Mae and Freddie Mac both offer a targeted affordable 

housing product. They also offer forward commitment programs that support the 

construction or rehabilitation of multifamily properties, typically using the Low Income 

Housing Tax Credit (LIHTC) program. Both also offer bond credit enhancements, thereby 

supporting tax-exempt bond programs for refinancing, acquisition or rehabilitation of 

multifamily properties. 

However, based on the interviews, there are still differences of opinion on the extent to 

which the GSEs’ underwriting and appraisal requirements support affordable lending. 

Informants who participate in the GSEs’ DUS and Program Plus programs were very familiar 

with the underwriting requirements and know how to arrange for waivers when needed. In 

contrast, informants outside the GSEs’ sphere consider neither of the GSEs’ underwriting 

requirements flexible, especially for smaller or older properties and any deal with 

subordinate financing. In comparison with the GSEs, the Housing Finance Agencies (HFAs) 

and the conduits were viewed as having much more flexible requirements and being much 

more willing to work out the deals. 

As a consequence, although Fannie Mae has a national presence in the affordable secondary 

multifamily market (and Freddie Mac is developing a presence), the GSEs were rarely 

viewed as playing a leadership role in the affordable segment of the multifamily market in 

the four local markets studied. Instead, in the affordable segment of the multifamily market, 

leadership was perceived as resting with local depositories (banks and thrifts) and conduits. 

Depending on the market, other influential players mentioned by the interviewees included 

Low-income refers to households with incomes at or below 80 percent of area median. 

xiv Executive Summary 

8 
 

the state housing finance agencies, lending consortia, and the Federal Home Loan Banks. In 

several of the markets, lenders with a national presence were mentioned. State housing 

finance agencies were cited as active players in California and Massachusetts. Moreover, in 

30 to 40 markets across the U.S., consortia of large banks, smaller thrifts, and insurance 

companies are operating in separate, mostly metropolitan (or statewide) markets, and play a 

large role in the multifamily market. Three markets have very large consortia: New York, 

Chicago, and the State of California. 

Credit Gaps 

Are there credit gaps in segments of the multifamily market? The 1995 Final Rule (HUD, 

1995) cited anecdotal evidence of credit shortages among several multifamily segments: 

smaller multifamily properties, multifamily properties in older urban areas, and inner city 

properties in need of rehabilitation. Without intervention, such as targeting of underserved 

areas to meet housing goals, the credit gaps could be severe and persistent. 

There is evidence that small multifamily properties with five to 50 units have been adversely 

affected by differentials in the cost of mortgage financing relative to larger properties.9 

While mortgage loans can generally be obtained for most properties, the financing that is 

available is relatively expensive, with interest rates as much as 150 basis points higher than 

those on standard multifamily loans.10 Loan products are characterized by shorter terms and 

adjustable interest rates. Borrowers typically incur costs for origination and placement fees, 

environmental reviews, architectural certifications (on new construction or substantial 

rehabilitation projects), inspections, attorney opinions and certifications, credit reviews, 

appraisals, and market surveys.11 Because of a large fixed element, these costs are usually 

not scaled according to the mortgage loan amount or number of dwelling units in a property 

and consequently are often prohibitively high on smaller projects. This market segment 

appears to be dominated by thrifts and other depositories that keep these loans in portfolio. 

In part to hedge interest rate risk, loans on small properties are often structured as adjustablerate mortgages. 

The GSEs’ multifamily purchases do not appear to be contributing consistently to the 

mitigation of excessive cost of mortgage financing facing small properties with five to 50 

units. Based on HUD’s analysis of loans originated in 1997 and acquired by the GSEs in 

9	 See Schneider and Follain (1998) and Segal and Herbert (2000). 

10	 Schneider and Follain (1998) assert that interest rates on small property mortgages are as high as 300 basis points over 

comparable maturity Treasuries. Berkshire Realty, a Fannie Mae Delegated Underwriting and Servicing (DUS) lender 

based in Boston, was quoting spreads of 135 to 150 basis points in “Loans Smorgasbord,” Multi-Housing News, 

August-September 1996. Additional information on the interest rate differential between large and small multifamily 

properties is contained in Segal and Herbert (2000). 

11	 These costs have been estimated at $30,000 for a typical transaction. Presentation by Jeff Stern, Vice President, 

Enterprise Mortgage Investments, HUD GSE Working Group, July 23, 1998. The most comprehensive account of the 

multifamily housing finance system as it relates to small properties is contained in Schneider and Follain (1998). 

Executive Summary xv 
 

1997, 1998, and 1999, the GSEs have purchased loans backed by 24 percent of units financed 

in the overall conventional multifamily mortgage market in 1997, but their acquisitions of 

loans on small multifamily properties have been only 2.3 percent of such properties financed 

that year.12 The GSEs’ failure to buy significant numbers of loans on small multifamily 

properties disadvantages the owners of such properties by denying them the benefits of 

mortgage liquidity provided by secondary market exposure to mortgages on larger properties. 

To encourage the GSEs’ activity in financing small multifamily loans, the 2000 Final Rule 

(HUD, 2000a) includes bonus points for purchases of mortgages financing multifamily 

properties of five to 50 units. Specifically, HUD will assign double weight in the numerator 

under the low- and moderate-income and special affordable housing goals for each unit 

financed by GSE mortgage purchases in small multifamily properties. 

A recent noteworthy development is Fannie Mae’s announcement of a new product through 

its DUS program for multifamily properties with 5-50 units. Features include a streamlined 

underwriting process designed, in part, to reduce borrower costs for third-party reports; use 

of FICO scores to evaluate borrower creditworthiness; and recourse to the borrower in the 

event of default.13 

Multifamily properties with significant rehabilitation needs have experienced difficulty in 

obtaining mortgage financing. Multifamily rehabilitation loans accounted for only 0.5 

percent of units backing Fannie Mae’s 1998 purchases and for 1.6 percent in 1999. These 

loans accounted for 1.9 percent of Freddie Mac’s 1998 multifamily total (with none indicated 

in 1999). 

Fair Lending 

Two sections of legislation provide HUD with authority to oversee the GSEs’ underwriting 

and appraisal requirements with respect to fair housing issues: 

•	 Section 1325 of FHEFSSA, which refers broadly to the underwriting and 

appraisal requirements and standards of the GSEs and outlines HUD’s regulatory 

responsibility in prohibiting discriminatory impacts of the GSEs’ operations (e.g., 

considering the age or location of dwelling units or age of neighborhood) (see 

Exhibit 5-2); and 

12	 It is assumed that that units in small multifamily properties represented approximately 39.4 percent of multifamily units 

financed in 1997, per the 1991 Residential Finance Survey, as discussed above. Additionally, it is assumed that 1997 

multifamily conventional origination volume was $38 billion, based on discussions with HUD. An average loan 

amount per unit of $ 27,266 is used, the GSE average for 1997 acquisitions. 

13	 “Fannie Mae Announces New 5-50(SM) Streamlined Mortgage for Small Multifamily Properties is Now Available 

Through DUS Lenders; 10-Year Volume Goal is $18 Billion,” Fannie Mae press release, May 10, 2000. 

xvi Executive Summary 
•	 The provisions of the Fair Housing Act that relate to the provision of mortgage 

loans (42 USC 3605). 

The provisions of the fair housing and fair lending laws prohibiting discrimination apply to 

all entities involved in real-estate transactions, including lenders, secondary market 

purchasers of loans, real estate agents and appraisers, and those offering to sell or rent a 

dwelling. The fair lending issue raised in this study is whether the GSEs’ multifamily 

underwriting and appraisal requirements are consistent with the Fair Housing Act and 

FHEFSSA more generally. For example, do the underwriting requirements that include 

consideration of age or location of dwelling units or age of neighborhood or census tract 

location have a “discriminatory effect” on protected classes? 

As required by FHEFSSA, the GSEs are prohibited from considering the age of a property in 

purchase decisions in a manner that has a discriminatory effect. Very few of the GSEs’ 

underwriting and appraisal requirements apply specifically to older properties. However, 

Fannie Mae’s subordinate financing requirements for older properties are stricter than 

requirements for newer properties. Finally, perhaps more important than the GSEs’ written 

underwriting guidelines is the perception in the lending community that the GSEs typically 

prefer “Class A” properties (which is generally defined as newer housing stock that is less 

than 10 years old). 

Both GSEs have guidelines that indicate market strength as a consideration in multifamily 

underwriting for their prospective purchase of loans. Market strength factors may be 

correlated with factors with respect to which discrimination is prohibited, such as geographic 

areas where members of protected classes reside. The emphasis of these underwriting 

guidelines on employment, property values, vacancy rates and other characteristics that 

might adversely affect minority areas may have a discriminatory effect. Although the GSEs 

are explicit about what is not to be considered (e.g., racial composition of the neighborhood), 

the issue remains as to how the requirements are actually implemented. 

In addition, there is empirical evidence that the GSEs lag in three sectors of the multifamily 

market that may have fair lending implications: 

•	 Purchases of loans in high-minority tracts; 

•	 Purchases of loans on small multifamily properties, which are disproportionately 

for minority-owned properties; and 

•	 Purchases of loans for multifamily properties in underserved areas. 

Although the GSEs’ relative lack of purchasing activity in these areas does not by itself 

demonstrate that the GSEs are violating fair lending legislation, it does raise the question of 

Executive Summary xvii 
 

whether some of their underwriting and appraisal guidelines are having a disproportionate 

adverse impact on protected classes. 

Recommendations 

Several areas of GSE multifamily activities merit monitoring by HUD. Each of these areas 

will require data collection 

Fair Lending Monitoring. Fair lending analysis of the GSEs’ multifamily mortgage 

purchase activity is governed by a statutory framework similar to that governing the GSEs’ 

single-family activities. A basic issue is whether the GSEs’ underwriting or appraisal 

standards and guidelines have a disproportionate adverse impact on protected classes.14 An 

underwriting or appraisal standard may have an unfavorable effect on protected classes even 

if the requirements are imposed impartially. However, a finding of disproportionate adverse 

impact is not sufficient to support a finding of discrimination as defined by the courts. 

Follow-up research and analysis would be needed on whether the guidelines have a “business 

necessity” and whether some other, less discriminatory alternative exists that would also 

satisfy the business necessity. Protected classes under FHEFSSA include race, color, 

religion, sex, handicap, familial status, age, or national origin. Also prohibited is any 

consideration of the age or location of the dwelling or the age of the neighborhood or census 

tract where the dwelling is located, in a manner that has a discriminatory effect. 

A monitoring strategy would include ongoing review of written guidelines and statistical 

analysis of the GSEs’ multifamily mortgage purchase practices. 

First, HUD should review GSE underwriting guidelines regularly with attention to provisions 

of those guidelines governing specific geographic areas, minimum loan amounts, and age of 

the property. Objectives of the review would be to determine whether there is any indication 

of disparate treatment, as well as to provide a basis for analysis of the question of disparate 

impacts. 

Second, with regard to GSE underwriting practices, a difficulty in evaluating the potential for 

disparate impacts is the lack of data on protected-class characteristics of tenants residing in 

the collateral property, both for GSE multifamily acquisitions and for properties that receive 

mortgage financing through non-agency secondary market sources or portfolio lenders. 

However, the data that are available on census tract characteristics may be correlated with 

race of tenant and/or the age of the property and could be used for a first-stage analysis. 

14	 In contrast to disproportionate adverse impact, the issue of disparate treatment of borrowers (for multifamily 

properties) with the same relevant underwriting features is essentially an issue of lender behavior at origination, 

although it also would be theoretically possible for the GSEs to discriminate if their purchases differed for a member of 

a protected class from a non-protected borrower with a similarly qualified loan. 

xviii Executive Summary 
 

Other data sources, such as data from the survey of multifamily properties in compliance 

with accessibility requirements by HUD’s Real Estate Assessment Center, may provide some 

useful information because this survey also picks up demographic characteristics. 

Another approach, requiring new data, would seek to determine whether GSE underwriting 

practices result in higher credit costs for properties in high-minority areas or for properties 

where a large proportion of minorities are predicted to reside based on census tract 

characteristics. Successful implementation of this approach would require that the GSEs 

provide additional loan-level data to HUD on note rate, origination costs, and prepayment 

penalties. In order to determine whether differences in the cost of credit are real or apparent, 

however, HUD would need to control for credit risk, and would therefore also need to be 

provided with data on LTV and DSC ratio as well. 

In addition, HUD could collect information regarding the geographic location of properties 

where the GSEs have approved waivers to their underwriting guidelines. When the census 

tract location of such properties has been determined, HUD could analyze whether there is 

evidence that properties likely to be inhabited by members of protected classes have been 

approved for waivers less frequently than other properties, representing a potentially 

disproportionate effect of the GSEs’ waiver approvals (although it is not necessarily the case 

that this would signify adverse impact). 

Furthermore, HUD could collect information regarding effects on protected classes of the 

streamlined GSE approval procedures for DUS and Program Plus lenders. HUD could utilize 

GSE and HMDA data to analyze whether these lenders are less active in high-minority or 

inner city neighborhoods, or in areas with an older housing stock, than are other lenders. 

DUS and Program Plus lenders could usefully be compared with all other lenders active in 

the multifamily market or with minority-owned thrift institutions identified by the Office of 

Thrift Supervision.15 HUD could also evaluate whether the process by which the GSEs 

approve lenders for the DUS and Program Plus programs has disproportionate adverse effects 

on minority-owned lending institutions. 

HUD could also monitor GSE multifamily transaction volume involving originations by 

minority-owned thrift institutions. To the degree that loans originated by such institutions 

are backed by properties in high-minority areas, or owned by African Americans, expanded 

transactions volume would represent an opportunity for the GSEs to expand the benefits 

provided by secondary market access to such properties. Conversely, any significant 

reduction in transactions volume involving such institutions could call into question the 

GSEs’ commitment to fully serving the multifamily mortgage market. 

15 See Office of Thrift Supervision, “Policy Statement on Minority Owned Thrift Institutions,” May 25, 1999. 

Executive Summary xix 
 

Finally, HUD could request loan-level information on default risk and loan losses as well as 

factors entering the underwriting process such as LTV and DSC to determine the 

effectiveness of GSE underwriting standards in controlling credit risk.16 HUD could also ask 

the GSEs for any additional information pertaining to validation of their underwriting 

criteria. 

Pilot Programs. The GSEs occasionally offer pilot programs to their DUS and Program Plus 

lenders to implement. According to the informants, some of these programs gain high 

visibility in the press but are seldom used in the marketplace. Some of these informants 

recommend that HUD closely monitor any pilot program, perhaps semi-annually through the 

first two years of its existence. From this information, HUD could determine whether the 

program is reaching hard-to-serve segments of the market. 

Small Multifamily Properties. The GSEs’ treatment of “smaller” loans, in both urban and 

rural areas, especially for affordable multifamily properties with fewer than 50 units, needs 

closer examination, especially in light of evidence that such properties are often located in 

high-minority census tracts and that ownership of multifamily properties by African 

Americans is concentrated among such properties. The GSEs continue to modify their 

underwriting approach to these loans and are likely to be further encouraged to do so by the 

2000 Final Rule, which gives the GSEs bonus points for their purchases of small multifamily 

mortgages. HUD should continue to monitor the GSEs’ purchases of small multifamily 

mortgages to determine whether HUD’s 2000 Final Rule is effective in creating incentives 

for the GSEs to become more active in financing these properties. 

Information would also need to be collected on credit enhancements in order to isolate the effectiveness of 

underwriting standards in mitigating loan losses, since credit enhancements may also have the effect of mitigating such 

losses. 

xx Executive Summary 

16 
 

Chapter One 

Project Description and Background 

The U.S. Department of Housing and Urban Development (HUD) contracted with Abt 

Associates Inc. through contract DU100C000005978, Task Order 3, and C-OPC-18571, Task 

Order 6, to conduct an exploratory qualitative study to examine the multifamily underwriting 

requirements and standards of the Government Sponsored Enterprises (GSEs)—Fannie Mae 

and Freddie Mac—and their role in the conventional secondary multifamily mortgage 

market.17 Under Section 1325 of the Federal Housing Enterprises Financial Security and 

Soundness Act of 1992 (FHEFSSA), HUD is required to review and comment periodically 

on the underwriting and appraisal requirements and standards of Fannie Mae and Freddie 

Mac for consistency with the Fair Housing Act and with specific requirements that they 

refrain from discriminating in their mortgage purchases because of race, color, religion, sex, 

handicap, familial status, age, or national origin. This study provides technical support of 

that objective. 

The purpose of this study of multifamily underwriting and the GSEs’ role in the multifamily 

market is to aid HUD in understanding the significance of the GSEs’ underwriting standards 

and practices in relation to three areas of interest to the Department:18 

•	 The availability of loans on properties affordable to lower income people and in 

underserved areas;19 

•	 GSE capability to help fill identified credit gaps20 in the affordable segment of the 

multifamily mortgage market; and 

•	 The possibility that the GSEs’ underwriting standards or practices could have a 

disproportionate adverse impact21 on one or more groups statutorily protected 

17	 Multifamily properties are defined as rental property containing five or more units. The multifamily segment of the 

entire rental market represents approximately 41 percent of the total number of rental units; the subsegments are 5 to 19 

units (24 percent) and 20+ units (17 percent). The other major segment of the rental market is in single-family 

properties. The subsegments are detached and attached one-unit single-family (33 percent), two- to four-single-family 

units (22 percent), and manufactured housing units (4 percent), including mobile homes and some manufactured 

housing that is preconstructed and assembled on permanent foundations (1993 American Housing Survey data). 

18	 The following areas of interest are presented exactly as stated in HUD’s Statement of Work. 

19	 A unit is considered affordable if the rent (adjusted for number of bedrooms and including any tenant-paid utilities) is 

less than or equal to 30 percent of Area Median Income (AMI). A unit is considered “low income” if rent (similarly 

adjusted) does not exceed 24 percent of AMI. 

20	 This term is discussed in detail in Chapter 5. 

21	 See Chapter 5, Exhibit 5-4 for a discussion of the concept of “disproportionate adverse impact.” 

Chapter 1 – Project Description and Background 1 
 

against discrimination, or that the GSEs’ underwriting standards or practices 

involve consideration of the age or location of the dwelling or the age of the 

neighborhood or census tract where the dwelling is located in a manner that has a 

discriminatory effect. 

Section 1.1 provides background on the GSEs’ and HUD’s responsibilities. Section 1.2 

describes the GSEs’ response to multifamily market regulations. Relevant policy and 

analytic issues are described in more detail in Section 1.3 and Section 1.4 provides an 

overview of the remainder of the report. 

1.1 The GSEs’ and HUD’s Responsibilities 

The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan 

Mortgage Corporation (Freddie Mac) were established as government-chartered private 

enterprises in 1968 and 1970, respectively. Fannie Mae and Freddie Mac are shareholderowned corporations, with the following responsibilities: 

1.	 Provide stability in the secondary market for residential mortgages; 

2.	 Respond appropriately to the private capital market; 

3.	 Provide ongoing assistance to the secondary market for residential mortgages 

(including activities relating to mortgages on housing for low- and moderateincome families involving a reasonable economic return that may be less than the 

return earned on other activities)22 by increasing the liquidity of mortgage 

investments and improving the distribution of investment capital available for 

residential mortgage financing; and 

4.	 Promote access to mortgage credit throughout the Nation (including central cities, 

rural areas, and underserved areas) by increasing the liquidity of mortgage 

investments and improving the distribution of investment capital available for 

residential mortgage financing.23 

HUD was assigned a role to regulate Fannie Mae in 1968 and Freddie Mac in 1989. 

22	 Section 1381(a)(2)(A) of Public Law 102-550, approved October 28, 1992, 106 Stat. 3994, amended this paragraph by 

deleting “(including mortgages securing housing for low- and moderate-income families involving a reasonable 

economic return)” and inserting the language in parentheses. 

23	 Sections 301(b) of the Freddie Mac Act and 301 of the Fannie Mae Charter Act. 

2 Chapter 1 – Project Description and Background 
 

Motivated in part by concern over the contingent liability to taxpayers from the perception of 

an implicit federal guarantee on the GSEs’ debt obligations, Congress passed the Federal 

Housing Enterprises Financial Safety and Soundness act of 1992 (FHEFSS). This act:24 

•	 Established an independent financial regulator within HUD, the Office of Federal 

Housing Enterprise Oversight, to be responsible for the financial safety and 

soundness of the GSEs, under Section 1321; 

•	 Provided the Secretary of HUD with general regulatory power (other than for 

financial safety and soundness) with respect to the GSEs and the responsibility for 

making rules and regulations to ensure that the purposes of FHEFSSA and the 

Fannie Mae and Freddie Mac Charter Acts are carried out; 

•	 Directed the Secretary of HUD to establish three separate housing goals for the 

GSEs’ mortgage purchases of: 

- housing for low- and moderate-income families; 

- housing located in central cities, rural areas, and other underserved areas; and 

- special affordable housing to meet unaddressed needs of very low-income 

families and low-income families living in low-income areas; 

•	 Required the GSEs to submit loan-level data to HUD about their mortgage 

purchases, including detailed borrower, census tract, and other mortgage 

characteristics; 

•	 Established new fair lending responsibilities under FHEFSSA Section 1325; and 

•	 Required HUD to review and comment periodically on the underwriting and 

appraisal guidelines of Fannie Mae and Freddie Mac for consistency with the Fair 

Housing Act and with specific requirements that they refrain from prohibited 

discrimination in their mortgage purchases. 

The 1995 Final Rule (HUD, 1995)25 further articulated the fair lending requirements, related 

to the Fair Housing Act26 and FHEFSSA section 1325(1), that bear on HUD and the GSEs. 

FHEFSSA established a transition period of 1993 and 1994 to provide HUD with time to 

develop interim notices to the GSEs regarding the housing goals, collect and analyze the 

GSE data, and prepare a proposed rule by February 16, 1995. The housing goals established 

for the transition period were ultimately extended through 1995 to allow time for public 

24 12 U.S.C. 4501-4641. 

25	 pp. 61,847-61,848. All references in this report are included in the bibliography in Appendix A. 

26 42 U.S.C. 3605 

Chapter 1 – Project Description and Background 3 
 

review of the proposed rule and publication of the Final Rule. In December 1995, HUD 

issued the Final Rule for regulation of Fannie Mae and Freddie Mac. The Final Rule 

contained delineation of the three housing goals for 1996 through 1999, FHEFSSA 

prohibitions against discrimination, new GSE program approval requirements, reporting 

requirements, access to information requirements, and other provisions. The housing goals 

were updated in October 2000, when a new Final Rule was issued.27 The 2000 Final Rule 

specifies the GSEs’ housing goals for 2001 through 2003, set at higher levels than those 

contained in the 1995 Final Rule. Goals for 2000 were maintained at the level set in the 1995 

Final Rule. Because the new Final Rule has been in place for a very short period of time, this 

chapter’s discussion focuses on the 1995 Final Rule. 

Included in both the 1995 and 2000 Final Rule were three appendices delineating HUD’s 

considerations and studies of issues pertaining to establishing: 

A: Low- and Moderate-Income Housing Goal;28 

B: Central Cities, Rural Areas, and Other Underserved Areas Goal;29 

C: Special Affordable Housing Goal;30, 31 

27	 HUD, 2000a, pp. 65,044-65,089 

28	 The low- and moderate-income goal: housing for families with incomes at or below 100 percent of the local AMI. 

This housing goal was set at 40 percent for 1996 and 42 percent for 1997 through 1999. The 2000 Final Rule set this 

goal at 50 percent for 2001 through 2003. To be qualified under the goal, rental units must have rents (adjusted for unit 

size) that do not exceed 30 percent of AMI, thereby considered “affordable.” The affordability determination is based 

on the total of rent plus utilities. For example, if the AMI is $60,000, then the maximum monthly rents (and utilities) 

are as follows for: 

0BR 1BR 2BR 

Moderate income families (100% AMI) $1,050 $1,125 $1,350 

29	 The geographically targeted goal: “Underserved areas” for Office of Management and Budget-defined metropolitan 

census tracts (and non-metropolitan counties), with (1) median tract income at or below 90 percent of AMI (95 percent 

in non-metropolitan area), or (2) minority concentration of at least 30 percent with median tract (or county) or income 

no greater than 120 percent of AMI. The goals were set at 21 percent for 1996 and 24 percent for 1997 through 1999. 

In the 2000 Final Rule, this goal was increased to 31 percent for 2001 through 2003. 

30	 The special affordable goal: housing for families with very low incomes (60 percent of AMI) or, if located in a lowincome census tract or non-metropolitan county, for families with low incomes (80 percent of AMI). The goals were 

set at 12 percent for 1996 and 14 percent or 1997 through 1999. This goal was increased to 20 percent for 2001 

through 2003 in the 2000 Final Rule. The required minimum affordable multifamily purchase volumes were set at 

$1.29 billion for Fannie Mae and $998 million for Freddie Mac. These levels were increased in the 2000 Final Rule to 

$2.85 billion for Fannie Mae and $2.11 billion for Freddie Mac. These levels represent one percent of each GSE’s total 

mortgage purchases over 1997 through 1999. The affordability determination is based on the total of rent plus utilities. 

For example, if the AMI is $60,000, then the maximum monthly rents (including utilities) are as follows for: 

0BR 1BR 2BR 

Very low-income families (60% AMI) $630 $675 $810 

Low-income families (80% AMI) $840 $900 $1,080 

31 Three additional appendices in HUD’s 1995 Final Rule delineate methodology used in preparing the Final Rule: 

D: Estimating the Size of the Conventional Conforming Market for Each Housing Goal; 

E: Required Loan-Level Data Elements; and 

F: Proprietary Information/Public Use Data (U.S. Department of Housing and Urban Development, 1995). 

4 Chapter 1 – Project Description and Background 
 

The three housing goals shown in this section are for the sum of single-family and 

multifamily mortgage purchases by the GSEs. 

1.2 GSEs’ Response to HUD Housing Goals 

The response of the GSEs to the HUD housing goals has been successful from many points 

of view. Fannie Mae and, especially, Freddie Mac have rapidly expanded their presence in 

the multifamily mortgage market in the period since the implementation of HUD’s interim 

housing goals in January 1993. Freddie Mac has successfully rebuilt its multifamily 

acquisition program, as shown in Exhibits 1-1 and 1-2 by the increase in its purchases of 

multifamily mortgages from $193 million in 1991 to $7.6 billion in 1999 and $6.8 billion in 

2000.32 Freddie Mac’s presence in the multifamily market is not as large as that of Fannie 

Mae. Freddie Mac’s direct holdings of multifamily mortgages and guarantees outstanding as 

of the third quarter of 2000, $19.8 billion, are much smaller than Fannie Mae’s $51.0 billion, 

not only in absolute terms, but also as a percentage of all mortgage holdings and guarantees. 

Freddie Mac’s multifamily holdings and guarantees are 2.3 percent of its total, compared 

with 4.3 percent for Fannie Mae.33 Fannie Mae never withdrew from the multifamily market, 

but it has also stepped up its activities in this area substantially, with multifamily purchases 

rising from $4.0 billion in 1993 to $9.4 billion in 1999, and $10.1 billion in 2000, as shown 

in Exhibit 1-1.34 

The rapid expansion of the GSEs’ multifamily transactions volume during the 1990s may be 

related to the multifamily Special Affordable subgoal, set at $998 million for Freddie Mac 

and $1.29 billion for Fannie Mae during 1996-1999, as mentioned above. In particular, 

Freddie Mac would have been unable to meet HUD’s low- and moderate-income special 

affordable goals without re-entering the multifamily market. The GSEs’ multifamily Special 

Affordable performance for 1993-1999 is shown in Exhibit 1-3. 

Growth in GSE multifamily transactions volume is also related to the fact that the 

multifamily market contributes disproportionately to GSE purchases meeting both the Lowand Moderate-Income and Special Affordable Housing goals generally. In 1999, Fannie 

Mae’s multifamily purchases represented 9.5 percent of its total acquisition volume, 

measured in terms of dwelling units. Yet these multifamily purchases comprised 20.4 

Appendix D in the 1995 Final Rule also has a counterpart in the 2000 Final Rule with the same name, “Estimating the 

Size of the Conventional Conforming Market for Each Housing Goal” (U.S. Department of Housing and Urban 

Development, 2000). 

32 Corresponding transactions volume as measured in dwelling units is shown in Exhibit 1-2. 

33 Federal Reserve Bulletin, June 2001, A 35. 

34 Corresponding transactions volume as measured in dwelling units is shown in Exhibit 1-2. 

Chapter 1 – Project Description and Background 5 
Chapter 1 – Project Description and Background 

Exhibit 1-1
 

GSE Multifamily Dollar Volume
 

1993 - 2000
 

$12.00 

$10.00
 

$8.00
 

$6.00
 

$4.00
 

$2.00
 

$0.00
 

1993 1994 1995 1996 1997 1998 1999 2000 

$4.6 

$0.2 

$4.7 

$0.9 

$6.0 

$1.6 

$7.0 

$2.4 

$6.9 

$2.7 

$12.5 

$6.6 

$9.4 

$7.6 

$10.10 

$6.8 

Fannie Mae Freddie Mac 

Dollar Volume of Mortgage Purchases UPB1 (in billions) 

1 Unpaid principal balance of mortgages purchased. 

Source: HUD analysis of GSE loan-level data. 

6 
400,000 

350,000 

300,000 

250,000 

200,000 

150,000 

100,000 

50,000 

0 

Exhibit 1-2
 

GSE Multifamily Transaction Volume in Units
 

1993 – 1999
 

Number of Units Purchased

Chapter 1 – Project Description and Background

186,471 

10,794 

221,420 

45,538 

235,358 

66,381 

272,931 

98,574 

253,065 

99,469 

221,319 

294,091 

191,492 

Fannie Mae Freddie Mac 

393,397
 

1993 1994 1995 1996 1997 1998 1999
 

Source: HUD analysis of GSE loan-level data. 

7 
Chapter 1 – Project Description and Background 

Exhibit 1-3
 

GSE Multifamily Special Affordable Acquisition Volume
 

1993 – 1999
 

$ Billions 

$5.00 

$4.00 

$3.00 

$2.00 

$1.00 

$0.00 

$1.7 

$0.1 

$1.7 

$0.5 

$1.3 

$0.7 

$2.4 

$1.1 

$3.2 

$1.2 

$3.5 

$2.7 

$4.1 

$2.3 

Fannie Mae Freddie Mac 

1993 1994 1995 1996 1997 1998 1999 

Source: HUD analysis of GSE loan-level data. 

8 
 

percent of units qualifying for the Low- and Moderate-Income Housing Goal, and 31.3 

percent of units meeting the Special Affordable Goal. Multifamily purchases were 8.2 

percent of units backing Freddie Mac’s 1999 acquisitions, 16.8 percent of units meeting the 

Low- and Moderate-Income Housing Goal, and 21.6 percent of units qualifying for the 

Special Affordable Housing Goal. The multifamily market therefore comprises a significant 

share of units meeting the Low- and Moderate-Income and Special Affordable Housing goals 

for both GSEs, and the goals may have contributed to increased emphasis by both GSEs on 

multifamily in the period since the previous Final Rule took effect in 1996. 

The majority of units backing GSE multifamily transactions meet the Low- and ModerateIncome Housing Goal because the great majority of rental units are affordable to families at 

100 percent of median income, the standard upon which the Low- and Moderate-Income 

Housing Goal is defined. For example, 38.5 percent of units securing Freddie Mac’s 1999 

single-family, one-unit owner-occupied mortgage purchases met the Low- and ModerateIncome Housing Goal, compared with 90.0 percent of its multifamily transactions. 

Corresponding figures for Fannie Mae were 37.9 percent and 94.8 percent.35 For this reason, 

multifamily purchases represent a crucial component of the GSEs’ efforts in meeting the 

Low- and Moderate-Income Housing Goal. The share of 1999 GSE multifamily purchases 

satisfying housing goals requirements is illustrated in Exhibit 1-4. 

Both GSEs have met or exceeded each of the housing goals each year since they took effect 

in January 1996. 

Despite the GSEs’ success in meeting their goals there is still concern that they are taking a 

very cautious approach and concentrating their efforts in the middle of the multifamily 

market segment with regard to affordability (Segal and Szymanoski, 1998; Segal and 

Szymanoski, 1997). Such an approach could contribute to limits or constraints on 

availability of credit within some segments of the multifamily market, including properties 

affordable to low- and moderate-income families. 

1.3 Policy and Analytic Issues 

Policy Issues and Questions 

HUD contracted for the Study of Multifamily Underwriting and the GSEs’ Role in the 

Multifamily Market to provide information about a set of policy issues and questions. HUD 

formulated the following four policy issues: 

35 HUD analysis of GSE loan-level data. 

Chapter 1 – Project Description and Background 9 
Chapter 1 – Project Description and Background 

Exhibit 1-4
 

Share of 1999 GSE Multifamily Purchases Satisfying Goals Requirements
 

Percent of Units Backing Multifamily Purchases 

95% 

100% 90% Fannie Mae Freddie Mac 

90% 

80% 

70%
 

60%
 

50%
 

40%
 

30%
 

20%
 

10%
 

0%
 

56% 

43% 

38% 36% 

Low-Mod Income Underserved Area Special Affordable 

Source: HUD analysis of GSE loan-level data. 

10 
 

•	 Market Segmentation: the possibility that segments of the affordable multifamily 

market receive different levels of pricing and ultimately availability of mortgage 

credit; 

•	 Credit Gaps: the possibility that the demand for credit, especially in some 

segments of the multifamily market, may exceed the supply; 

•	 Underwriting Standards: the possibility that particular GSE underwriting 

standards or practices affect the availability of mortgage credit in multifamily 

market segments that are affected by credit gaps; and 

•	 Fair Lending Issues: the possibility that the GSEs’ multifamily underwriting and 

appraisal guidelines have a disproportionate impact on protected classes. 

The literature review we conducted as part of this study, especially of articles in the trade 

press, and the commentary provided in interviews with people who are familiar with the 

multifamily market, led to another issue: 

•	 Current Competition in the Multifamily Market: the possibility that the demand 

for investments in commercial mortgage-backed securities may close potential 

credit gaps; and 

Many specific questions are implied by each of the policy issues. Under each of the policy 

issues is a series of questions that are addressed by the study as shown in Exhibit 1-5. This 

exhibit shows the issues covered in the interviews with key informants. 

Analytic Issues 

HUD’s efforts in the preparation of the 1995 Final Rule utilized both quantitative and 

qualitative methods to understand the role of the GSEs in the multifamily market. These 

methods included interviews with industry representatives, advocacy groups and other 

knowledgeable persons; analysis of various GSE and mortgage databases; and a series of 

contracted studies by various outside experts and academics. HUD has continued to analyze 

additional data on GSE profitability, to hold background discussions with knowledgeable 

multifamily industry experts and lenders, and has assembled a GSE Working Group to serve 

as an advisory board to HUD. HUD continued its multifamily research in preparation for the 

2000 GSE Rule. Appendices A and D of that Rule summarize HUD’s findings related to the 

multifamily market.36 

36 HUD, October 30, 2000. 

Chapter 1 – Project Description and Background 11 
 

Exhibit 1-5 

Questions Used to Address the Policy Issues 

Market Segmentation Questions: 

• Does the (affordable)37 multifamily market break into any of the following distinct segments: 

- Targeted affordable housing; 

- Smaller properties; 

- Inner-city properties; 

- Properties in need of rehabilitation; and/or 

- Properties developed with Low Income Housing Tax Credit Program? 

• Do specific types of lenders dominate any of the market segments above? 

• Do any of the above segments show evidence of risk-based pricing? 

Credit Gap Questions: 

• Are any of the above (affordable) multifamily market segments affected by credit gaps? 

• Are any financial institutions perceived as market leaders in any of the segments 

experiencing credit gaps? 

• Does this phenomenon vary by locality? 

Underwriting Questions: 

• Are there any underwriting standards that adversely affect the availability of mortgage credit, 

especially in areas affected by credit gaps? 

• Is there any evidence that any of the following are obstacles to GSE activity: 

- Lack of information regarding multifamily market performance; 

- Lack of owner management expertise; 

- Borrower net worth requirements; 

- Property or neighborhood conditions; 

- Appraisers’ opinion of the stability of the market area (e.g., area vacancy and absorption 

rates, depth and quality of rental market); 

- Property rehabilitation standards; 

- Risk sharing on acquisition/rehabilitation projects; and 

- Presence of partnerships or multiple borrowers. 

Fair Lending Question: 

• Is there any evidence that GSEs’ multifamily underwriting and appraisal guidelines (e.g., 

regarding age or location of building, or age of neighborhood or census tract location) have 

a disproportionate effect on protected classes?38 

Current Multifamily Market Competition Questions: 

• What is the current composition of the multifamily lending market; and 

• How are the GSEs performing in light of current competition? 

Improved Multifamily Market Risk Assessment Questions: 

• How is the competition viewing the riskiness of the multifamily market; and 

• Are there remaining credit gaps? 

37 During the implementation of this study using interviews with informants who are considered either national market 

experts, multifamily lenders, or both, it became necessary to distinguish between the generic multifamily market and 

the more specific affordable multifamily market. See Appendix B for a more extensive discussion of methodology 

used in this study. 

38 That is, the statistical evidence may demonstrate unequal outcomes across different types of borrowers, even though the 

guidelines are not explicitly discriminatory. However, a guideline that has a disproportionate effect and does not serve 

a business necessity (or does serve a business necessity but had a substitute with a smaller disproportionate effect) 

meets the legal definition of disparate impact and is discriminatory. 

12 Chapter 1 – Project Description and Background 
 

This study is designed to supplement these ongoing efforts. It is an exploratory qualitative 

study that includes a series of investigations: a review of the GSEs’ underwriting and 

appraisal standards and practices, a review of related studies of the multifamily market, a 

series of 26 interviews with key national industry experts from a variety of participants in the 

multifamily market, and a second series of interviews with 24 multifamily lenders and 

industry participants in four metropolitan markets: Atlanta, Boston, Chicago, and Dallas. 

1.4 Overview of the Remainder of the Report 

Chapter 2 provides an overview of the multifamily market, beginning with a review of the 

developments in the multifamily mortgage market since 1979 that have had lasting 

implications for the development of a liquid secondary mortgage market. This chapter also 

introduces the key types of multifamily lenders as well as other key secondary market 

players. Chapter 3 contains an overview of the GSEs’ underwriting and appraisal standards 

and the GSEs’ policies and programs. Chapter 4 reviews the literature on the role of the 

GSEs in the multifamily primary and secondary markets. It also discusses the interface 

between the GSEs’ experiences in the 1980s and early 1990s and the economic and housing 

conditions in 1995 when the Final Rule was published. Chapter 5 provides background 

information on three of the policy issues that HUD is considering with respect to the GSEs’ 

multifamily underwriting and appraisal requirements and standards: lending for affordable 

housing, credit gaps in the multifamily market, and the GSEs’ fair lending obligations. 

Chapter 6 introduces four local housing markets (Atlanta, Boston, Chicago, and Dallas) that 

were the locations of the interviews with multifamily lenders.39 Chapter 7 presents the 

combined findings from the interviews with 26 national industry experts and the 24 

multifamily lenders on various aspects of the policy issues considered by the study. This 

chapter provides an analysis and inferences drawn from all aspects of the study. Chapter 8 

provides monitoring recommendations to HUD on the housing goals. Following the chapters 

are five appendices that cover the following topics: 

A.	 Bibliography; 

B.	 Research Methodology; 

C. Summaries of Fannie Mae’s and Freddie Mac’s Multifamily Programs and 

Guidelines; 

D.	 Features of Selected Multifamily Finance Programs; and 

E.	 Provides a glossary of acronyms used in the report. 

39	 Although these were originally intended to be “local” lenders, of those nominated by the national industry experts, 75 

percent represented organizations with a national presence. Therefore, the information the lenders provided was not 

necessarily restricted to the market where they were located but included their more national perspective. Chicago is 

an exception where most (but not all) of the lenders focused solely on that market. 

Chapter 1 – Project Description and Background 13 
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14 Chapter 1 – Project Description and Background 
Chapter Two 

Overview of Multifamily Mortgage Market 

The multifamily mortgage market is a segment of the income-producing or commercial real 

estate market. In order to understand today’s multifamily market, it is important to review its 

recent history and the fundamental problems that developed during the 1980s. These 

problems resulted in substantial losses for both primary lenders and secondary market 

institutions. After the early 1990s, the multifamily market began to recover and new 

secondary market players began to invest in multifamily and other commercial real estate as 

described in this chapter. At present, the performance of multifamily mortgages is very 

important to investors as a segment of the income-producing or commercial real estate 

market. According to Goldberg and Capone (1998): 

Multifamily housing projects are considered very sound investments today, 

and they generally rate as a lower risk than other commercial property 

types.... This is a substantial change from just six years ago, when 

traditional lenders and investors were removing multifamily projects from 

their portfolios. (p. 93) 

Section 2.1 provides a discussion of developments in the multifamily mortgage market since 

the late 1970s. Section 2.2 describes the key types of mortgage lenders and secondary 

market players. 

2.1	 Developments in the Multifamily Mortgage Market Since the 

Late 1970s 

Financial services vehicles for ensuring liquidity and developing a secondary market for the 

multifamily mortgage and other commercial real estate markets have evolved from the early 

1980s and are still evolving. Wratten (1996) has traced a history of the commercial real 

estate secondary and securitization markets from the late 1970s. Portions of the discussion in 

this chapter are abstracted from that document. The following history shows the cyclical 

nature of the multifamily market, the evolution of various secondary market entities, and 

selected strategies that have emerged to contribute to continuing liquidity of the commercial 

real estate market. 

Federal Reserve Board Actions: October 6, 1979 

Since the late 1970s, there has been considerable volatility in the commercial real estate 

portion of the marketplace. For example, on October 6, 1979—”Bloody Sunday”—the 

Chapter 2 – Overview of Multifamily Mortgage Market 15 
Federal Reserve Board raised the discount rate by a full 1 percent, in an effort to forestall 

increasing inflation. During the succeeding 24 months, interest rates climbed to all-time 

highs, capital available for the commercial and residential real estate markets stopped 

flowing, and an economic recession with significant impacts on commercial real estate 

ensued. 

Economic Recovery Act of 1981 

In 1981, Congress responded with the Economic Recovery Act. This act created tax 

incentives for commercial real estate construction by providing large and fast depreciation 

tax write-offs. It succeeded, but fueled excessive building, particularly among multifamily 

properties. By 1983, interest rates began to fall and commercial real estate syndication sales 

began to rise. 

By 1984, the credit crunch was over. Life insurance companies’ portfolio lending responded 

to the tax-induced building; banks and S&Ls succumbed to the pressure to lend. During 

1985, the lending volume increased again. Within the next three years, the volume of 

commercial real estate debt in portfolios became the largest in history. 

Tax Reform Act of 1986 

By early 1986, the private markets were holding much of the quality transactions. Former 

sellers and portfolio lenders held, instead of securitizing, the high yielding commercial real 

estate mortgages. The 1986 Tax Reform Act substantially decreased the tax advantages of 

owning commercial real estate. 

DiPasquale and Cummings (1992) provide a detailed assessment of the impacts of changes in 

tax policy on real estate investment. According to their analysis of tax policy changes 

between 1960 and 1990, when the method of depreciation changed from a double declining 

balance to straight line depreciation mandated by the Tax Reform Act of 1986, the benefits of 

multifamily real estate investments decreased substantially. In the same vein, according to 

Goldberg and Capone (1998), the 1986 Act restrictions on “passive losses” substantially 

reduced the value of the depreciation write-off (whereby excess depreciation could be used to 

shelter other income), from $27 per hundred dollars to $6.90, and sent property values 

plummeting. 

Ultimately, the cumulative default rate of multifamily properties was just under 9 percent in 

1991. These default rates were the product of a number of factors, including the commercial 

real estate recession as well as the provisions of the 1986 Tax Reform Act. 

The Tax Reform Act of 1986 also included some provisions benefiting commercial real 

estate and multifamily. Specifically, it authorized a new financial investment vehicle, the 

Real Estate Mortgage Investment Conduit (REMIC). Although authorized initially for the 

16 Chapter 2 – Overview of Multifamily Mortgage Market 
 

single-family mortgage market, this securities instrument would ultimately become one of 

the most utilized multi-class mortgage-backed securities in the commercial real estate 

market. 

The Tax Reform Act of 1986 also authorized the low-income housing tax credit (LIHTC). 

This program, administered by the states, offered investors in low-income housing projects a 

9 percent annual tax credit of the total construction costs for new construction or 

rehabilitation, or 4 percent of the construction costs if there was other tax-exempt financing 

or federal subsidy. The 4 percent tax credit also applied to acquisition costs. The life of the 

tax credits is ten years. The LIHTC legislation stipulated low- and moderate-income units in 

each project as follows: 

•	 At least 20 percent of all units must be affordable to households with incomes at 

or below 50 percent of the area median income (AMI), adjusted for family size; or 

•	 At least 40 percent of all units must be affordable to households with incomes at 

or below 60 percent of the AMI, adjusted for family size. 

According to an early assessment of the program by DiPasquale and Cummings (1992), this 

de facto federal program for production of affordable housing was slow to be implemented, 

and costly in terms of the number of lawyer and accountant hours per deal, but the only tax 

credit available to developers and investors. A follow-up study by Cummings and 

DiPasquale (1998a) found that LIHTC had emerged as a very important source of new 

construction.40 Segal and Szymanoski (1997) concur that since 1986, LIHTC has contributed 

significantly to the affordable multifamily segment of market (i.e., for the construction and 

substantial rehabilitation of affordable multifamily housing). 

Financial Institutions Reform, Recovery and Enforcement Act of 1989 

By 1987, the Tax Reform Act of 1986 was beginning to take effect. Within the next two 

years, the commercial real estate market and the economy were faltering. As the S&L crisis 

expanded and the banking sector also began to experience problems, Congress responded 

with the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). 

As described in detail in Appendix A of the 1992 report of the National Task Force on 

Financing Affordable Housing, entitled From the Neighborhoods to the Capital Markets, 

major components of FIRREA were designed to reduce insolvency risk and increase the 

financial cautiousness of the S&Ls.41 These components included: 

40	 For example, 27 percent of the central-city LIHTC projects were found in census tracts with no other new rental 

housing construction between 1985 and 1990. Development costs ranged from an average per unit cost of $65,000 to 

over $180,000. The most expensive projects were located in central cities, the northeast, and western regions of the 

country. 

41	 Some provisions of FIRREA have since been modified. 

Chapter 2 – Overview of Multifamily Mortgage Market 17 
•	 Capital requirements—Multifamily mortgages and acquisition, development, and 

construction loans were assigned a 100 percent risk rating (compared to a 50 

percent risk rating for single-family mortgages). The risk-based capital 

requirements also applied to loans sold with recourse; any percentage of recourse 

had the same risk-based capital requirements as if the loan were still held in 

portfolio. 

•	 Single-borrower loan limits—Thrifts were limited to lending a maximum of 15 

percent of capital to one borrower (with some exceptions). This impacted large 

multifamily-related loans and rural areas served by a single S&L. 

•	 Qualified thrift lender test—FIRREA raised the minimum for housing-related 

portfolio assets of S&Ls from 60 to 70 percent of total assets. These housingrelated assets had to meet specific requirements to be “qualified thrift 

investments.” 

•	 Loan-to-value restrictions—Guidelines restricting loans with LTVs of 70 percent 

or more. Significantly constrained the availability of loans for multifamily 

acquisition, development, and construction in some regions of the country. 

•	 Direct equity investment—FIRREA prohibited thrifts from direct equity 

investment in real estate. Multifamily acquisition, development, and construction 

loans with low interest rates and some profit sharing by the thrift were considered 

equity investments and prohibited. 

•	 Public disclosure of Community Reinvestment Act (CRA) ratings—Once the 

CRA ratings were disclosed, the public demand for enforcement of the CRA of 

1977, and for stricter banking regulations in general, forced Congress, the nonconforming banks, and the regulators to take CRA seriously. The change in the 

enforcement of the CRA had the potential of driving new resources and capital to 

support low- and moderate-level income housing. 

Creation of the Resolution Trust Corporation 

FIRREA also created the Resolution Trust Corporation (RTC) to market the failed assets of 

the S&Ls until the expiration of its charter in 1995. The RTC could not directly sell the 

whole loans to depositories or other investors, so it turned to capital markets, using 

securitization. 

The obstacles for the RTC initiatives in liquidation of assets and commercial mortgage 

securitization included: 

•	 No infrastructure, standards, or national organizations to service the mortgages; 

18 Chapter 2 – Overview of Multifamily Mortgage Market 
•	 No standard underwriting, due-diligence criteria, or risk-rating systems; 

•	 No asset managers with local experience on a nationwide basis; 

•	 No source for local or national data, no historic performance data, and no risk 

insurance for unknowns (e.g., environmental risks); 

•	 No experience in liquidating non-performing or low quality commercial 

mortgages, without continuing involvement of the seller as a bundled servicer/ 

warrantor/guarantor; and 

•	 A hostile market for commercial real estate investments. 

Overcoming these obstacles required planning and developing an entirely new approach to 

commercial real estate investment. Research into the components of commercial real estate 

lending and servicing led to identification of separate functions for which standards could be 

developed and costs segregated. Unbundling the process was the ultimate key to addressing 

each of the obstacles listed above. Use of credit enhancements, typically in the form of 

senior/subordinated structures, enhanced the asset sale process. 

With the help of investment bankers, the RTC developed a mortgage disposition plan and a 

commercial real estate capacity in mortgage servicing and asset management. Gradually, 

market forces began to respond. Rating agencies increased capacity to rate new RTC 

commercial mortgage-backed securities (CMBS). Private companies developed their 

capacity to service loans nationally, and several companies were rated as commercial 

mortgage-backed servicers. By the end of 1991, master servicing, primary servicing, and 

special servicing had become recognized specialties. 

Commercial Real Estate Recession 

Another recession in commercial real estate exacerbated the thrift problems in the early 

1990s. Although multifamily housing starts had been gradually declining from the first 

quarter of 1985 (as a result of oversupply and the Tax Reform Act of 1986), when the latest 

real estate cycle occurred, multifamily starts declined 47 percent between 1990 and 1991 

(Segal and Szymanoski, 1997). The peak to trough decline in property valuation of 

multifamily real estate stock between the first quarter of 1990 and the third quarter of 1993 

was 16.7 percent (Bradley, Nothaft, and Freund, 1998a). Widespread defaults contributed to 

a decision by Freddie Mac to leave the multifamily market entirely. 

During 1993, the commercial real estate investment market bottomed out, and at around the 

same time Wall Street began to respond to the RTC effort; bidding for RTC assets and 

servicing CMBS securities became competitive. Portfolio lending by depositories and the 

remaining thrifts made a weak response as well. Ultimately, the RTC experience helped lead 

Chapter 2 – Overview of Multifamily Mortgage Market 19 
 

an expansion of secondary market opportunities for stabilizing and maintaining liquidity in 

the commercial real estate market. 

Commercial Real Estate Recovery through the Present 

The expansion phase of the real estate cycle has been well underway for several years now, 

at least insofar as it pertains to multifamily. Rents have been rising, and vacancy rates have 

been relatively stable, contributing to a favorable environment for multifamily construction 

and lending activity.42 Delinquencies on commercial mortgages reached an 18-year low in 

1997 and multifamily defaults fell further since then.43 As of the end of 1999 both GSEs’ 

multifamily performance had improved to the point where multifamily delinquencies were 

less than those in single-family.44 

Since the mid-1990s, the multifamily mortgage market has become more closely integrated 

with global capital markets, approaching the same degree of securitization as the singlefamily mortgage market by the end of the decade. In 1999, 58.8 percent of new multifamily 

mortgage originations were securitized, compared with 60.8 percent of single-family 

originations.45 

In particular, growth in the multifamily mortgage market has been fueled by investor 

appetites for CMBS. Nonagency securitization of multifamily and commercial mortgages 

received an initial impetus from the sale of nearly $20 billion in mortgages acquired by the 

RTC from insolvent depositories in 1992-1993. Nonagency issuers typically enhance the 

credit-worthiness of their offerings through the use of senior-subordinated structures, 

combining investment-grade senior tranches with high-yield, below investment-grade junior 

tranches designed to absorb any credit losses.46 

Because of their relatively low default risk in comparison with loans on other types of 

income property, multifamily mortgages are often included in mixed-collateral financing 

structures including other commercial property such as office buildings, shopping centers, 

and storage warehouses. CMBS volume reached $30 billion in 1996; $44 billion in 1997; 

42 Regarding rents and vacancy rates see Cornwell (1996) and Berson (1998). 

43 American Council of Life Insurance data reported in Inside MBS & ABS (March 20, 1998). 

44 U.S. HUD 2000b, p. V-2. 

45 The Mortgage Market Statistical Annual for 2000 (Washington, DC: Inside Mortgage Finance Publications), 1, 286. A 

conventional multifamily mortgage market of $46 billion is assumed in this calculation. B and C mortgages are 

excluded from the calculation. Although the degree of securitization is now similar, Schnare (2001) notes that the 

securitization in mulitfamily continues to be labor intensive on inefficient and has yet to produce a significant savings 

in costs. 

46 On the effects of multifamily mortgage securitization see Bradley, Nothaft, and Freund (1998a) and (1998b). 

20 Chapter 2 – Overview of Multifamily Mortgage Market 
 

$78 billion in 1998; and $67 billion in 1999. Approximately 25 percent of each year’s total 

is comprised of multifamily loans.47 

Depository institutions and life insurance companies, formerly among the largest holders of 

multifamily debt, have experienced a decline in their share of the market at the expense of 

CMBS conduits (Bradley, Nothaft, and Freund, 1998a). Increasingly, depositories and life 

insurance companies are participating in multifamily markets by holding CMBS rather than 

whole loans, which are often less liquid, more expensive, and subject to more stringent riskbased capital standards (Dinsmore, 1998, and Taylor, 1997). In recent years a rising 

proportion of multifamily mortgages have been originated to secondary market standards. 

This is a consequence of a combination of factors including the establishment of a smoothly 

functioning securitization “infrastructure;” the greater liquidity of mortgage-related securities 

as compared with whole loans; and the desire for an “exit strategy” on the part of investors.48 

Because of their limited use of mortgage debt, increased equity ownership of multifamily 

properties by Real Estate Investment Trusts (REITs) may have contributed to increased 

competition among mortgage originators, servicers and investors for a smaller mortgage 

market than would otherwise exist. During the first quarter of 1997, REITs accounted for 45 

percent of all commercial real estate transactions, and the market capitalization of REITs at 

the end of January 1998 exceeded that of outstanding CMBS.49 

During the financial markets turmoil in the fall of 1998, investors expressed reluctance to 

purchase the subordinated tranches in CMBS transactions, jeopardizing the ability of issuers 

to provide a cost-effective means of credit-enhancing the senior tranches as well.50 When 

investor perceptions regarding credit risk on subordinated debt escalated rapidly in August 

and September, the GSEs, which do not typically use subordination as a credit enhancement, 

benefited from a “flight to quality.”51 

Demographic factors will contribute to continued steady growth in the new construction 

segment of the multifamily mortgage market. The number of apartment households is 

expected to grow approximately 1.1 percent per year over 2000-2005. Taking into 

47	 CMBS Database, Commercial Mortgage Alert, Harrison-Scott Publications, Hoboken, NJ. 

48	 Board of Governors of the Federal Reserve System and U.S. Securities and Exchange Commission, Report to the 

Congress on Markets for Small-Business- and Commercial-Mortgage-Backed Securities (September 1998). 

49	 “REITs Tally Nearly Half of All Big CRE Deals in First Quarter,” National Mortgage News, (July 7, 1997); “Will 

REITs, Mortgage-Backeds Make Difference in Downturn,” Jennifer Goldblatt, American Banker, (February 18, 1998). 

50	 “New CMBS Headache: B-Piece Market Softens,” Commercial Mortgage Alert (September 21, 1998); “Criimi 

Bankruptcy Accelerates CMBS Freefall,” Commercial Mortgage Alert (October 12, 1998); “Capital America Halts 

Lending Amid Woes,” Commercial Mortgage Alert (October 12, 1998). 

51	 On CMBS spreads see “Turmoil Hikes Loan Rates” in Wall Street Mortgage Report (September 14, 1998). Regarding 

implications for the GSEs of the conduit pullback see “No Credit Crunch for First Mortgages” in Commercial 

Mortgage Alert (October 12, 1998). 

Chapter 2 – Overview of Multifamily Mortgage Market 21 
 

consideration losses from the housing stock, it has been projected that approximately 250,000 

- 275,000 additional multifamily units will be needed in order to meet anticipated demand 

(Goodman, 1997, and Goodman, 1998). This flow is approximately half that of the mid1980s, but twice that of the depressed early 1990s. In 1999, 291,800 apartment units were 

completed, and in 2000, 300,000 units were completed.52 

The high degree of volatility of multifamily new construction experienced historically is 

consistent with a view that this sector of the housing market is driven more by fluctuations in 

the availability of financing than by demographic fundamentals. The stability and liquidity 

of the housing finance system is therefore a significant determinant of whether the volume of 

new construction remains consistent with demand. 

Past experience suggests that the availability of financing for all forms of commercial real 

estate is highly sensitive to the state of the economy. In periods of economic uncertainty, 

lenders and investors sometimes raise underwriting and credit standards to a degree that 

properties that would be deemed creditworthy under normal circumstances are suddenly 

unable to obtain financing. Ironically, difficulty in obtaining financing may contribute to a 

fall in property values that can exacerbate a credit crunch.53 The sensitivity of commercial 

real estate markets to investor perceptions regarding global volatility was demonstrated by 

the rise in CMBS spreads in September 1998 (Holusha, 1998). 

2.2	 Key Types of Mortgage Lenders and Secondary Market 

Players 

There are several types of multifamily mortgage originators in the primary mortgage market. 

Chief among them are commercial banks and thrifts, mortgage bankers, state housing finance 

agencies, community lending consortia, and other community-based lenders. Once a 

mortgage is originated in the primary market, the originator has two choices: keep the 

mortgage in the institution’s portfolio or sell it (and typically retain the servicing) to the 

secondary market. 

Those entities that purchase the originated mortgages are referred to as the secondary market. 

The secondary market players tend not to originate multifamily mortgages (Fannie Mae and 

Freddie Mac are prohibited from doing so), but to acquire the multifamily mortgages once 

they have been originated. In many cases, arrangements for the purchase or acquisition of 

originated mortgages (or so-called “deals”) have been agreed upon before the mortgage is 

52 U.S. Housing Market Conditions, U.S. Department of Housing and Urban Development (May 2001), Table 4. 

53 Howard Esaki, a principal in CMBS Research at Morgan Stanley Dean Witter stated recently that volatility in global 

markets contributed to a 10-20 percent decline in commercial real estate values in late 1998. John Hackett, “CRE Seen 

Down 10% to 20%,” National Mortgage News, (November 23, 1998), p. 1. 

22 Chapter 2 – Overview of Multifamily Mortgage Market 
 

originated. The entities that typically purchase the originated multifamily mortgages include 

the GSEs, life insurance companies, Wall Street conduits, investment houses, and REITs. 

The holders of multifamily debt, as shown in Exhibit 2-1, provide an indication of the 

competition the GSEs encounter in the multifamily market. Traditionally, the depositories 

have been the dominant players. This remains true today, as commercial banks held 17.7 

percent and savings institutions held 15.9 percent of multifamily mortgage debt outstanding 

at the end of 1999. However, there has been a considerable decrease in their combined share 

from 50.5 percent in 1980 to 33.6 percent in 1999. The holders of multifamily debt that have 

increased their market share are state agencies, the GSEs, and a new player—private-label 

MBS. 

Exhibit 2-2 shows another indication of the growth of competition for the GSEs in 

securitized multifamily debt. Private label MBS is growing rapidly. Multifamily debt is also 

being securitized at higher rates than ever before. Although the overall rates of securitization 

of the multifamily and other commercial real estate ($1.1 trillion in total) remains at 

approximately 15 percent (Goldblatt, 1998), industry experts estimate that this is going to 

increase. Exhibit 2-3 shows the volume of activity in CMBS between 1985 and 1999.54 

54	 Rather dramatic turmoil in financial markets followed the financial tumbles in Russia and Asia. This probably 

contributed to the decline in CMBS issuance in 1999 because of the “flight to safety” that ensued, especially current 

U.S. Treasury issues – and a consistent increase in returns demanded by CMBS investors (Foong, 1998a). The 

widening of CMBS spreads relative to those of agency securities benefited the GSEs relative some of their competitors. 

See “No Credit Crunch for First Mortgages” in Commercial Mortgage Alert, October 12, 1998. 

Chapter 2 – Overview of Multifamily Mortgage Market 23 
Exhibit 2-1
 

Major Holders of Multifamily Debt
 

Percent of Multifamily Debt Outstanding 

100%
 

90%
 

80%
 

70%
 

60%
 

50%
 

40%
 

30%
 

20%
 

10%
 

47.1% 

44.6% 

33.6% 

16.6% 

12.4% 

10.8% 

7.3% 

8.0% 

3.6% 

7.5% 

14.2% 

13.0% 

4.7% 4.6% 

6.1% 

11.2% 

12.5% 5.8% Others 6.3%

Fannie Mae &Freddie Mac

State Agencies

Federal Agencies

Insurance Co.

& Pension Funds 

Banks 

& 

Savings 

Institutions 

Private-Label 

MBS 

0.3% 

15.4%

Federally Related

Mortgage Pools* 

4.2% 10.0% 

0%
 

1980 1990
 1999 

Source: Table format from Bradley, Nothaft, and Freund (1998a). Data are from analysis of Federal Reserve Board data. 

* Includes GNMA, FNMA, FHLMC, and Farmers Home Administration pools. Also includes federally related pools that are used as collateral for federally related agency-issued CMOs 

and privately issued CMOs. Excludes Federal Financing Bank holdings of pool securities.

Chapter 2 – Overview of Multifamily Mortgage Market 24 
Chapter 2 – Overview of Multifamily Mortgage Market 

Exhibit 2-2 

Securitized Multifamily Debt Outstanding 

$ Billions 

$50
 

$45
 

$40
 

$35
 

$30
 

$25
 

$20
 

$15
 

$10
 

$5
 

$0
 

Fannie Mae Freddie Mac Private-Label MBS 

1992 1993 1994 1995 1996 1997 1998 1999 

Source: Federal Reserve Bulletin 

25 
Chapter 2 – Overview of Multifamily Mortgage Market 

Exhibit 2-3 

Commercial Mortgage Backed Securities Issuance Volume 

$ Billions 

$90 

$80 

$70 

$60 

$50 

$40 

$30 

$20 

$10
 

$0
 

$18 

$8 

$14 

$18 $20 $19 

$26 

$37 

$74 

$57 

1985- 1991 1992 1993 1994 1995 1996 1997 1998 1999 

1990 

Source: Lehman Brothers and Commercial Mortgage Alert. 

26 
 

Chapter Three 

GSEs’ Underwriting Requirements, Policies, and 

Programs 

The GSEs’ fundamental underwriting standards are relatively similar. Loan-to-value (LTV) 

ratios of 80 percent and debt service coverage (DSC)55 ratios of 125 to 130 percent represent 

standard thresholds utilized in the Delegated Underwriting and Servicing (DUS) and 

Program Plus products.56 However, underwriting standards differ across a number of special, 

targeted programs and initiatives sponsored by each of the GSEs. 

There are several sources of information about the GSEs’ business practices in the secondary 

market: their published underwriting and appraisal requirements57 and standards, their 

policies and practices as implemented by Fannie Mae’s DUS lenders and Freddie Mac’s 

Program Plus lenders, and their product descriptions. This chapter provides an introduction 

to the GSEs’ business practices. In addition to the published underwriting and appraisal 

requirements, Abt Associates also reviewed the Annual Housing Activities Reports 

submitted by the GSEs to HUD and spoke with Fannie Mae’s and Freddie Mac’s 

representatives. These additional sources of information were invaluable in better 

understanding the underwriting requirements and how they were to be interpreted. 

In contrast to the much larger single-family acquisition volume (in terms of dollars and 

units), Fannie Mae (1998) and Freddie Mac (1998) characterize the multifamily market as 

more complex, with: 

•	 More lender expertise and experience required; 

•	 Complex financing, often combined from a number of different sources; and 

•	 Much less standardization. 

55 DSC is defined as the ratio of net operating income to required debt service. 

56	 Additional details on the GSEs, descriptions of their programs, and required documentation for underwriting are 

contained in Appendix C. Features of selected multifamily finance programs for the GSEs and FHA are detailed in 

Appendix D. 

57	 Both GSEs have changed the terminology used to describe their underwriting and appraisal policies and practices. The 

document specifying their written standards and procedures is called a “Guide.” The guide contains (variously) 

“requirements,” “standard eligibility requirements,” “special requirements,” “underwriting standards,” or “general and 

specific standards.” “General mortgage property requirements” include DSC and LTV levels and “specific mortgage 

requirements” include required years of remaining term to maturity. The term “guidelines” is no longer used because it 

connotes discretion is permitted. Although the requirements in the guide permit no discretion, waivers can be 

requested on a case-by-case basis, and the GSEs permit documentation of extenuating circumstances that also support 

certain flexibilities. 

Chapter 3 – GSEs’ Underwriting Requirements, Policies and Programs 27 
 

The GSEs’ response to the complexity of the multifamily market has been to develop an 

approved seller/servicer lender network and to provide them with detailed underwriting and 

appraisal standards. For example, Fannie Mae finances most of its multifamily business 

through its DUS network of 26 lenders. Similarly, Freddie Mac does its multifamily business 

through a national network of 35 locally based Program Plus lenders. The two approved 

GSE lender networks overlap. Of Freddie Mac’s Program Plus lenders, eight are also Fannie 

Mae DUS lenders. 

The approved lenders in the networks have considerable expertise in originating multifamily 

mortgages that meet the underwriting and appraisal standards of the GSE with which they do 

business. There are some differences in the approach taken by each of the GSEs. For 

example, because of a combination of financial strength, track record, and loss sharing 

provisions with its DUS lenders, Fannie Mae delegates underwriting authority to them. 

Fannie Mae does not re-underwrite DUS loans, with the exception of mortgage loans in 

excess of $20 million, which are subject to pre-review prior to closing. However, Fannie 

Mae does conduct some level of post-purchase review of all DUS loans. 

Freddie Mac’s Program Plus seller/servicers underwrite the loan applications, and Freddie 

Mac relies on its Program Plus seller/servicers to provide analyses of the property market, 

borrower, and other characteristics of the loan.58 However, Program Plus seller/servicers do 

not have the final authority on loan originations, nor do they assume any of the loss risk. 

Instead Freddie Mac re-underwrites all multifamily mortgage originations prior to closing, 

even though it considers its Program Plus lenders to be the most knowledgeable originators 

in their “approved geographic areas” and very familiar with the local market trends.59 

Section 3.1 describes the GSEs’ underwriting requirements and standards in more detail. 

Section 3.2 describes the contents of the GSEs’ appraisal requirements and standards. 

Section 3.3 provides descriptive information on the similarities and differences among the 

GSEs’ and FHA’s programs. 

3.1 Underwriting Requirements and Standards 

The underwriting requirements and standards developed by both Fannie Mae and Freddie 

Mac provide guidance for lenders and property appraisers, and also serve as a part of the 

contractual relationship between the GSEs and their seller/servicers. These manuals, 

thousands of pages in length, provide extremely detailed information on each GSEs’ product 

line. 

58 Freddie Mac states that it works with the most experienced multifamily commercial lenders in the industry. 

59 Freddie Mac staff state that Program Plus eligibility requirements for lenders reflect the complexity of the business, and 

are broadly consistent with those of other institutional capital sources and their correspondents. 

28 Chapter 3 – GSEs’ Underwriting Requirements, Policies and Programs 
 

The primary objective of the underwriting requirements is to ensure that implementation of 

the requirements will result in an accurate assessment of whether the mortgage applicant will 

be willing and able to repay the mortgage. Cummings and DiPasquale (1998b) observe that: 

Underwriting assesses the soundness of the mortgages as an investment. 

Uniform underwriting guidelines are essential to the operation of the 

secondary mortgage market because they assure the investor that— 

regardless of the individual underwriter or the location of the project—the 

assessment of the investment follows standard guidelines. (p. 26) 

Similarly, the primary objective of the appraisal requirements and standards is to ensure that 

the assessment of property value is currently accurate and the property will provide sufficient 

collateral for the mortgage in the event of borrower default in the future. 

Over time, both GSEs have reassessed their underwriting standards to ensure that the 

standards do not compromise the availability of affordable housing or the requirements of the 

fair lending statutes (especially for single family mortgages). Both GSEs have conducted 

extensive loan level data analysis and other experiments60 to determine the relative 

importance of their underwriting requirements and criteria. This research is used to validate 

their current underwriting criteria, to determine which criteria are most predictive of a variety 

of risk factors (both individually and in combination), and which are predictive of loan 

delinquency or default. It is also used to determine whether there are more precise ways to 

assess credit risks or to permit more flexible product choices for borrowers. These 

requirements are revised frequently, especially when there is confusion among the selected 

lenders (DUS and Program Plus) in their interpretation and application to specific 

multifamily mortgage loans. 

During the implementation of this project, HUD selected and provided Abt Associates with 

major portions of Fannie Mae’s and Freddie Mac’s Underwriting Guides. Abt Associates 

also had access to electronic versions of these underwriting guides through a subscription to 

the Fannie Mae and Freddie Mac modules of AllRegs. These sections were thoroughly 

reviewed for content and potential relationship to the policy issues under consideration in this 

project. For example, could the underwriting requirements affect the availability of loans on 

multifamily properties affordable to lower income people and in underserved areas? 

Exhibits 3-1 and 3-2 show selected multifamily underwriting requirements for Fannie Mae 

and Freddie Mac, respectively. As shown in these exhibits, the requirements are very 

specific. Most requirements are designed to ensure that the mortgages offered to and 

purchased by the GSEs are high-quality loans that can be profitably securitized or retained in 

portfolio. The requirements are designed to achieve the desired goals as well as to prevent 

60 Experiments are alluded to in some annual reports, but not further described. 

Chapter 3 – GSEs’ Underwriting Requirements, Policies and Programs 29 
 

unintended consequences (e.g., Fannie Mae’s Anti-Redlining Policy61). Although both GSEs 

state that the requirements are very specific, considerable training and years of experience are 

required before DUS and Program Plus underwriters become familiar with all of the 

underwriting guidelines and possible waivers (e.g., exceptions that may be approved under a 

specific set of conditions) by the GSE to whom the multifamily mortgage loan is to be sold. 

Attention to numerous details is required throughout the underwriting process. As shown in 

Appendix C (Exhibits C-3 and C-4), there are nearly 40 items or documents (e.g., narratives, 

third party reports, or verifications) that are required even in the simplest borrower 

organizational structure (i.e., single borrower, personal financial statement, and schedule for 

real estate owned). If the borrower entity includes multiple borrowers, each borrower’s 

financial statement and schedule for real estate owned must be included in the 

application/documentation, thereby expanding the minimum number of documents required. 

61 This policy is articulated in several locations in the Fannie Mae Guide. 

30 Chapter 3 – GSEs’ Underwriting Requirements, Policies and Programs 
Exhibit 3-1
 

Statements from the Fannie Mae Multifamily Guide
 

Chapter 1. Mortgage Terms and Loan Documents 

Fannie Mae will purchase first lien multifamily Mortgages subject to specific requirements 

[emphasis added] as to the Mortgage Loan amount, payments and term, property condition, 

performance and value, and other conditions as described in this Guide. 

Section 301.01 Anti-Redlining Policy 

Fannie Mae does not designate certain areas as being acceptable or unacceptable. In other words, 

Fannie Mae does not “redline.” Locational factors are fundamental to Property appraising and 

prudent underwriting, and there is nothing improper about underwriting on the basis of a realistic 

perception of risk in a given neighborhood. Redlining can occur when perceived property risks are 

based on improper locational factors (such as the arbitrary imposition of unfavorable loan terms on 

the basis of geographic area) or when the perceptions of risk are derived from factors that do not 

predict risk, either reliably or not at all. An example of a factor that is not predictive of risk is race, 

and racial redlining is illegal under federal law . . .. None of Fannie Mae’s Property guidelines [sic] is 

intended to foster redlining. If any provision is interpreted to do so, it has been misunderstood. 

Section 305.07 Market Areas Evidencing Weakness 

The lender must carefully evaluate the strength and stability, including trends, of the market area in 

which each Property is located. 

Lenders must exercise extreme caution in considering a loan in markets with poor market indicators 

or increased market risk factors. Additional analysis and support will be required for markets with 

any of the following characteristics: current occupancy levels less than 90%; a sustained downward 

trend in occupancy levels over the prior 12 months; seasonal occupancy; rent levels that are 

competitive with single-family housing; rent levels that are declining or have not kept pace with 

inflation over the last two years; markets in which concessions are high or increasing rapidly; markets 

experiencing unsustainable construction levels coupled with a sustained downward trend in 

occupancy levels; default and foreclosure rates which are high or rising rapidly; markets with over 

15% of employment by a single employer or over 30% in a single industry; shrinking employment 

base. 

Properties located in markets with one or more of the characteristics listed above will be acceptable 

only if there are exceptional circumstances that have been fully documented by the Lender. 

Acceptable properties located in such markets typically either receive subsidies from an established 

program or have very low Loan to Value Ratios, very high Debt Service Coverage Ratios and 

shortened amortization periods. (Pg. III-3-15 - 16) 

Chapter 3 – GSEs’ Underwriting Requirements, Policies and Programs 31 
Exhibit 3-2
 

Statements from the Freddie Mac Multifamily Seller/Servicer Guide
 

Chapter 6 Multifamily Conventional Cash Mortgage Purchase Program 

6.1 Overview 

Each Mortgage to be delivered to Freddie Mac must have characteristics that demonstrate high 

investment quality. These characteristics may include 

1.	 Strong market (that is, low vacancy, minimal rental concessions, stable or increasing tenant 

demand, good balance of housing supply and demand, stable economic base, and 

employment diversification) 

2.	 Strong property operations (that is, low vacancy, minimal rental concessions, stable or 

increasing rents, and stable operating and maintenance expenses) 

3.	 Excellent property condition 

4.	 Strong Borrower and Borrower Principals (that is, net worth, liquidity, credit history and 

experience) 

5.	 Proven management ability of the Borrower, Borrower Principals or third-party property 

manager (Page 6-1) 

Chapter 15 Multifamily Negotiated Transactions Program 

15.3 Eligible Sellers 

All multifamily Program Plus® Seller/Servicers in good standing are eligible to submit offers under 

the Multifamily Negotiated Transactions Program. 

In addition, offers may be submitted by non-Program Plus entities, such as consortia, pension funds, 

bank conduits and real estate investment trusts (REITs). The offering entity must complete Freddie 

Mac’s new customer application materials, and be evaluated by Freddie Mac. Freddie Mac will make 

the determination regarding whether offering entities are qualified on a case-by-case basis. (Page 10­

5) 

15.4 Eligibility Requirement for Mortgages 

To be eligible for purchase under the Multifamily Negotiated Transactions Program . . . .The Property 

must: 

1.	 Have a current minimum occupancy of 90 percent (physical and economic) 

2.	 Have a current Debt Coverage Ratio (DCR) of at least 1.25 on the first Mortgage (as 

determined by Freddie Mac) 

3.	 Have a current minimum combined DCR of 1.15 (as determined by Freddie Mac) 

4.	 Have a current maximum Loan-to-Value (LTV) Ratio of 80 percent on the first Mortgage (as 

determined by Freddie Mac) 

32 Chapter 3 – GSEs’ Underwriting Requirements, Policies and Programs 
 

3.2 GSEs’ Appraisal Requirements and Standards 

Both of the GSEs have developed appraisal requirements. These requirements are designed 

to insure that a reliable estimate of the current market value and a complete description of the 

subject multifamily property are prepared by the appraiser. If the market value estimate is 

done properly, another appraiser should be able to replicate the market value. 

Lenders are responsible for ensuring that the appraiser is qualified to conduct the multifamily 

property appraisal.62 The lender determines whether the appraiser is qualified by reviewing 

the appraiser’s education, experience with and frequency of multifamily appraisals, 

professional affiliations, and state license or certification. Appraisers, qualified to meet the 

GSEs’ appraisal requirements, must have at least four years of experience appraising 

multifamily properties and adhere to the Uniform Standards of Professional Appraisal 

Practice of the Appraisal Standards Board of the Appraisal Foundation. In-service training is 

offered by the Appraisal Institute, which provides a five-year continuing education cycle for 

all licensure courses.63 

The GSEs’ appraisal requirements and standards also provide detailed instructions and 

lengthy forms, which are designed to ensure a consistent approach to the market value of the 

multifamily property. The topics covered include the following: 

•	 Property Identification e.g., address, legal description, sales price, lender, and 

lender’s address; 

•	 Required Attachments e.g., descriptive photographs of subject property; 

descriptive photographs of the street scene;64 sketch of the floor plan of typical 

units; owners current certified rent roll, or pro forma if proposed or incomplete; 

and owner’s income and expense statement for the current year or pro forma 

income and expense statement; 

•	 Summary of Salient Features e.g., number of apartment units, year built, date of 

appraised value, forecasted annual income, parking ratio, overall capitalization 

rate, and forecasted annual income from real property; 

62	 Two organizations provide leadership for the appraisal process: the Appraisal Foundation and the Appraisal Institute. 

The Appraisal Foundation provides standards about the professional ethics and process. The Appraisal Institute 

provides guidance on the methodology, especially in terms of “standardized” appraisal forms, training, and procedures. 

63	 May 1999 conversations with several Appraisal Institute representatives familiar with multifamily appraisals confirm 

their belief that both single and multifamily appraisals are now “standardized.” 

64	 The photographs of the property or the street scene may not include any information about the race, color, national 

origin, or handicapped status of the persons living in the property nor in the surrounding area. 

Chapter 3 – GSEs’ Underwriting Requirements, Policies and Programs 33 
•	 Summary of Neighborhood Features e.g., employment stability, convenience 

to employment, protection from detrimental conditions, adequacy of shopping 

facilities and public transportation and Property Features e.g., architectural 

attractiveness, landscaping, quality of construction, condition of exterior, room 

size and layout, compatibility to neighborhood, and overall appeal and 

marketability; 

•	 Area Data e.g., area population, growth direction of population, economic base 

and influence on real estate stability, employment stability, and role of 

government agencies with respect to apartment development; 

•	 Neighborhood and Marketing Area e.g., type [urban, suburban, rural]; direction 

of property values; present land use; overall property appeal and maintenance 

level; estimate of neighborhood vacancy rate; unit types and rent ranges in the 

neighborhood; potential for additional units; and general comments including 

either favorable or unfavorable elements not mentioned previously; 

•	 Site Description e.g., site square footage; zoning; site improvements [public 

water, public sewer; and/or street lights]; topography; sketch of property; 

description of improvements [e.g., foundation, basic structural system, and/or 

roof]; parking; and recommended observable repairs; 

•	 Value Using the Cost Approach used for forward commitment or recently 

completed property, including land value estimate and replacement cost estimate; 

•	 Comparable Rental Data competitive market rents on no fewer than three 

comparables including locational characteristics; tenant user categories [e.g., 

single people, couples, or elderly]; types of building structures; amenities; and 

unit mixes; 

•	 Monthly Rent Schedule scheduled and economic rental income for the property 

including premium income units, rent concession units, economic rents for 

restricted units; and other income from laundry facilities, parking, and 

commercial space; 

•	 Value Using the Market Approach comparison of the subject property with at 

least three properties that are similar with regard to age, size, condition, amenities, 

and tenant user profile; located in the same neighborhood or in areas that are 

physically similar; and have sold recently; 

•	 Annual Expense Analysis completed on a line-by-line basis and forecast the 

succeeding 12 months; it must also consider such items as insurance, utilities; 

building maintenance, management expenses, payroll, and replacement reserves; 

34 Chapter 3 – GSEs’ Underwriting Requirements, Policies and Programs 
 

•	 Value Using the Income Approach uses gross annual economic income less the 

forecasted vacancy and collection loss, less the forecasted annual expenses and 

replacement reserves, less the return on and recapture of the depreciated value of 

the furnishings to determine the net annual income from the property which is 

divided by a local capitalization rate to arrive at market value; and 

•	 Reconciliation and Value Conclusion after entering the indicated value using 

the cost approach (if needed), the market and the income approach to value, the 

appraiser does a final reconciliation and states a conclusion about the final market 

value with a rationale for arriving at this valuation. If the property requires 

moderate rehabilitation, the Conditions and Requirements of Appraisal indicates 

the “as is” and “as rehabilitated” estimated market value of the subject property. 

•	 Signature of Appraiser and date the appraisal was completed. This signature 

indicates certification of the appraiser’s approach according to stipulated 

conditions on the appraisal form. 

The material requested of the appraiser in the appraisal form is very detailed and specific. 

The directions to appraisers from the GSEs’ materials and from the Appraisal Institute are 

very clear with respect to issues that could potentially be discriminatory. Appraisers are 

clearly instructed to avoid making any conclusions based on the race, color, national origin or 

handicapped status of either the borrower, prospective occupants of the property or the 

owners or occupants of the properties in the vicinity of the subject property. 

At present the GSEs, HUD and the Appraisal Institute are collaborating to develop a 

standardized form for all multifamily property appraisals (Fannie Mae, 1999). This form, 

when approved, will add one more area of standardization to multifamily mortgage 

financing.65 

3.3 Comparison of GSEs’ Multifamily Mortgage Programs 

Exhibits 3-3 and 3-4 introduce selected products offered by Fannie Mae and Freddie Mac, 

respectively. The products shown in the exhibits are selected from among the 

programs/products offered by each agency. Each exhibit shows at least one program that is 

designed specifically for “affordable” multifamily mortgages. 

Broad underwriting parameters established by the GSEs with regard to maximum LTV and 

minimum DSC ratios are generally similar for the DUS and Program Plus programs, and 

these represent the bulk of Fannie Mae’s and Freddie Mac’s multifamily purchase activities. 

65	 Fannie Mae does not currently require appraisers who have been designated as Members of the Appraisal Institute to 

use a standard form. 

Chapter 3 – GSEs’ Underwriting Requirements, Policies and Programs 35 
 

However, as already noted, in its DUS product line (which accounts for more than half of its 

multifamily volume), Fannie Mae delegates underwriting and servicing responsibilities to 

approved seller/servicers. Freddie Mac, in contrast, re-underwrites each of its acquisitions, 

and negotiates prices for each acquisition individually. Fannie Mae’s pricing tiers offer 

better rates for less leveraged loans (i.e., lower LTVs), reflecting a type of risk-based pricing. 

Loan amounts, terms, and amortization periods (which pertain more to products and 

programs than underwriting per se) are generally similar between Fannie Mae and Freddie 

Mac. 

Exhibit 3-5 provides information on FHA multifamily programs, which differ from those of 

the GSEs in a number of respects. FHA-insured loans can have longer self-amortizing terms; 

permit up to 95 percent LTV for non-profit borrowers in the FHA 232 program; and allow 

DSC ratios as low as 111 percent. However, FHA’s processing fees frequently exceed those 

of the GSEs, making the overall cost of some FHA programs less price competitive. More 

details on these and other features of selected Fannie Mae, Freddie Mac, and FHA programs 

are shown in Appendix D.66 

66 It should be noted that additional features of the programs are shown in Exhibits D-1 to D-3 of Appendix D. These 

features are included in the published information on the programs and are subject to change by the offering agencies. 

36 Chapter 3 – GSEs’ Underwriting Requirements, Policies and Programs 
Chapter 3 – GSEs’ Underwriting Requirements, Policies and Programs 

Exhibit 3-3
 

Selected Multifamily Finance Programs: Fannie Mae
 

Name of 

Program DUS Product Line Prior Approval Product Line 

Targeted Affordable Housing 

Program 5-50 Streamlined Mortgage 

Description Under DUS, Fannie Mae purchases 

qualified multifamily mortgages from 

specially designated lenders. These 

DUS lenders have been delegated 

responsibilities for originating, 

underwriting, closing and servicing. 

Fannie Mae purchases multifamily 

mortgages without prior review by 

Fannie Mae. 

Individual transactions are submitted 

by approved Prior Approval lenders to 

Fannie Mae regional offices, where 

they receive full review prior to 

commitment. Underwriting standards 

are the same as DUS. Current priority 

is given to targeted affordable housing 

transactions. 

This program is available through 

either the DUS or Prior Approval 

product lines. This program has 

specific affordability and 

occupancy restrictions similar to 

the LIHTC program. 

Through this program, available through the 

DUS product line, Fannie Mae purchases 

small multifamily properties of five to 50 

apartment units. Mortgages purchased 

through the program are eligible for 

streamlined underwriting requirements and 

processing and reduced costs. 

Loan Amount No minimum or maximum loan 

amount (average is $5 million) 

No minimum or maximum loan 

amount 

No minimum or maximum loan 

amount 

No maximum or minimum loan amount 

(average is $750,000) 

Term and 5, 7, 10, 15, 25 years, or others by 5, 7, 10, 15, 25 years, or others by 5, 7, 10, 15, 25 years, or others by 5 to 30 years; amortization from 10 to 30 

Amortization request; 25- or 30-year amortization 

or less, by request. ARMs available 

also. 

request; 25- or 30-year amortization or 

less, by request. ARMs available also. 

request; minimum 18-year term 

for LIHTC properties; 25- or 30­

year amortization or less, by 

request. ARMs available also. 

years. ARMs available also. 

Maximum 

Loan-to-Value 

Ratio 

80%. 80%. Special underwriting, up to 90% 

for targeted affordable housing 

transactions. 

80% for fixed-rate loans, 77.5% for ARMs. 

Debt Service 125% or higher for most loans 125% or higher for most loans For properties supported 100% by 125% or higher for fixed-rate loans; 100% at 

Coverage project-based Section 8 HAP 

contract is 110%; for other 

targeted affordable housing 

properties—115%. 

cap for ARMs. 

Subordinate The combined DSC and LTV of the The combined DSC and LTV of the The combined DSC of first The combined DSC and LTV of the first 

Financing first mortgage and the subordinate 

financing must conform with the 

DSC and LTV limits established for 

the underwriting tier of the first 

mortgage. 

first mortgage and the subordinate 

financing must conform with the DSC 

and LTV limits established for the 

underwriting tier of the first mortgage. 

mortgage and subordinate 

financing must be a minimum of 

105%. 

mortgage and the subordinate financing must 

conform with the DSC and LTV limits 

established for the underwriting tier of the 

first mortgage. 

Sources: Adapted from Multi-Housing News (August/September 1996), Fannie Mae brochures, and AllRegs. 

37 
Chapter 3 – GSEs’ Underwriting Requirements, Policies and Programs 

Exhibit 3-4
 

Selected Multifamily Finance Programs: Freddie Mac
 

Name of 

Program Conventional Cash Program Forward Commitment Pilot LIHTC Execution 

Senior Housing and 

Assisted Living Pilot Program 

Description The program is for refinance, acquisition or 

moderate rehabilitation loans that demonstrate 

high investment quality. 

This pilot provides a single source of construction 

and permanent first mortgage financing for newly 

constructed properties or those being substantially 

rehabilitated that will receive 9 percent credits under 

the LIHTC program. It provides for a maximum of 

36-month interest-only construction financing, 

followed by an 18-to 30-year amortizing permanent 

loan upon construction completion, lease-up, and 

property income stabilization. 

This pilot provides a source of first mortgage 

financing for rental housing that is exclusively 

for senior residents, including properties that 

provide assistance for residents with the activities 

of daily living. 

Loan Amount Small loan program: $300,00 - $999,999. 

Large loan program: $1 million - $50 million. 

$1 million to $15 million per property. $3 million to $15 million per property. 

Term and 

Amortization 

5, 7, 10, 15, 25 years, or others by request; 25- or 

30-year amortization or less, by request. 

18 to 30 year term; 25 to 30 year amortization. 7, 10, 15, 20, and 25 years (loans with terms of 

20 years or longer must be self-liquidating). 

Standard amortization schedule is 25 years or 

less. 

Loan to Value 

Ratio 

80%, based upon Freddie Mac value. 85% maximum; 90% with HUD risk sharing. (See 

subordinate financing). 

75% maximum. 

Debt Service 

Coverage 

125% for loans of $1 million or more; 130% 

minimum for loans under $1 million. 

115% minimum; 110% with HUD risk sharing. (See 

subordinate financing). 

135% minimum. May be as low as 125% for 

shorter amortization periods. 

Subordinate 

Financing 

Subordinate financing will be considered under 

certain conditions and circumstances. 

Subordinate financing allowed with consent of 

Freddie Mac:a 

Hard: DSC of 110% minimum 

LTV of 90% maximum 

Soft: DSC of 105% minimum 

LTV of 100% maximum 

None. 

a Industry subordinate loan. 

Sources: Adapted from Multi-Housing News (August/September 1996), Freddie Mac web page (www.freddiemac.com/multifamily/prodsh01.htm and 

www.freddiemac.com/multifamily/lowincome.htm), AllRegs, and Freddie Mac brochures. 

38 
Chapter 3 – GSEs’ Underwriting Requirements, Policies and Programs

Exhibit 3-5
 

Selected Multifamily Finance Programs: FHA
 

Name of 

Program FHA 221(d)(4) Program FHA 223(f) Program FHA 232 Program 

Description The program provides mortgage insurance for 

new construction or substantial rehab of rental or 

cooperative multifamily housing. (Substantial 

rehab when cost exceeds $6,500 per unit adjusted 

by area high cost percentage, or when more than 

one major building component must be replaced.) 

The program is for acquisition or refinance of 

existing nursing homes and assisted living 

facilities. 

This program is for new construction or 

substantial rehabilitation of nursing homes and 

assisted living facilities. 

Loan Amount No minimum or maximum No maximum limits. Up to 90 % (95% for non-profit) of cost. 

Underwritten at 111% pro forma debt service 

coverage. 

Term and 

Amortization 

Up to 40 years, self-amortizing. Up to 35 years, self-amortizing. (75% remaining 

useful life). 

40 years, self-amortizing. 

Loan to Value 

Ratio 

None for new construction; 90% for substantial 

rehabilitation. 

Up to 85% provided no cash out. Up to 79% 

with proceeds to the borrower. 

Up to 90% (95% for non-profit borrowers). 

Debt Service 

Coverage 

111% for new construction. No change from 

original underwriting for rehab projects; no 

performance requirements. 

117.6%. No change from original underwriting for rehab 

projects; no performance requirements. 

Subordinate 

Financing 

Subordinate financing will be considered under 

certain conditions and circumstances. 

In certain cases, second mortgages may be 

permitted where acquisition or refinancing costs 

are greater than the mortgage amount. The 

secondary debt may have no foreclosure rights 

and cannot exceed 7.5% of the project’s value, 

or: 

a) In a purchase transaction, 7.5% of costs. 

b) In a refinance transaction, 50% of the 

difference between total costs and the mortgage 

amount. 

Second mortgages are allowed subject to HUD 

review and provided that the secondary debt has 

no foreclosure rights. 

Sources: Adapted from Multi-Housing News (August/September 1996); and “a mortgage banker’s” brochures. 

39 
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40 Chapter 4 – The State of the Multifamily Primary and Secondary Markets 
 

Chapter Four 

The State of the Multifamily Primary and Secondary 

Markets 

Many discussions of the role of the GSEs in the multifamily mortgage market make some 

comparison with the role of the GSEs in the single-family mortgage market, where the GSEs 

are the dominant secondary-market players. In its 1995 Final Rule, HUD recognizes several 

differences between these markets, but asserts that multifamily mortgages pose a different 

level of risk, but not a higher level of difficulty (HUD, 1995). HUD maintains that the 

perception that the multifamily market was riskier and more difficult to judge was an 

impression left from the volatility of the market resulting from wide swings in tax policy, as 

described in Chapter 2 of this report. 

This chapter provides context for Chapter 5, which will discuss policy issues related to 

multifamily housing finance in both the primary and secondary markets, including affordable 

housing, credit gaps, and fair lending. Section 4.1 presents an overview of losses by the 

GSEs and by FHA, which have greatly affected assumptions about the credit risk of 

multifamily mortgages. Section 4.2 discusses special challenges in multifamily financing, 

and Section 4.3 concludes with a discussion of the volatility of the multifamily market and 

the potential impacts of market cycles. 

4.1 Multifamily Losses by the GSEs 

The appropriate role of the GSEs in the multifamily mortgage market must be understood in 

the context of their prior experiences with substantial losses. During the 1980s and early 

1990s, the GSEs encountered serious challenges to their roles in the multifamily mortgage 

markets (DiPasquale and Cummings, 1992). Underlying their losses were two important 

factors: a real estate recession following the Tax Reform Act of 1986 and underwriting 

requirements and standards that were too lenient to address multifamily market conditions 

during a recession. One result of the GSEs’ experience in the early 1990s was a lasting 

impression within the secondary mortgage market that multifamily mortgages could be risky 

investments.67 

67 More recently, multifamily properties are considered sound investments when compared to the risks associated with 

other types of commercial properties (Goldberg and Capone, 1998). 

Chapter 4 – The State of the Multifamily Primary and Secondary Markets 41 
 

Fannie Mae 

At the end of fiscal year 1990, Fannie Mae’s total portfolio of $17.9 billion in multifamily 

loans included $6.9 billion (39 percent) in multifamily mortgages that neither had recourse to 

the lender nor FHA insurance and were therefore considered “at risk” in the sense that Fannie 

Mae would itself sustain any loss. At the same time, GSE underwriting practices in the mid1980s reportedly overstated net operating income by 10 to 20 percent, and underwriters often 

overestimated property values by failing to gather adequate information regarding property 

condition.68 Fannie Mae’s delinquency rates69 peaked at 6 percent in the third quarter of 1988 

before falling to 2.7 percent in the first quarter of 1991. 

In 1987, Fannie Mae developed the Delegated Underwriting and Servicing (DUS) lender 

program with new underwriting requirements that emphasized risk sharing.70 The DUS 

program built on the concept of delegated underwriting in FHA’s co-insurance program, but 

sought to avoid the risk of defaults and fraud that had plagued FHA co-insurance by 

redesigning loss-sharing provisions and selecting lenders carefully.71 

Before the co-insurance program was launched, FHA, a major source of insurance for 

multifamily housing, was the sole guarantor for the loans it insured. Under the co-insurance 

program, FHA delegated a portion of the risk to private-sector lenders who would originate, 

underwrite, and service the mortgages. The co-insurance program was a financial disaster 

for HUD for a number of reasons (Scott, 1992): 

•	 FHA did not focus on ensuring that the private lenders remained financially sound 

by: 

- Demanding sufficient capital from the lenders;
 

- Monitoring the financial condition of the lenders;
 

- Requiring reserve accounts in the case of default; and
 

- Approving a group of lenders as co-insurers; instead, FHA relied on two
 

lenders for over two years while others were engaged in FHA’s laborious 

approval process. 

•	 FHA focused on what its employees thought they knew how to do better than the 

private sector—multifamily underwriting—and wrote a 50 page document 

68 Goldberg and Capone (1998), p. 95. 

69 Delinquency rates are based on payments that are 60+ days late, plus foreclosures. 

70 According to Goldberg and Capone (1998), Fannie Mae also required more due diligence and tighter controls over the 

calculation of the underwriting ratios. 

71 See Scott (1992). 

42 Chapter 4 – The State of the Multifamily Primary and Secondary Markets 
 

instructing lenders on how to underwrite properties. But FHA did not understand 

employee reservations about delegation. Thus the program did not: 

- Reassure civil servants that the co-insurance program would not threaten their 

jobs; and 

- Provide incentives to employees to implement the co-insurance program in a 

timely and cost-effective way. 

Fannie Mae’s DUS program was launched in the light of the HUD risk-sharing experience 

and in anticipation of the coming impacts of the Tax Reform Act. The DUS program placed 

more emphasis on prevention of lender failure, not reliance on real estate collateral: 

•	 DUS required higher capital standards for approved originators—$2.5 million 

minimum instead of HUD’s $1.5 million; 

•	 DUS required lenders to set up reserve accounts; and 

•	 DUS began with ten approved lenders, compared with two approved lenders in 

the FHA program. 

The DUS strategy was successful in keeping delinquencies low. The delinquency rate on the 

DUS loans was only 0.2 percent (third quarter 1990). 

Freddie Mac 

In 1990 Freddie Mac’s total portfolio of multifamily loans was $11 billion. The portfolio 

included $9.7 billion (88 percent) generated by their cash mortgage purchase program 

without recourse or credit enhancement and that was considered “at risk.” Only $1.3 billion 

(12 percent) was credit enhanced by Freddie Mac.72 Freddie Mac’s delinquency rate peaked 

in 1990, later than Fannie Mae’s, and at a lower rate (3.8 percent). 

The delinquency rate during 1990 was 4.2 percent among the conventional cash mortgage 

purchase program loans and 0.8 percent within the guarantor program.73 In 1990 dollars, the 

charge-offs between 1986 and the end of the third quarter of 1990 were $122 million. By 

1991, Freddie Mac’s multifamily charge-offs were $162 million or 51.4 percent of all its 

credit losses, although multifamily loans were only 2.6 percent of their entire portfolio 

72	 According to Goldberg and Capone (1998), Freddie Mac did not recognize the underwriting deficiencies as soon as 

Fannie Mae did. “Freddie Mac continued to purchase noninvestment-quality loans through 1990.” (p. 95). 

73	 Freddie Mac has attributed the difference in performance among the guarantor program loans to several facts: they 

were originated by depositories that expected to retain them in portfolio; they were seasoned (held for at least 12 

months prior to sale); some had credit enhancements; and many were in the West, where property values increased 

substantially during the 1980s. 

Chapter 4 – The State of the Multifamily Primary and Secondary Markets 43 
 

(Goldberg and Capone, 1998). In 1990, Freddie Mac shut down its cash mortgage purchase 

program until late 1993; its only activity with multifamily mortgages was refinancing loans 

in its own portfolio. 

DiPasquale and Cummings (1992) attribute Fannie Mae’s relatively lower losses to their not 

bearing the full risk of loss in the vast majority of their multifamily business activities. 

Although most of the loans in their “at risk” portfolio were DUS lender-originated, the 

lenders shared the risk of loss and had been carefully screened for sound business practices 

and capital reserves to cover potential losses. They also believe that although the “written 

underwriting requirements for multifamily mortgage programs for Fannie Mae and Freddie 

Mac show surprisingly similar criteria,” there were differences in the implementation of the 

criteria. According to DiPasquale and Cummings (1992), the primary weakness, uncovered 

later by Goldman, Sachs equity analysts,74 was that Freddie Mac was allowing higher 

property appraisals that over-valued the properties and artificially reduced the loan-to-value 

(LTV) ratios75 (instead of using debt service coverage (DSC) ratios–the ratio of net operating 

income to debt service payments). Freddie Mac was more lax than Fannie Mae was in 

originating, servicing, and auditing the underwriting standards that were being used. 

In summary, DiPasquale and Cummings (1992) draw the conclusion that many factors 

influenced the formation of the bleak impression of the credit risks in the multifamily 

mortgage market, including the overall weakness in the real estate market at the time. They 

state: “The well-publicized problems at the FHA and Freddie Mac have led many to 

conclude that the multifamily mortgages, particularly those on low- and moderate-income 

housing, are very risky investments.”76 

Prompted in part by the HUD housing goals, Freddie Mac re-entered the multifamily 

mortgage market in late 1993. Purchase volume rose rapidly, from $191 million in 1993 to 

$6.6 billion in 1998, $7.6 billion in 1999, and $6.8 billion in 2000. Freddie Mac’s policy of 

re-underwriting the loans it acquires, rather than delegating underwriting, may be viewed as 

motivated in part a the perceived need to minimize the types of risks that contributed to 

earlier losses. 

4.2 Special Challenges in Multifamily Financing 

Given the GSEs’ earlier losses, the conclusion that multifamily real estate investing was 

riskier than single-family has seriously impacted the development of the secondary market 

74 Goldman, Sachs, 1990. 

75 LTVs were considered the most important variable for underwriting single-family mortgages; Freddie Mac extended 

LTVs to multifamily properties. Vandell (1992) determined that a high LTV is the principal determinant of default risk 

in CRA loans. The DSC is the principle measure of credit-worthiness of a multifamily property’s financials. 

76 p.110 [Emphasis added.] 

44 Chapter 4 – The State of the Multifamily Primary and Secondary Markets 
 

for multifamily mortgages. In 1992, DiPasquale and Cummings observed that the 

multifamily market was considerably slower than the single-family mortgage market in 

penetrating the national and international capital markets. They asserted that an increase in 

the rate of growth in multifamily secondary market capitalization would require: 

•	 Increasing standardization of multifamily mortgages; 

•	 Increasing credit quality with both better underwriting and credit enhancement; 

•	 Educating investors on the underlying structure of multifamily mortgage 

instruments and on the performance and risks of multifamily securities; and 

•	 Providing access to consistent data for analyzing the risks and performance of 

multifamily investments. 

Some of these requirements have now been addressed, at least in part. For example, various 

market forces (e.g., large mortgage banks and conduits) have begun increasing 

standardization of multifamily mortgages. The GSEs have improved underwriting and credit 

enhancement to more effectively control credit risk and reduce default losses. Wall Street 

conduits and various rating agencies have participated in the education of investors regarding 

the multifamily market through the trade press. At least in part as a result of these changes, 

over the past seven years, the reputation of multifamily projects has changed from risky by 

traditional lenders and investors to very sound investments (Goldberg and Capone, 1998). 

Other changes in the structure of the multifamily mortgage market have also led to increased 

securitization and a decreased perception of riskiness. According to Szymanoski (1998), the 

system for financing multifamily properties has expanded from depository lenders (e.g., 

banks and thrifts) to other lending institutions (e.g., mortgage banks, state housing finance 

agencies, and community-based lending consortia) that have access to and often sell loans to 

the secondary markets. Forms of ownership have expanded as well, from individual owners 

and partnerships to publicly traded real estate investment trusts (REITs). Simultaneously, the 

Federal government’s role has decreased, as FHA’s share of the multifamily market has been 

replaced by non-FHA-insured loan financing, especially for multifamily developments with 

equity investments from the Low-Income Housing Tax Credits (LIHTC) program. 

Nonetheless, according to Cummings and DiPasquale (1998b), the lack of standardization 

and the lack of complete information for accurate assessment of the risks and returns of 

investments77 in the multifamily market has continued to slow the development of the 

secondary market for multifamily loans. 

77	 To a considerable extent, the GSEs have contributed to the more rapid development of a secondary market for singlefamily mortgages by proposing standardization of the: 

� Mortgage contract; 

Chapter 4 – The State of the Multifamily Primary and Secondary Markets 45 
 

Although the GSEs have succeeded in developing these two key elements for the singlefamily mortgage market—standardization and information—the GSEs’ efforts in the 

multifamily market lag by two to three decades in the development of these elements. 

Furthermore, the multifamily market, especially for affordable housing targeted at low- and 

moderate-income tenants, has additional elements not found in single-family loans that pose 

special challenges for standardization. For example, they cite the structure of grants and soft 

second mortgages. These structures often come with restrictions that encumber the first 

mortgage and make the package (of the first mortgage and subordinate debt) difficult to sell 

to the secondary market. 

Follain and Szymanoski (1995) conclude that special features associated with financing 

affordable multifamily housing may in fact create uninsurable risks and prohibitive 

information costs. For example, the increasing reliance on nonprofit organizations to provide 

affordable multifamily housing contributes to the complexity of financing packages and high 

costs of obtaining information. 

To explore the contribution the GSEs could make to develop the multifamily market, 

Cummings and DiPasquale (1998b) present two case studies of programs in which a GSE has 

cooperated with an organization specializing in affordable multifamily housing: 

•	 Freddie Mac and the Local Initiatives Managed Assets Corporation (LIMAC),78 

an initiative begun in February 1991 and suspended after two years that had a goal 

of $100 million and was targeted to low-income populations and neighborhoods; 

and 

•	 Fannie Mae and Enterprise Mortgage Investments Inc. (EMI),79 an initiative begun 

in November 1994 and still ongoing, with a goal of $150 million available for 

LIHTC-eligible multifamily housing loans. 

GSE ambivalence regarding the perception of credit risk involved in lending on affordable 

multifamily properties is evident with regard to the history of both pilot programs. 

Cummings and DiPasquale (1998) conclude that both initiatives had mixed results, although 

the Fannie Mae/EMI pilot was more successful in a number of regards. The Freddie 

Mac/LIMAC initiative was suspended after two years with only one completed transaction, 

involving eight loans with an aggregate loan amount of $4.6 million. As of June 1997, 15 

transactions comprising $20.5 million had been completed under the Fannie Mae/EMI pilot, 

which is ongoing. 

� Underwriting requirements; 

� Mortgage documents; and 

� An information database for secondary market reassessment. 

78 LIMAC is a subsidiary of the Local Initiatives Support Corporation (LISC). 

79 EMI is a subsidiary of the Enterprise Foundation. 

46 Chapter 4 – The State of the Multifamily Primary and Secondary Markets 
 

Both programs suffered initially from documentation requirements that borrowers perceived 

as burdensome. Cummings and DiPasquale observe that “The smaller, nonprofit, and CDC 

developers that these programs intended to bring to the market were unprepared, and perhaps 

unwilling or unable, to meet the high costs of Freddie Mac’s and Fannie Mae’s due diligence 

requirements.” (p. 30.) 

In addition, the Freddie/LIMAC program had difficulty with predictable pricing because 

pricing was ultimately determined by a Freddie Mac pricing committee more accustomed to 

pricing single-family mortgages. During the course of the Fannie/EMI pilot, pricing 

concessions by Fannie Mae significantly enhanced the competitiveness of the program. 

Cummings and DiPasquale (1998b) ultimately conclude that given the size and profitability 

of the single-family market, the GSEs’ focus remains fixed on this segment of the mortgage 

market. Small, undercapitalized organizations like LIMAC and EMI can generate neither the 

volume nor the profits from the affordable multifamily housing segment to gain significant 

attention by the GSEs. Another conclusion is that both GSEs need to develop more 

experience and expertise with the multifamily market to understand how to make the 

affordable multifamily deals work. Finally, they conclude that HUD must set higher 

multifamily goals if the GSEs are ever to become leaders in the multifamily market. 

These case studies by Cummings and DiPasquale (1998b) provide some indications of the 

barriers and potential solutions that could be implemented by the primary and secondary 

markets for multifamily mortgages. The case studies also underscore the difficulties that 

must still be addressed if the GSEs are going to become national leaders in the multifamily 

market. 

4.3 Volatility in the Multifamily Market 

The level of liquidity in the multifamily market has changed substantially over the last 

decade. In the early 1990s, the single family market had higher liquidity: three-fourths of the 

originated loans had been sold to the secondary market while only one-third of the 

multifamily mortgages had been sold to the secondary market.80 Since then, integration with 

the capital markets in the multifamily mortgage market has approached that of the singlefamily market. In 1999, 58.8 percent of new multifamily mortgage originations were 

securitized, compared with 60.8 percent of single-family originations.81 However, DiPasquale 

and Cummings (1998) suggest that there remains a lack of liquidity in particular segments of 

the multifamily market, such as affordable multifamily housing and multifamily properties in 

80 HUD, 1995 [p. 61914] and DiPasquale and Cummings, 1992 

81 HUD, 2000 [p. 65107] and The Mortgage Market Statistical Annual for 2000. 

Chapter 4 – The State of the Multifamily Primary and Secondary Markets 47 
 

need of rehabilitation. As described in Chapter 2, since the 1995 Final Rule, the GSEs have 

increased their acquisition of multifamily loans. 

Simultaneously, other players in the secondary market have responded with increased interest 

in the multifamily market, as well. Although volatility in the financial markets in 1998 

(discussed further below) that increased CMBS spreads had a dampening effect on the 

securitization of commercial mortgages in 1999, securitization of commercial mortgages for 

1999 were approximately $57 billion (Federal Reserve, 2000). The proportion of the CMBS 

that are backed by multifamily properties ranges from one-quarter to one-half.82 Projections 

for 2000 were that the multifamily market would experience slow, but steady growth in 2000 

(Viccaro, 1999). 

The international capital markets shifted dramatically in the late summer and early fall of 

1998, with significant effects on the CMBS market, as described later in this section. Was 

there any advance warning? The answer is “yes” from several Wall Street entities and 

associates. For example, E&Y Kenneth Leventhal Real Estate Group (1998) warned that the 

CMBS market might be leading to more inherent risk than had been seen since the real estate 

recession in the early 1990s. They cited competition as the reason that the following chain of 

business pressures was in evidence: 

•	 Borrowers were pressuring conduits to lower prices and loosen mortgage 

covenants; 

•	 Conduits were pressuring rating agencies to reduce subordination levels; 

•	 Rating agencies were expressing concerns that the longer amortization periods 

may have been artificially increasing DSCs, and the special servicers’83 

experience was still not thoroughly tested; and 

•	 Investors were expressing concerns that the rating agencies were more concerned 

with the lending process than with the quality of the loans, the collateral, and 

underwriting process. 

Esaki and Philips (1997), also indicated that the investment market’s appetite for multifamily 

real estate investment could change if the capital markets change in the future. Other, more 

optimistic opinions, however, were also continuing to appear. For example, in 1998 the 

Urban Land Institute’s forecast that in the near term, “profits should continue to rise 

82	 Berton, in a discussion of the role of commercial banks in apartment mortgage securitization, states “as rating agencies 

prefer multi-housing to represent a third or more of the underlying collateral . . ..” Dinsmore (1998) cites an interview 

with Sally Gordon, KPMG Peat Marwick, in which she says approximately one-half of the total outstanding $170 

billion of CMBS indebtedness is collateralized by multifamily properties. 

83	 A special servicer assumes servicing responsibilities when a loan goes into default and conducts the “workout” or 

foreclosure process. 

48 Chapter 4 – The State of the Multifamily Primary and Secondary Markets 
 

moderately through mid-1999, although increases will be slightly off the 1997 pace.”84 The 

Urban Land Institute forecast said that, although there are signs of a slowdown in the flow of 

debt and equity capital for real estate, there was no evidence of a shortage through mid-1999. 

The report did say that between 1999 and 2001, however, some of the commercial real estate 

market’s excessive behaviors that resulted in the last real estate recession (e.g., overbuilding, 

overpaying, and lax underwriting) were seen as possibly leading to future reductions in 

growth of profits, property values, and rent levels. 

By late summer of 1998, capital market conditions changed. According to Holson and Bagli 

(1998), when Russia stopped paying on its bonds and the Asian and Latin American markets 

reverberated, investors sought less risky investments (e.g., 10-year Treasury securities).85 

Those who were still willing to invest in CMBS demanded higher spreads (i.e., 80 basis 

points in June grew to 110 basis points by August 28, 1998). Any investment bank holding 

commercial (or multifamily) loans in their portfolio was likely to be collecting interest rates 

that were lower than what they would have to pay investors, “a money-losing equation.” In 

many cities, the commercial real estate market slowed dramatically after late August 1998; 

by late 1999, new CMBS issuance was down substantially from 1998’s record high, and 

developers and investors were still finding it more difficult to finance purchase of new 

properties (Viccaro, 1999). 

The volatility in the CMBS market led to a windfall for some large banks and for the GSEs 

as well (Berton, 1998). During the fall of 1998, the spreads for the GSEs rose less than the 

non-GSE rates. The banks with connections to the GSEs (or with strong balance sheets that 

could hold the newly originated mortgages in portfolio) grew even stronger. For example, 

Banc One Capital Funding group expected to end the fourth quarter with $500 million in new 

originations or three times the level of the first three quarters combined. The source of the 

volatility was not attributable to perceived increased risks in the CMBS market, but rather to 

a decrease in investor tolerance for risk. As Berton (1998) writes: 

Throughout the tumultuous period, property finance professionals have 

stressed that the securities and underlying real estate collateral have 

remained sound assets. As Banc One’s [Ken] Bowen notes, the spread hikes 

were not precipitated by any losses to bond buyers—nor by any real 

evidence of a downturn in the relative health of multifamily real estate 

markets around the country. 

The GSEs’ volume of multifamily business in 1998 was unusually large. Fannie Mae 

volume increased by about 80 percent to $12.5 billion in 1998 from about $7 billion in 1997. 

84	 ULI, 1998 

85	 The flight to safety in U.S. Treasury securities has meant the yields for Treasury securities have “fallen through the 

floor,” to as low as five percent (Foong, 1998a). 

Chapter 4 – The State of the Multifamily Primary and Secondary Markets 49 
 

Freddie Mac’s business increased by about 140 percent to about $6.5 billion in 1998 from 

about $2.7 billion in 1997. In part this increase in GSE activity was a result of less secondary 

market competition from Wall Street entities (conduits and REITs). 

According to Berton’s report (1998), the fallout of the volatility in the multifamily market 

might be lasting. The interest rates on multifamily mortgages that rose during the volatility 

were expected to remain higher than during mid-1998.86 The other reported predictions 

include: 

•	 Spreads would decrease, but not return to mid-1998 levels; 

•	 Vacancy rates would decline; 

•	 Multifamily building would decrease; and 

•	 Quote of terms would include interest “floors,” in addition to spreads. 

Changes in the capital markets raise questions about the magnitude and timing of credit gaps 

in the future: 

•	 Will this lead to credit gaps in the multifamily market? 

•	 If so, in which segments of the multifamily market do credit gaps appear? 

•	 Will the cycle downturn be as severe as in the early 1990s? 

The answers to the first two questions have yet to emerge, especially in terms of which 

segments of the affordable multifamily market will be struck first. It is difficult to compare 

the current cycle with the early 1990s; the economy is in much better condition and the 

multifamily housing market is not glutted with oversupply in most markets. The answer to 

the third question has been addressed in several prior forecasts described below. 

In late 1996, Wratten forecast that the credit crunches of 1970, 1974-1975, 1980-1982, and 

the early 1990s would probably not be repeated. Instead, so much had been learned about the 

commercial real estate market since the last crunch that many of the danger signals would be 

recognized earlier. He also forecast that one of the next phases of development for portfolio 

lenders would be adding an “exit strategy” to their traditional origination and servicing 

strategies. The exit strategy would encompass a variety of secondary market alternatives to 

their typical “buy and hold” strategies. This would result in a substantial increase in the 

86	 According to Berton (1998), lenders who previously would quote the minimum spreads were now quoting the absolute 

interest “floor.” 

50 Chapter 4 – The State of the Multifamily Primary and Secondary Markets 
 

 

CMBS market. He foresaw it growing to approximately $200 billion within a few years (of 

1996).87 

Predicting what will happen next with both commercial and multifamily markets depends on 

where the market is in its historically recurring cycle. Gordon (1997) reports findings on a 

KPMG study of the commercial real estate lending strategies among commercial banks 

within the previous year. They found intense competition in the market coming from a 

variety of sources. The view, from the commercial bankers’ perspectives, was that 

“competition, not risk, is driving pricing.” This translates into “lenders are pressed to shave 

either price—or underwriting standards—or both.” Given the historical business cycles of 

the capital markets, Gordon cautions that although the market appears to be mature, with 

substantial additional capital in REITs, CMBS and the primary mortgage market, commercial 

property values did not fully adjust during the last real estate downturn, and commercial 

lending may enter a slowdown during an adjustment period when values gradually return to 

“par.”88 

Goldberg and Capone (1998) drew a similar conclusion about a repeat of the early 1980s 

cycle in their simulations of multifamily mortgage credit risk. Their simulations addressed 

projections for loans that might be underwritten in 1998. They cited several changes in the 

multifamily market including the use of greater due diligence, valuation controls, and lower 

interest rates (that could reduce rental price growth and depreciation allowances) as factors 

that decrease the overall mortgage credit risk. The most serious risk factors that could 

negatively impact the market would be another building boom or a rise in interest rates. 

Repeating the 1983 experience, according to Goldberg and Capone, would require a 

“significant deterioration in underwriting quality and adverse legislative action.” For 

example, their simulation models show that to keep the ten-year cumulative default rate 

under 8 percent, even under severe economic conditions, DSCs of 1.30 and LTVs of 0.70 

would suffice. If, however, underwriting standards permit DSCs of 1.20 (or 1.10 for special 

affordable housing loans) and LTVs of .80 (or .90 for special affordable housing loans), then 

replication of the 1983 experience is possible. 

87	 As a reference, in 1996, the total value of the all stock listed on the American Stock Exchange was approximately $125 

billion. As of 1998, the portfolio of CMBS was over $170 billion. 

88	 “In property markets, or the market for space, we have become accustomed to thinking of “excess capacity,” space that 

was built in excess of underlying demand. Gradually demand erodes this excess supply, allowing vacancy rates to 

decline. Perhaps the same model applies to capital markets. “Excess” capital that flowed into commercial real estate in 

the 1980s is being eroded gradually through repricing of the underlying assets— but the process is not yet over. If we 

have not really finished with the last cycle yet, then the market is still not “at par.” As a result, we might continue to 

see growth in commercial mortgages at a rate below historical averages or current economic growth rates. At the same 

time, we might be alert to a potential hidden source of instability.” (Gordon 1997, p. 8.) 

Chapter 4 – The State of the Multifamily Primary and Secondary Markets 51 
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52 Chapter 4 – The State of the Multifamily Primary and Secondary Markets 
 

Chapter Five 

Policy Issues in the Multifamily Market 

As discussed in Chapter 3, the purpose of the GSEs’ underwriting and appraisal requirements 

and standards is to ensure that the borrower will have the ability to repay the loan and the 

property will have sufficient value to recover the loan if necessary. However, it is possible 

that some of these requirements pose obstacles to the financing of specific types of 

multifamily property or those located in certain types of neighborhoods. Even if these 

obstacles are not explicit in the GSEs’ requirements, they may result from the way the GSEs’ 

underwriting requirements are being interpreted and applied. The GSEs’ underwriting and 

appraisal standards as they are written were reviewed in Chapter 3. 

This chapter presents background information on three important policy issues that HUD is 

considering with respect to the GSEs’ multifamily underwriting and appraisal requirements 

and standards. Each section examines the GSEs’ mortgage purchases for evidence that the 

actual application of the GSEs’ requirements may present obstacles to financing for 

particular types of multifamily housing. Section 5.1 addresses the GSEs’ track record in 

lending for affordable housing. Section 5.2 describes credit gaps in the multifamily market, 

particularly for small multifamily properties, for multifamily properties with significant 

rehabilitation needs, and for multifamily housing for seniors. Section 5.3 discusses potential 

fair lending implications of the GSEs’ business practices. The section first shows that it is 

reasonable to assume that fair lending laws apply to GSE purchases of loans for multifamily 

properties. The section then presents two areas where disproportionate adverse impacts on 

protected groups may result from the GSEs’ underwriting and appraisal requirements: how 

guidelines affect older neighborhoods and the role market strength plays in underwriting. 

The section concludes with a discussion of GSE lags in purchasing specific types of loans. 

While these lags do not demonstrate that the GSEs are violating fair lending legislation, they 

raise the question of whether some underwriting and appraisal guidelines are having a 

disproportionate adverse impact on protected classes. The views of lenders and national 

experts on these policy issues are presented in Chapter 7. 

5.1 Affordable Lending 

The first policy issue that could be affected by the GSEs’ underwriting and appraisal 

requirements and standards is affordable lending within the various segments of the 

multifamily market. In the context of the multifamily market, affordable lending can be 

considered lending for multifamily housing that is affordable to low-income tenants.89 Segal 

89 Low-income refers to households with incomes at or below 80 percent of area median. 

Chapter 5 – Policy Issues in the Multifamily Market 53 
 

and Symanoski (1997) have previously examined the secondary mortgage market and the 

role of the GSEs. They contend that, following the losses experienced by the GSEs and 

others in the multifamily market in the early 1990s, there has been considerable GSE 

reluctance to rebuild an active secondary market for multifamily properties, especially in the 

affordable segments. 

HUD’s 1995 Final Rule established GSE housing goals for the period 1996 through 1999. 

Included in these goals were special affordable goals that set minimum annual dollar 

amounts in affordable multifamily mortgages for each of the GSEs; the goals were set at 

$1.29 billion for Fannie Mae and $998 million for Freddie Mac. The 2000 Final Rule (HUD, 

2000a) updated these goals, and set the minimum annual affordable multifamily purchases at 

$2.85 billion for Fannie Mae and $2.11 billion for Freddie Mac for the period 2001 through 

2003. Both GSEs have exceeded the Special Affordable goal for multifamily since it became 

effective in 1996. 

The affordability of GSE multifamily acquisitions, expressed in terms of the ratio of rent to 

income for units covered by GSE mortgage acquisitions, has been relatively constant since 

the GSEs began providing loan-level data to HUD in 1993, although there has been some 

year to year fluctuation. This is shown in Exhibit 5-1. The proportion of Fannie Mae 

acquisitions affordable at or below 60 and 80 percent of Area Median Income (AMI) 

declined from 1997 to 1998 before rising in 1999. The percentage of Freddie Mac 

acquisitions affordable at 60, 80, and 100 percent of median decreased noticeably from 1998 

to 1999, accompanied by a sharp increase in the proportion of units affordable at more than 

100 percent of area median.90 

90	 In considering the apparently high level of affordability among Freddie Mac’s acquisitions in 1993-1994, it is 

important to bear in mind that Freddie Mac was re-entering the multifamily market during this time period, and 

therefore may not be fully representative. 

54 Chapter 5 – Policy Issues in the Multifamily Market 
 

Exhibit 5-1 

Multifamily Units by Affordability Level, As Percent of Units Funded* 

1993-1999 Acquisition Year 

Fannie Mae 

Affordability of Unit 1993 1994 1995 1996 1997 1998 1999 Total 

60% or less of AMI** 43.3% 43.7% 36.1% 40.8% 50.5% 44.0% 48.9% 44.3% 

80% or less of AMI 87.1% 85.5% 83.1% 84.5% 89.2% 85.0% 85.8% 85.7% 

100% or less of AMI 95.4% 93.8% 94.4% 93.3% 95.9% 94.7% 95.1% 94.6% 

More than 100% of AMI 4.6% 6.2% 5.6% 6.7% 4.1% 5.3% 4.9% 5.4% 

Freddie Mac 

Affordability of Unit 1993 1994 1995 1996 1997 1998 1999 Total 

60% or less of AMI** 72.8% 54.5% 40.1% 42.1% 46.4% 47.5% 44.9% 46.2% 

80% or less of AMI 90.6% 90.0% 88.8% 89.9% 85.1% 88.4% 82.1% 86.5% 

100% or less of AMI 94.3% 97.2% 97.2% 97.4% 95.9% 96.3% 92.5% 95.4% 

More than 100% of AMI 5.7% 2.8% 2.8% 2.6% 4.1% 3.7% 7.5% 4.6% 

* Excludes missing data.
 

** Area median income.
 

Source: GSE Public Use Data Base
 

5.2 Credit Gaps 

A second policy issue is credit gaps in various multifamily market segments. In this case, a 

credit gap refers to a situation where the demand for credit exceeds the supply at market 

interest rates as a result of disparities in the information available to borrowers and lenders 

with regard to credit risk.91 This section reviews the literature on evidence of the existence of 

credit gaps in both the primary and secondary markets for multifamily lending. It next 

focuses on three particular segments of the market where credit gaps appear to exist: small 

multifamily properties, multifamily properties in need of rehabilitation, and housing for 

seniors. 

Literature on the Existence of Credit Gaps 

Stiglitz and Weiss (1981) explain how credit rationing can occur in situations where lenders 

cannot fully evaluate borrowers’ credit risk, although borrowers themselves are aware of the 

level of risk. In theory, interest rates charged will affect the riskiness of their loan pool by 

sorting potential borrowers (adverse selection effect) or affecting the behavior of the 

borrowers (incentive effect). Under the adverse selection effect, borrowers who are willing 

to pay a higher interest rate are those who believe their probability of repaying the loan is 

low (thereby increasing the riskiness to the bank). Under the incentive effect, the behavior of 

91 Segal and Szymanoski (1998) state that credit gaps are a current policy issue because of the continuing declines in 

affordable housing units, especially in inner city locations, as reported by the Harvard University Joint Center for 

Housing Studies (1995). 

Chapter 5 – Policy Issues in the Multifamily Market 55 
 

the borrower is likely to change as the interest rate increases. Borrowers are more likely to 

undertake projects with a lower probability of success but a higher payoff if successful. In 

cases where lenders cannot identify the credit risks of otherwise identical borrowers, Stiglitz 

and Weiss show how lenders will set an interest rate with the highest expected profit given 

the probability of repayment by borrowers. However, at this profit maximizing interest rate, 

the demand for credit may exceed supply. But lenders cannot raise interest rates to market 

clearing levels, as higher interest rates would attract applicants with higher credit risk and 

lead to lower profits. Thus, the imperfect information available to lenders about credit risk 

results in credit rationing.92 

Stiglitz and Weiss also demonstrate how, in cases where there are distinguishable groups of 

borrowers, selected groups may face credit rationing while others may be completely 

“redlined” and unable to secure loans at any interest rate. The groups facing credit rationing 

or redlining may be characterized by either greater credit risk or greater difficulty in 

assessing credit risk, either of which would lower the expected profits for the lender. At the 

same time, credit may be provided to other groups with lower risk or for whom risk is more 

readily discernible, because expected profits are greater for these groups. If additional 

investment capital were available, lenders would provide loans to the credit rationed or 

redlined groups but at a higher interest rate. 

This model suggests that credit gaps are most likely to be found in the riskier segments of the 

market or markets where it is more difficult to discern risk. Market segments such as those 

with lower housing quality, older properties and properties in poor neighborhoods or rural 

areas are generally considered riskier. Risk may be more difficult to assess for properties 

needing rehabilitation or layers of subsidies because of uncertainties about either the 

construction process or the security of the subsidy source. Since these types of housing 

represent an important part of the affordable segment of the multifamily market, such credit 

gaps would be a cause of concern for public policy to ensure that the affordable stock is not 

adversely affected by a lack of financing. 

Lang and Nakamura’s (1990) discussion of the dynamics of the credit market extends Stiglitz 

and Weiss’s model by including external effects such as the outcomes of previous similar 

loans in a lender’s own portfolio and in the portfolios of other lenders. They also extend 

Stiglitz and Weiss (1981) to multiple markets (or geographic areas) where credit gaps could 

exist for varying lengths of time. 

92	 Stiglitz and Weiss (1981) “reserve the term credit rationing for circumstances in which either (a) among loan applicants 

who appear to be identical some receive a loan and others do not, and the rejected applicants would not receive a loan 

even if they offered to pay a higher interest rate; or (b) there are identifiable groups of individuals in the population 

who, with a given supply of credit, are unable to obtain loans at any interest rate, even though with a larger supply of 

credit, they would.” 

56 Chapter 5 – Policy Issues in the Multifamily Market 
 

Lang and Nakamura’s model considers a theory of alternating periods of growth and 

contraction in a dynamic credit market. In this model, lender success in the form of profits 

induces more lending activity and more information about profitability, which can be used 

for the allocation of future resources. Risk also influences the results within any time period. 

For example, a bankruptcy will influence future allocation of resources, leading to reductions 

in lending and thereby reducing the amount of information available for the next decision 

period. Thus the initial shock is perpetuated into future periods, thereby exaggerating the 

number of decision periods during which risk aversion will persist until the decision is made 

to return to a steady state that is more in balance with the actual risks. 

Both of these models provide support for the existence of credit gaps. HUD’s 1995 and 2000 

Final Rules (HUD, 1995, 2000a) cited anecdotal and other evidence of credit shortages 

among several multifamily segments: smaller multifamily properties in older urban areas and 

all sizes of inner city properties in need of rehabilitation. Without intervention, such as the 

housing goal targeting underserved areas, the credit gaps could be severe and persistent. 

Credit gaps present in the primary mortgage market can be found in the secondary mortgage 

market as well. Dinsmore (1998) examined the commercial mortgage-backed securities 

(CMBS) market93 and reports that the current high levels of capital available in the CMBS 

market do not benefit all segments of the multifamily market equally. Credit may be more 

difficult or costly to obtain for: 

•	 Construction loans; 

•	 Small multifamily loans; 

•	 Government-subsidized or regulated properties; 

•	 Mixed-use properties; and 

•	 Any project with unconventional risks. 

Dinsmore (1998) explains that construction-financing loans are not currently included in the 

CMBS market because there are no cash flows from the property until it is completed. The 

standard CMBS loans are repaid from the property’s income cash flow. Small properties, 

needing loans of less than $1 million, typically do not have access to the CMBS market, 

which considers anything less than $5 million too small.94 In general, the CMBS market is 

93	 In addition to the GSEs, CMBS is an alternative secondary market vehicle for multifamily mortgages. CMBSs consist 

of all forms of commercial mortgages including about 30 percent multifamily mortgages. 

94	 There are a few exceptions when a company decides to target specific segments of the multifamily market for strategic 

reasons (e.g., Daiwa Finance Corporation, an investment bank, targets commercial loans ranging from $250,000 to $3 

million). Dinsmore (1998) also points out that the GSEs treat any loan under $1 million as small. 

Chapter 5 – Policy Issues in the Multifamily Market 57 
 

looking for “plain vanilla” loans that can be underwritten quickly, which often rules out 

lending for mixed-use developments and other unconventional risk deals. 

Small Multifamily 

There is evidence that small multifamily properties, defined as properties with five to 50 

units, have been adversely affected by differentials in the cost of mortgage financing relative 

to larger properties.95 While mortgage loans can be obtained for most small properties, the 

financing that is available is relatively expensive, with interest rates as much as 150 basis 

points higher than those on standard multifamily loans. Loan products also are characterized 

by shorter terms and adjustable interest rates. The fixed-rate financing that is available is 

typically structured with a five to 10 year term, with interest rates as much as 150 basis 

points higher than those on standard multifamily loans, which may have adverse implications 

for affordability.96 This market segment appears to be dominated by thrifts and other 

depositories that keep these loans in portfolio. In part to hedge interest rate risk, loans on 

small properties are often structured as adjustable-rate mortgages. 

Borrowers typically incur costs for origination and placement fees, environmental reviews, 

architectural certifications (on new construction or substantial rehabilitation projects), 

inspections, attorney opinions and certifications, credit reviews, appraisals, and market 

surveys.97 Because of a large fixed element, these costs are usually not scaled according to 

the mortgage loan amount or number of dwelling units in a property and consequently are 

often prohibitively high for smaller projects. 

GSE purchases of loans backed by small multifamily properties 

The GSEs’ multifamily purchases do not appear to be contributing consistently to the 

mitigation of the excessive cost of mortgage financing facing small properties. Based on 

data from the Survey of Residential Finance showing that 39.4 percent of units in recently 

mortgaged multifamily properties were in properties with five to 49 units, it appears 

reasonable to assume that loans backed by small properties account for 39.4 percent of 

multifamily units financed each year. As a share of units backing their multifamily 

transactions, however, GSE purchases of loans on small multifamily properties are typically 

95	 See Schneider and Follain (1998), pp. 43-58; and Segal and Herbert (2000). 

96	 Schneider and Follain (1998) assert that interest rates on small property mortgages are as high as 300 basis points over 

comparable maturity Treasuries. Berkshire Realty, a Fannie Mae DUS lender based in Boston, was quoting spreads of 

135 to 150 basis points in “Loans Smorgasbord,” Multi-Housing News, August-September 1996. Additional 

information on the interest rate differential between large and small multifamily properties is contained in Segal and 

Herbert (2000). 

97	 These costs have been estimated at $30,000 for a typical transaction. Presentation by Jeff Stern, Vice President, 

Enterprise Mortgage Investments, HUD GSE Working Group, July 23, 1998. The most comprehensive account of the 

multifamily housing finance system as it relates to small properties is contained in Schneider and Follain (1998). 

Herbert (1999) also descries the characteristics of loans on small multifamily properties. 

58 Chapter 5 – Policy Issues in the Multifamily Market 
 

 

less than 5 percent and have never approached the estimated 39.4 percent market share, as 

shown in Exhibit 5-2. Based on HUD’s analysis of loans originated in 1997 and acquired by 

the GSEs in 1997, 1998, and 1999, the GSEs have purchased loans backed by 24 percent of 

units financed in the overall conventional multifamily mortgage market in 1997, but their 

acquisitions of loans on small multifamily properties have been only 2.3 percent of such 

properties financed that year.9899 The GSEs’ failure to buy significant numbers of loans on 

small multifamily properties disadvantages the owners of such properties by denying them 

the benefits of mortgage liquidity provided by secondary market purchases of mortgages on 

larger properties. 

Exhibit 5-2 

GSE Multifamily Transactions by Size of Property 

1994-1999 Acquisition Years 

1994 1995 1996 1997 1998 1999 

Fannie Mae 

Small (5-50 units) 8,717 45,488 5,838 8,111 64,753 12,351 

As % FNMA MF Total 3.9% 19.3% 2.1% 3.2% 16.5% 4.2% 

Freddie Mac 

Small (5-50 units) 1,165 2,461 4,100 3,963 10,244 4,068 

As % FHLMC MF Total 2.6% 3.6% 4.2% 4.0% 4.6% 2.1% 

Source: GSE Public Use Data Base. 

To encourage the GSEs’ activity in financing small multifamily loans, the 2000 Final Rule 

(HUD, 2000a) includes the use of bonus points for purchases of mortgages financing 

multifamily properties with five to 50 units. Specifically, HUD will assign double weight in 

the numerator under the low- and moderate-income and Special Affordable housing goals for 

each unit financed by GSE mortgage purchases in small multifamily properties. 

98	 It is assumed that units in small multifamily properties represented approximately 39.4 percent of multifamily units 

financed in 1997, per the 1991 Residential Finance Survey, as discussed above. Additionally, it is assumed that 1997 

multifamily conventional origination volume was $38 billion, based on discussions with HUD. An average loan 

amount per unit of $ 27,266 is used, the GSE average for 1997 acquisitions. 

99	 Schnare (2001) p. 22 similarly shows that GSEs’ purchases of small loans for multifamily properties (under $1 million) 

lagged behind loans financed by depositories. She shows that in 1999 over half the multifamily loans issued by 

depositories were for under $1 million, compared with 18 percent for Freddie Mac and 13 percent for Fannie Mae. 

Chapter 5 – Policy Issues in the Multifamily Market 59 
 

GSE underwriting requirements for small multifamily mortgages 

Although Freddie Mac purchases loans with principal balances of less than $1 million under 

the Conventional Cash Program, the underwriting guidelines used for small loans are more 

stringent than those for large loans. In particular, the minimum DSC ratio required for large 

loans is 1.25; for small loans the minimum is 1.30. The maximum LTV allowed for large 

loans is 80 percent; for small loans it is 75 percent. In addition, the borrower is required to 

retain recourse liability of at least 25 percent for small mortgages. Borrowers of large 

mortgages typically are not required to retain recourse. 

Fannie Mae introduced the 5-50 Streamlined Mortgage Loan for small multifamily properties 

as a permanent product in May 2000. The product features streamlined underwriting and 

documentation requirements, designed to reduce the cost and time to finance multifamily 

properties with five to 50 apartment units. For example, the appraisal form required for the 

5-50 program is half the length of the form required for larger multifamily loans (four pages 

compared with eight). Additional features include use of FICO scores to evaluate borrower 

creditworthiness and recourse to the borrower in the event of default.100 

Underwriting standards for the 5-50 product are similar to those for Fannie Mae’s 

multifamily DUS product line in general. Specifically, the minimum DSC ratio and the 

maximum LTV are the same for loans originated under the 5-50 program and those 

originated under the DUS product line. In addition to the size requirement, properties 

obtaining financing under the 5-50 product must be affordable at 100 percent of area median 

income. Fannie Mae’s plans for 2000 were to do $750 million of small loan volume. Of 

Fannie Mae’s DUS lenders, 19 are currently authorized to provide Fannie Mae’s 5-50 

Streamlined Mortgage product (Pikramenos, 2000). 

Multifamily Properties with Significant Rehabilitation Needs 

Multifamily properties with significant rehabilitation needs have also experienced difficulty 

in obtaining mortgage financing. Properties that are more than 10 years old are typically 

classified as “C” or “D” properties and are considered less attractive than newer properties by 

many lenders and investors.101 Multifamily rehabilitation loans accounted for only 0.5 

percent of units backing Fannie Mae’s 1998 purchases and for 1.6 percent in 1999. These 

loans accounted for 1.9 percent of Freddie Mac’s 1998 multifamily total (with none indicated 

in 1999). 

100	 “Fannie Mae Announces New 5-50(SM) Streamlined Mortgage for Small Multifamily Properties is Now Available 

Through DUS Lenders; 10-Year Volume Goal is $18 Billion,” Fannie Mae press release, May 10, 2000. 

101	 On the relation between age of property and quality classification see Jack Goodman and Brook Scott, “Rating the 

Quality of Multifamily Housing,” Real Estate Finance, (Summer, 1997). 

60 Chapter 5 – Policy Issues in the Multifamily Market 
 

Housing for Seniors 

According to a document prepared for an American Association of Retired Persons White 

House Conference on Aging Mini-Conference on Expanding Housing Choices for Older 

People, historically, the flow of capital into housing for seniors has been characterized by a 

great deal of volatility. A continuing lack of long-term, fixed-rate financing reportedly 

jeopardizes the feasibility of a number of properties. There is evidence that financing for 

new construction as well as rehabilitation remains scarce.102 Both Fannie Mae and Freddie 

Mac offer Senior Housing pilot programs. 

5.3 Fair Lending 

The third policy issue considered under the scope of work for this project is the applicability 

of the fair housing and fair lending legislation to the GSEs’ underwriting and appraisal 

requirements. The section first shows that it is reasonable to assume that these laws apply to 

GSE purchases of loans for multifamily properties and then explores the potential for 

disproportionate adverse impacts on protected groups that may result from the GSEs’ 

underwriting and appraisal requirements. 

Fair Lending Regulation 

Two legislative provisions apply to the GSEs’ underwriting and appraisal requirements, as do 

relevant court cases that demonstrate interpretation of this legislation. The legislative 

provisions are: 

•	 Section 1325 of the Federal Housing Enterprises Financial Safety and Soundness 

Act of 1992 (FHEFSSA), which refers broadly to the underwriting and appraisal 

requirements and standards of the GSEs and outlines HUD’s regulatory 

responsibility in prohibiting discriminatory impacts of the GSEs’ operations (see 

Exhibit 5-3); and 

•	 The provisions of the Fair Housing Act that relate to the provision of mortgage 

loans. (42 USC 3605)103 

Although the GSEs are not lenders per se, they are involved in the lending-decision process 

through their seller/servicer networks (i.e., DUS lenders for Fannie Mae and Program Plus 

102	 W. Donald Campbell. Seniors Housing Finance, prepared for American Association of Retired Persons White House 

Conference on Aging Mini-Conference on Expanding Housing Choices for Older People, (January 26-27, 1995). 

103	 Fair Housing Act-based regulation also specifically covers discrimination in the purchasing of loans or pools of loans. 

24CFR 100.125. 

Chapter 5 – Policy Issues in the Multifamily Market 61 
 

lenders for Freddie Mac) and through their business relationships and practices as prescribed 

in their Guides.104 

Therefore, the Policy Statement on Discrimination in Lending, published on April 15, 1994, 

applies to the GSEs as well as to primary lenders. This statement was prepared jointly by 

HUD, Office of Federal Housing Enterprise Oversight, Department of Justice, Department of 

Treasury, Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal 

Reserve System, Federal Deposit Insurance Corporation, Federal Housing Finance Board, 

Federal Trade Commission, and the National Credit Union Administration. The policy 

statement is based upon the Equal Credit Opportunity Act (enacted in 1974) and the Fair 

Housing Act (enacted in 1968) as outlined in Exhibit 5-4. 

The fair lending issue raised in this study is whether the GSE multifamily underwriting and 

appraisal requirements are consistent with the Fair Housing Act and with FHEFSSA. For 

example, do the underwriting requirements that require the consideration of the age or 

location of a multifamily development or the age of its neighborhood or census tract location 

have a “discriminatory effect” on protected classes? If so, HUD itself under FHEFSSA 1325 

would have a basis for action. Exhibit 5-5 presents the relevant legal concept of 

“disproportionate adverse impact” based on the Policy Statement and a General Accounting 

Office report on fair lending issues. 

104	 The fundamental statutory references regarding possible discriminatory practices by the GSEs are in the FHEFSSA 

Section 1325 and in HUD’s Final Rule published on December 1, 1995, which are what defines HUD’s role as a 

regulator. 

62 Chapter 5 – Policy Issues in the Multifamily Market 
Exhibit 5-3 

The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 

(FHEFSSA): Section 1325. Fair Housing 

The Secretary shall: 

•	 by regulation, prohibit each enterprise from discriminating in any manner in the 

purchase of any mortgage because of race, color, religion, sex, handicap, familial 

status, age, or national origin, including any consideration of the age or location of 

the dwelling or the age of the neighborhood or census tract where the dwelling is 

located in a manner that has a discriminatory effect; 

•	 by regulation, require each enterprise to submit data to the Secretary to assist the 

Secretary in investigating whether a mortgage lender with which the enterprise 

does business has failed to comply with the Fair Housing Act; 

•	 by regulation, require each enterprise to submit data to the Secretary to assist in 

investigating whether a mortgage lender with which the enterprise does business 

has failed to comply with the Equal Credit Opportunity Act, and shall submit any 

such information received to the appropriate Federal Agencies, as provided in 

section 704 of the Equal Credit Opportunity Act, for appropriate action; 

•	 obtain information from other regulatory and enforcement agencies of the Federal 

Government, State and local governments regarding violations by lenders of the 

Fair Housing Act and the Equal Credit Opportunity Act and make such 

information available to the enterprises: 

•	 direct the enterprises to undertake various remedial actions, including suspension, 

probation, reprimand, or settlement, against lenders that have been found to have 

engaged in discriminatory lending practices in violation of the Fair Housing Act or 

the Equal Credit Opportunity Act, pursuant to a final adjudication on the record, 

and after opportunity for an administrative hearing, in accordance with subchapter 

II of chapter 5 of title 5, United States Code; and 

•	 periodically review and comment on the underwriting and appraisal requirements 

of each enterprise to ensure that such requirements are consistent with the Fair 

Housing Act and this section. 

Chapter 5 – Policy Issues in the Multifamily Market 63 
105

 

Exhibit 5-4 

Policy Statement on Discrimination in Lending 

The Equal Credit Opportunity Act (ECOA) prohibits discrimination with respect to any aspect of a 

credit transaction based on: 

•	 Race or Color; 

•	 Religion; 

•	 National Origin; 

•	 Sex; 

•	 Marital Status; 

•	 Age; 

•	 The Applicant’s Receipt of Public Assistance; or 

•	 The Applicant’s exercise, in good faith, of any right under the Consumer Credit Protection 

Act. 

The Fair Housing Act prohibits discrimination in all aspects of residential real-estate related 

transactions, including, but not limited to: 

•	 Making or purchasing loans to purchase, construct, improve, repair, or maintain a dwelling; 

•	 Selling, brokering, or appraising residential real property;

104 

The Fair Housing Act prohibits discrimination based on: 

•	 Race or Color; 

•	 National Origin; 

•	 Religion; 

•	 Sex; 

•	 Familial Status; and 

•	 Handicap. 

Types of Lending Discrimination 

•	 Overt Evidence of Discrimination: open discrimination on a prohibited basis. 

•	 Evidence of Disparate Treatment: occurs when a lender treats a credit applicant differently 

based on one of the prohibited bases. 

•	 Evidence of Disparate Impact: occurs when a lender applies a policy or practice equally to 

credit applicants, but the policy or practice has a disproportionate adverse impact on 

applicants from a group protected against discrimination without business necessity. Even if 

business necessity exists, the policy or practice would be considered discriminatory if an 

alternative policy exists that would have less adverse impact. Whether the plaintiff or the 

defendant bears the burden of proof on the less discriminatory alternative prong of the 

adverse impact standard has yet to be definitively resolved under the Fair Housing Act. 

105 Concerning appraisals, it is stated that nothing in this title of the Act prohibits a person engaged in the business of 

furnishing appraisals of real property to take into consideration factors other than the six factors listed below in this 

exhibit. 

64 Chapter 5 – Policy Issues in the Multifamily Market 
Exhibit 5-5 

Disproportionate Adverse Impact: 

The Definition, the Difficulty of Identification, and an Example 

According to the Interagency Policy Statement on Discrimination in Lending (1994), evidence of 

a disparate impact is as follows: 

When a lender applies a policy or practice equally to credit applicants, but the policy or practice 

has a disproportionate adverse impact [emphasis added] on applicants from a group protected 

against discrimination, the policy or practice is described as having a “disparate impact.” Policies 

and practices that are neutral on their face and that are applied equally may still, on a prohibited 

basis, disproportionately and adversely affect a person’s access to credit. 

According to GAO (1996), disproportionate adverse impact is a type of lending discrimination 

with the following characteristics:

a 

Occurs when a seemingly innocuous policy or practice is applied equally to all credit applicants 

but with the result that the policy or practice has a disproportionate adverse impact on applicants 

from a protected group. It must be the case that the policy or practice is not justified by a business 

necessity and that a less discriminatory alternative does not exist. 

Among the three types of lending discrimination (blatant or overt discrimination, disparate 

treatment, and disparate or adverse impact), the third one is the most difficult to detect and 

requires several steps to determine its existence. According to GAO (1996), identification 

requires the following steps: 

First, the existence of disparate impact must be established. Frequently this is done by quantitative 

or statistical analysis. Once a disparate impact has been identified, it must then be determined if 

the policy or practice is justified by business necessity. If so, it must then be shown that a less 

discriminatory alternative to the policy or practice existed and that the lender refused to adopt the 

alternative policy. 

The example of disparate/adverse impact in the single-family realm as shown in GAO (1996) is as 

follows: 

A lender’s policy is not to extend loans for single family residences for less than $60,000. This 

minimum loan amount policy is shown to disproportionately exclude potential minority applicants 

from consideration because their income levels or the value of the houses in the areas where they 

live typically would qualify them only for smaller loan amounts. The lender would be required to 

justify the business necessity for the policy. 

A similar example could easily apply to multifamily properties, especially if the lender set a floor 

for the loan amount at $1,000,000. This minimum loan policy could disproportionately exclude 

from consideration, applications from minority borrowers, especially on small multifamily 

properties in inner city areas that are disproportionately minority neighborhoods. Furthermore, 

this policy could disproportionately affect the tenants of the small properties who also could be 

members of one of the protected classes shown in Exhibit 5-3. 

a	 The following definition, statement regarding the ease of identification, and the single-family example are 

drawn from GAO (1996) which adopted this version from the Interagency Policy Statement on 

Discrimination in Lending (1994). 

Chapter 5 – Policy Issues in the Multifamily Market 65 
 

Recent court cases shed further light on the application of fair lending law to GSE 

multifamily underwriting standards.106 For example, in the context of multifamily housing, 

courts have held that the Fair Housing Act provides a cause of action to white landlords who 

claim they were denied loans for their apartment complexes because of the racial 

composition of the tenants and the location of their buildings in predominantly minority 

areas. Simms v. First Gibraltar Bank, FSB (now known as First Madison Bank, FSB).107 In 

Ring v. First Interstate Mortgage Inc and Federal National Mortgage Association, a white 

developer was found to have cause of action under the Fair Housing Act against both the 

originating lender and Fannie Mae for allegedly refusing to extend credit for seven apartment 

buildings because of the racial composition of the neighborhoods in which they were 

located.108 

While the Fair Housing Act prohibits both intentional and effects-related discrimination in 

multifamily credit transactions, something of a grey area exists regarding the responsibilities 

of lenders for impacts on members of a protected class (e.g., minority tenants) who are not 

themselves applicants for credit. Congress intended that the Fair Housing Act protect any 

“person” who claims to have been injured by a discriminatory housing practice.109 In 

Trafficante v. Metropolitan Life Insurance Company,

110 the Supreme Court held that this 

provision should be broadly construed so as to promote an important goal of the Act–the 

replacement of the ghettoes and the fostering of “truly integrated and balanced living 

patterns.”111 In Trafficante then current tenants in an apartment complex (both white and 

minority) were allowed to sue their landlord for discriminating against minority applicants 

for apartments. By parity of reasoning, one might conclude that tenants of an apartment 

complex who allege they were harmed by the refusal of a lender to provide credit to the 

owners of their complex on a prohibited basis have a cause of action against the lender and/or 

secondary market purchaser. 

If challenges to credit transactions are brought under the discriminatory impact standard of 

the Fair Housing Act (whether by the actual credit applicant or aggrieved tenants), it seems 

clear that the plaintiffs will have to identify a policy, procedure, or practice that is allegedly 

causing the adverse impact and the extent of the impact. In Simms v. First Gibraltar Bank 

supra, the Fifth Circuit reversed a lower court jury finding that the lender had engaged in an 

106	 The information provided in this discussion is based on several communications with Attorney Richard Ritter, formerly 

the U.S. Department of Justice, and currently a private fair lending consultant (with the Washington Lawyers’ 

Committee for Civil Rights and Urban Affairs). The information provided by Mr. Ritter does not necessarily reflect 

the views of the Department of Justice. 

107	 83 F.3d 1546 (5th Cir. 1996 

108	 984 F. 2d 924 (8th Cir. 1993) 

109	 42 U.S.C. Sec. 3602(I)(1). 

110	 409 U.S. 205 (1972). 

111 409 U.S. at 211. 

66 Chapter 5 – Policy Issues in the Multifamily Market 
 

unlawful credit practice under the disparate impact standard of the Fair Housing Act because 

the plaintiff could not point to an underwriting standard, practice, or procedure that had any 

generalized adverse impact on minorities or residents of minority areas. The only evidence 

presented was that a loan was denied on an apartment complex occupied by minorities in a 

predominately minority area. That standing alone was not sufficient to establish a violation 

of the Act under the disparate impact standard. 

Although the defendant prevailed, if the plaintiff in Simms had shown that a specific 

underwriting requirement or standard with adverse effects caused the rejection of his loan 

application—such as a minimum loan amount that would disproportionately exclude the 

financing of multifamily housing in minority areas (because developers of properties in those 

areas were less likely to seek loans above the minimum)—a prima facie violation of the 

disparate impact standard would have been established. At that point, the lender would have 

had to prove the business necessity for the challenged underwriting practice and the jury 

could hear evidence of a less discriminatory alternative.112 In cases like Simms, plaintiffs 

could also conceivably challenge the lender’s overall underwriting guidelines under the 

disparate impact standard if they were subject to discretionary application or interpretation by 

the bank’s underwriters. Buycks-Roberson v. Citibank FSB,

113 permits a class-wide challenge 

to the lender’s subjective underwriting system under disparate impact theory. 

A discrimination case about property insurance for single family housing offers a possible 

parallel to multifamily properties. In that suit, NAACP v. American Family Mutual Insurance 

Company,

114 the underwriting guidelines of single-family property insurers were challenged 

in eight redlining lawsuits under the Fair Housing Act. The eight suits were combined into a 

class action suit because a whole neighborhood in Milwaukee was affected by the property 

insurance underwriting guidelines. Under a consent decree settlement, American Family 

agreed to changes in marketing, training, and underwriting standards for their insurance 

policies. They also agreed to increase their marketing and customer service presence in the 

minority community in Milwaukee and to pay a $14.5 million settlement. In the consent 

decree, American Family also agreed not to take into consideration the condition of other 

homes in the neighborhood, the racial composition of the neighborhood, or the age of the 

home. Instead, they agreed to revise their underwriting guidelines to consider only 

“objective standards that are directly related to loss or damage.” (p. 12) While a settlement 

of this kind may not have the same standing as case law, it is relevant to discussions and 

analyses of fair lending issues in the multifamily mortgage market. 

112	 Whether the plaintiff or the defendant bears the burden of proof on the less discriminatory alternative prong of the 

adverse impact standard has yet to be definitively resolved under the Fair Housing Act. 

113	 162 F.R.D. 322 (N.D. I11 1995) 

114	 978 F.2d 287 (7th Cir. 1992), cert. denied, 113 S.Ct. 2335 (1993) 

Chapter 5 – Policy Issues in the Multifamily Market 67 
These cases provide a strong indication that the fair lending laws apply to multifamily 

purchases, and how these laws apply. Thus, the GSE underwriting and appraisal 

requirements must not affect protected classes adversely. If they do affect protected classes 

adversely, business necessity must be shown, as must the absence of less discriminatory 

alternatives. 

Potential Effects of the GSEs’ Underwriting and Appraisal Requirements on Protected 

Classes 

There are two ways in which some of the GSEs’ underwriting requirements and standards for 

multifamily housing may, in fact, have the potential for adverse impact. These areas deserve 

further examination under HUD’s fulfillment of its obligations under FHEFSSA to review 

and comment on the underwriting and appraisal guidelines of each enterprise to ensure that 

they are consistent with the Fair Housing Act and FHEFFSA. 

•	 GSE underwriting guidelines may directly affect older neighborhoods by 

establishing different standards for older properties. These neighborhoods are 

protected themselves and also may include a disproportionately high 

concentration of minority residents. 

•	 GSE underwriting guidelines also indicate that market strength should be used as 

a consideration in multifamily underwriting. Market strength may be correlated 

with factors with respect to which discrimination is prohibited such as geographic 

areas where members of protected classes reside. 

Factors Relating to Older Properties 

FHEFSSA prohibits the GSEs from considering the age of a property in purchase decisions 

in a manner that has a discriminatory effect. Very few of the GSEs’ underwriting and 

appraisal requirements apply specifically to older properties. Fannie Mae’s DUS Guide 

specifically states that properties in older neighborhoods are eligible for purchase: 

A neighborhood analysis should consider the influence of social, economic, 

government, and environmental forces on property values in the subject 

neighborhood. However, neither the racial composition nor the age of a 

neighborhood is an Appraisal factor. A property located in an older 

neighborhood can be as sound an investment as a property located in a 

newer neighborhood .... (Fannie Mae, III, 507.04, 9/30/99) 

However, Fannie Mae’s subordinate financing requirements for older properties are stricter 

than requirements for newer properties. The combined DSC for the first mortgage and all 

subordinate loans must be, at a minimum, the greater of: 

68 Chapter 5 – Policy Issues in the Multifamily Market 
• The DSC applicable to the first mortgage at the time of purchase; or 

• 1.20 for properties more than 10 years old; or 

• 1.15 for properties 10 years old or less. (Fannie Mae, VI, 108.01, 9/30/99) 

In addition, lenders must examine the real estate owned by each of the key principals. Fannie 

Mae underwriting guidelines state that when underwriting a property other properties owned 

by the key principals must be examined and “older properties or properties in softer markets 

should be more highly capitalized than newer properties in stronger markets.” (Fannie Mae, 

III, 605.03, 11/23/99.) This underwriting requirement does not directly affect the property 

being financed, but may have an important indirect effect. Multifamily property owners who 

want to finance additional properties through Fannie Mae must either incur greater expense 

for other older properties they own or they may be discouraged from owning older 

properties. 

Perhaps more important than the GSEs’ written underwriting guidelines is the perception that 

the GSEs typically prefer “Class A” properties (newer housing stock that is less than 10 years 

old). This inference is based on the definition of “Class A” properties and the view 

(published in the press) that the GSEs purchase from the “A” mortgage category. Goodman 

and Scott (1997) examined several classifications for rating multifamily housing quality. 

“Class A” quality is most often defined as less than 10 years old. Class B properties are 

between 10 and 20 years old. While age is not an important variable by itself, and few of the 

GSEs’ guidelines mention age, it is a covariate of other important variables (e.g., basic 

structural systems, amenities, location, and rent level). 

An article in the Washington Post on risk-based pricing describes the mainstream of the 

mortgage market, the “A” category, as eligible for sale to Fannie Mae and Freddie Mac 

(Harney, 1998). However, a few exceptions are offered (e.g. Fannie Mae) for financing of 

properties in the B+ to B- range, through the DUS lenders who assume the first loss position 

and 20 to 60 percent of total risk (Goodman, 1997). In a conversation with Freddie Mac 

regarding issues related to this research project, a spokesman for Freddie Mac confirmed this 

viewpoint by stating that Class BBB properties are the lowest they consider for investment. 

Fannie Mae may be making efforts to change the perception in the industry that they prefer to 

buy loans on Class A properties. The only reference Fannie Mae’s underwriting guidelines 

to the classes of properties that are acceptable is in a description of Fannie Mae’s new 5-50 

Streamlined Mortgage Loan product: 

Fannie Mae prefers property owners with some multifamily management 

experience, a borrower portfolio that reflects good property maintenance, 

and affordable B- and C-class properties with stable income, expense and 

Chapter 5 – Policy Issues in the Multifamily Market 69 
vacancy histories and that have been well-maintained. (Fannie Mae, 2000­

3, Attachment, 5/9/00.) 

In this product, which is specifically for small multifamily properties that are affordable at 

100 percent of area median income, Fannie Mae’s guidelines encourage the delivery of loans 

on properties that are other than Class A. Because the 5-50 Streamlined Mortgage Loan 

product was introduced recently (in spring 2000), it is too early to tell whether this product is 

being widely used or accepted in the market and whether class B and C properties are 

actually being financed using the product. It is also not clear whether Fannie Mae’s 

encouragement of Class B and C properties extends to other products or to large multifamily 

loans. 

Factors Relating to Market Strength 

Both GSEs have guidelines that include market strength as a consideration in multifamily 

underwriting for their prospective purchase of loans. Although fair lending laws do not 

prohibit this practice, market strength factors may be correlated with factors for which 

discrimination is prohibited, such as geographic areas where members of protected classes 

reside. 

Fannie Mae cautions lenders about market areas evidencing weakness: “Lenders must 

exercise extreme caution in considering a loan in markets with poor market indicators or 

increased market risk factors. Additional analysis and support will be required for markets 

with any of the following characteristics: 

•	 current occupancy levels less than 90 percent; 

•	 a sustained downward trend in occupancy levels over the prior 12 months; 

•	 seasonal occupancy; 

•	 rent levels that are competitive with single-family housing; rent levels that are 

declining or have not kept pace with inflation over the last two years; 

•	 markets in which concessions are high or increasing rapidly; 

•	 markets experiencing unsustainable construction levels coupled with a sustained 

downward trend in occupancy levels; 

•	 default and foreclosure rates which are high or rising rapidly; 

•	 markets with over 15 percent of employment by a single employer or over 30; 

• percent in a single industry; and 

70 Chapter 5 – Policy Issues in the Multifamily Market 
 

•	 shrinking employment base. 

Properties located in markets with one or more of the characteristics listed above will be 

acceptable only if there are exceptional circumstances that have been fully documented by 

the Lender.” 115 

Freddie Mac provides the following instructions on acceptable mortgages: “Each Mortgage 

to be delivered to Freddie Mac must have characteristics that demonstrate high investment 

quality. These characteristics may include: 

•	 Strong market (that is, low vacancy, minimal rental concessions, stable or 

increasing tenant demand, good balance of housing supply and demand, stable 

economic base, and employment diversification) 

•	 Strong property operations (that is, low vacancy, minimal rental concessions, 

stable or increasing rents, and stable operating and maintenance expenses) 

•	 Excellent property condition”116 

Some of these underwriting guidelines—for example, employment base and property 

condition—are characteristics that might adversely affect minority areas and, from a fair 

lending standpoint, may be parallel to the emphasis on age of a property in the underwriting 

guidelines of property insurers. Although the GSEs are explicit about what is not to be 

considered (e.g., racial composition of the neighborhood), the issue remains as to how the 

requirements are actually implemented. 

GSE Performance in Segments of the Multifamily Market 

Fair lending questions are raised by empirical evidence that the GSEs lag in three sectors of 

the multifamily market: 

•	 Purchases of loans in high-minority tracts; 

•	 Purchases of loans on small multifamily properties, which are disproportionately 

minority-owned; and 

•	 Purchases of loans for multifamily properties in underserved areas. 

115	 Fannie Mae Multifamily Guidelines Section 305.07 

116	 Freddie Mac Multifamily Seller/Servicer Guide, Chapter 6 

Chapter 5 – Policy Issues in the Multifamily Market 71 
 

Although the GSEs’ relative lack of purchasing activity in these areas does not by itself 

demonstrate that the GSEs are violating fair lending legislation, it does raise the question of 

whether some of their underwriting and appraisal guidelines are having a disproportionate 

adverse impact on protected classes. 

The GSEs lag the overall multifamily mortgage market in purchasing loans backed by 

properties in high-minority census tracts.117 Exhibits 5-6, 5-7, and 5-8 indicate that in the 

overall multifamily market, 35.8 percent of loans originated during 1993-1999 were for 

properties located in high-minority tracts, compared with 29.9 percent for Fannie Mae and 

28.0 percent for Freddie Mac.118 

Exhibit 5-6 

Multifamily Originations, UPB, by Tract Percent Minority 

1993-1999 Origination Year 

Tract Percent Minority 1993 1994 1995 1996 1997 1998 1999 Total 

All loans 

< 30% 63.0% 61.2% 65.3% 65.3% 64.2% 65.8% 63.6% 64.2% 

>= 30% 37.0% 38.8% 34.7% 34.7% 35.8% 34.2% 36.4% 35.8% 

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 

UPB < $1 m. 

< 30% 54.8% 53.6% 54.1% 57.2% 56.0% 57.7% 54.9% 55.6% 

>= 30% 45.2% 46.4% 45.9% 42.8% 44.0% 42.3% 45.1% 44.4% 

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 

Source: HMDA. Excludes loans under $100,000. Absolute value used for loans with UPB < 0. 

Excludes missing data. 

117	 Because HMDA data does not provide information on number of units financed, these comparisons are in terms of 

unpaid principal balance (UPB). In the GSE Public Use Data Base, UPB is reported in the following ranges because 

of proprietary considerations: 0- $500,000; $500,000 - $1 million; $1 million - $2 million; $2 million - $4 million; 

and more than $4 million. For loans under $4 million, UPB is estimated midpoints; e.g., all loans with a reported UPB 

in the range of $500,000 - $1 million are treated as having UPB of $750,000. The UPB for loans over $4 million is 

estimated using the figure which, when multiplied by the number of loans in this range, and added to estimated UPB 

for loans under $4 million, equals total GSE acquisition volume. This calculation was performed separately for each 

GSE for each acquisition year. 

118	 The HMDA data, which are reported by year of loan origination, are not strictly comparable to the GSE data because of 

the GSEs’ purchases of loans originated in calendar years prior to the acquisition date. However, combining years can 

reduce the magnitude of any resulting error. 

72 Chapter 5 – Policy Issues in the Multifamily Market 
 

Exhibit 5-7 

Multifamily Acquisitions, Estimated UPB, by Tract Percent Minority* 

Fannie Mae, 1993-1999 Acquisition Year 

Tract Percent Minority 1993 1994 1995 1996 1997 1998 1999 Total 

All loans 

< 30% 73.7% 70.8% 62.7% 76.3% 72.2% 67.0% 70.8% 70.1% 

>= 30% 26.3% 29.2% 37.3% 23.7% 27.8% 33.0% 29.2% 29.9% 

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 

UPB < $1 m. 

< 30% 50.2% 61.5% 38.2% 66.8% 71.1% 38.2% 56.5% 43.0% 

>= 30% 49.8% 38.5% 61.8% 33.2% 28.9% 61.8% 43.5% 57.0% 

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 

Source: GSE Public Use Data Base. Excludes missing data. 

* UPB estimated using midpoints of intervals. 

Exhibit 5-8 

Multifamily Acquisitions, Estimated UPB, by Tract Percent Minority* 

Freddie Mac, 1993-1999 Acquisition Year 

Tract Percent Minority 1993 1994 1995 1996 1997 1998 1999 Total 

All loans 

< 30% 61.5% 60.6% 71.3% 78.2% 73.3% 70.8% 72.7% 72.0% 

>= 30% 38.5% 39.4% 28.7% 21.8% 26.7% 29.2% 27.3% 28.0% 

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 

UPB < $1 m. 

< 30% 65.6% 52.1% 63.4% 40.8% 34.9% 50.9% 53.6% 49.8% 

>= 30% 34.4% 47.9% 36.6% 59.2% 65.1% 49.1% 46.4% 50.2% 

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 

Source: GSE Public Use Data Base. Excludes missing data. 

* UPB estimated using midpoints of intervals. 

The GSEs lag the overall multifamily mortgage market in purchasing loans backed by 

small multifamily properties. As shown in Exhibit 5-2 above, 4.2 percent of Fannie Mae’s 

multifamily purchases were backed by properties with between 5 to 50 units, as were 2.1 

percent of Freddie Mac’s purchases. In contrast, nearly 40 percent of all units in recently 

mortgaged multifamily properties were in properties with 5 to 49 units. In addition, using the 

HUD Property Owners and Managers Survey data, Segal and Szymanoski (1998) show that 

the average multifamily property mortgaged in 1995 had 33.4 units. In contrast, the average 

number of units in Fannie Mae’s 1996 multifamily purchases was 137, and the average 

number in Freddie Mac’s was 189.119 

119 As noted above, Schnare (2001) also showed that the GSEs lagged the market when size is defined as the dollar amount 

of the loan. 

Chapter 5 – Policy Issues in the Multifamily Market 73 
 

The lag in purchasing loans backed by small multifamily properties has two potential 

implications for fair lending. First, loans backed by small multifamily properties are more 

likely than loans backed by larger properties to cover properties in high-minority areas. For 

example, in the multifamily origination mortgage market 44.4 percent of loans under $1 

million originated during 1993-1999 were located in high-minority tracts, compared with 

only 35.8 percent overall. (Exhibit 5-6) During 1993-1999, 57.0 percent of Fannie Mae 

acquisitions of loans backed by small multifamily properties were in high-minority tracts, 

compared with only 29.9 percent overall. The Freddie Mac data show 52.2 percent of loans 

backed by small multifamily properties in high-minority tracts, compared with 28.0 percent 

of overall multifamily transactions volume. 

Thus, disparity between the GSEs and the mortgage market in multifamily lending for 

properties in high-minority tracts can be explained, in part, by their extraordinarily small 

transactions volume involving small properties. 

Furthermore, to the limited degree that multifamily properties are identified as owned by 

African Americans, such ownership appears to be concentrated among small properties, 

especially those with 5-19 units. Based on the HUD Property Owners and Managers Survey, 

conducted during 1995-1996, 59.5 percent of units in multifamily properties identified as 

owned by African Americans were in properties with 5-19 units, compared with only 32.7 

percent of units in properties owned by whites. Of all properties where race of owner was 

identified, African-American ownership accounted for 4.1 percent of units in properties with 

5-19 units, compared with only 2.3 of multifamily units overall. Thus the GSEs’ failure to 

buy significant numbers of loans on small multifamily properties appears especially 

disadvantageous to African American multifamily property owners. 

The GSEs lag the multifamily market in mortgage lending backed by properties in 

underserved areas, which may include high concentrations of minority residents.120 Exhibit 

5-9 shows that Fannie Mae’s and Freddie Mac’s originations in served areas exceed those in 

underserved areas. The discrepancy is particularly large between suburban served and 

underserved areas. More importantly, GSE originations in central city underserved areas lag 

originations in these areas by both banks and thrifts. The GSEs lag thrift institutions and the 

FHA 223(f) program in originations in suburban underserved areas. A relatively large 

proportion of the GSEs’ originations is in suburban served areas.121 

120 “Underserved areas” for OMB-defined metropolitan census tracts (and non-metropolitan counties), with (1) median tract 

income at or below 90 percent of AMI (95 percent in non-metropolitan areas), or (2) minority concentration of at least 

30 percent with median tract (or county) or income no greater than 120 percent of AMI. 

121 A similar point is made in Schnare (2001) Table 6. 

74 Chapter 5 – Policy Issues in the Multifamily Market 
Exhibit 5-9 

Multifamily Industry Comparisons: Percentage of Unpaid Principal Balance by Central 

City1

/Suburban Areas and by Served/Underserved2 Areas, 1994-96 

Metropolitan Statistical Areas Only 

Home Mortgage 

Disclosure Act GSE Public 

FHA Data3 (HMDA) Data3, 5, 6 Use Data3, 5, 7 

Fannie Freddie 

221(d)(4)4 223(f)4 Banks Thrifts Mae Mac 

Central City 62.0 49.8 64.3 63.2 55.7 52.3 

Served 37.8 27.2 31.6 25.8 29.6 27.7 

Underserved 24.2 22.6 32.7 37.4 26.1 24.7 

Suburban 38.0 50.2 35.7 36.8 44.3 47.7 

Served 31.1 30.4 24.1 19.2 28.1 33.0 

Underserved 6.9 19.8 11.6 17.6 16.2 14.7 

Total 

Served 68.8 57.6 55.7 45.0 57.7 60.6 

Underserved 31.2 42.4 44.3 55.0 42.3 39.4 1 Central City includes all census tracts, any portion of which is within the boundaries of a central city.
 2 Underserved defined per GSE Final Rule.
 3

 FHA data for fiscal years 1994-96; HMDA and GSE data for calendar years 1994-96.
 4

 FHA 221(d)(4) is primarily new construction; 223(f) is refinance and purchase of existing construction
 5

 HMDA and GSE data include a mix of new construction and refinance/purchase of existing construction.
 6

 HMDA data exclude FHA-insured loans and GSE current-year purchases. HMDA data subject to significant underreporting
 

by commercial banks.
 7

 GSE data include a small number of FHA-insured loans. GSE unpaid principal balance (UPB) estimated using midpoints of
 

intervals in PUDB.
 

Sources: FHA fiscal year 1994-96 Multifamily Initial Endorsements Data Base; HMDA data; GSE Public Use Data Base
 

In summary, our review of the GSEs’ underwriting requirements and standards for 

multifamily housing has identified two aspects that may have the potential for adverse 

impact. First, GSE underwriting guidelines may directly affect older neighborhoods by 

establishing different standards for older properties. These neighborhoods are protected 

themselves and also may include a disproportionately high concentration of minority 

residents. Second, GSE underwriting guidelines also indicate that market strength should be 

used as a consideration in multifamily underwriting. Market strength may be correlated with 

factors with respect to which discrimination is prohibited such as geographic areas where 

members of protected classes reside. 

In addition, there is empirical evidence that the GSEs lag in three sectors of the multifamily 

market that may have fair lending implications: purchases of loans in high-minority tracts; 

purchases of loans backed by small multifamily properties, which are disproportionately for 

minority-owned properties; and purchases of loans for multifamily properties in underserved 

areas. Although the GSEs’ relative lack of purchasing activity in these areas does not by 

itself demonstrate that the GSEs are violating fair lending legislation, it does raise the 

question of whether some of their underwriting and appraisal guidelines are having a 

disproportionate adverse impact on protected classes. 

Chapter 5 – Policy Issues in the Multifamily Market 75 
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76 Chapter 5 – Policy Issues in the Multifamily Market 
 

Chapter Six 

Background on Lender Interview Sites and GSE 

Activity 

The sites selected for the interviews with multifamily lenders were Atlanta, Boston, Chicago, 

and Dallas. This site selection was based on analysis of HUD-provided data (Property 

Operators and Managers Survey (POMS) and GSE data) and was approved by HUD. The 

sites selected were markets where there was a high level of multifamily market activity 

(POMS data) and relatively high purchasing activity for both of the GSEs. These sites also 

provided variation in the types of multifamily housing stock, originating lenders, lending 

experience in the multifamily market, and age of the housing stock. 

Exhibit 6-1 indicates that the housing stock in Boston and Chicago is much older than the 

stock in Atlanta or Dallas.122 As shown in Exhibit 6-1, approximately 75 percent of the 

housing stock in Boston and Chicago is at least 28 years old and both cities have substantial 

multifamily stock that is approaching 50 years old. On the other hand, approximately 40 

percent of the housing stock in both Atlanta and Dallas is at least 28 years old and 

approximately 50 percent of their multifamily housing stock was built since 1970. As 

discussed in Chapter 5, the GSEs typically prefer “Class A” properties (newer housing stock 

that is less than 10 years old). As a result, the Boston and Chicago markets are more likely to 

encounter underwriting challenges for purchases of multifamily loans in the older affordable 

segments of the multifamily housing markets. 

As discussed in Chapter 3, the GSEs have a preference for larger multifamily properties. 

Freddie Mac’s underwriting guidelines for small multifamily properties are explicitly more 

stringent than those for large multifamily properties, and Fannie Mae only very recently 

introduced a product designed specifically to reduced transactions costs associated with 

underwriting small multifamily mortgages. As a result, the GSEs’ multifamily financing 

activity is concentrated in larger multifamily properties. Exhibit 6-2 compares the GSEs’ 

purchases of multifamily loans with UPBs of less than $1 million with non-GSE financing of 

these loans in each city between 1993-1999. From this exhibit, it is evident that in general, 

the GSEs’ role in financing small multifamily properties in these cities is minor. In Boston, 

where only 25 percent of the rental housing stock is in multifamily properties with more than 

20 units, the GSEs together financed less than 2 percent of all small multifamily properties in 

this period. The GSEs’ presence appears to be most significant in Atlanta, where they 

accounted for 14 percent of small multifamily financing activity in 1993-1993. 

122 The data in Exhibit 6-1 includes both single family and multifamily housing. 

Chapter 6 – Background on Lender Interview Sites and GSE Activity 77 
Chapter 6 – Background on Lender Interview Sites and GSE Activity

Exhibit 6-1
 

Metro Area Housing Stock by Year Built and Structure Sizea
 

(Thousands of Units) 

Atlanta Boston Chicago Dallas 

1200 

1000 

800 

600 

400 

200 

0 

Pre 1950 1950- 1970 or Pre 1950 1950- 1970 or Pre 1950 1950- 1970 or Pre 1950 1950- 1970 or 

1969 Later 1969 Later 1969 Later 1969 Later 

Structure sizes: 1 Unit 2-9 Units 10 + Units 

Percent of 

Housing Stock 10% 31% 59% 53% 24% 23% 42% 34% 25% 13% 31% 56% 

a

The housing stock includes both single family and multifamily.
 

Source: Joint Center Tabulations of 1989, 1990, 1991, and 1992 American Housing Surveys.
 

78 
Exhibit 6-2 

Fannie Mae, Freddie Mac, and HMDA: 1993-1999 

Number of Multifamily Loans by Year with UPB less than $1 Million 

1993 1994 1995 1996 1997 1998 1999 Total 

Atlanta, GA MSA 

Fannie Mae 0 5 5 2 2 17 0 31 

Freddie Mac 3 2 1 1 2 13 3 25 

HMDA 28 24 27 43 62 99 69 352 

Total 31 31 33 46 66 129 72 408 

Boston, MA-NH PMSA 

Fannie Mae 8 0 3 4 0 0 4 19 

Freddie Mac 0 1 0 2 3 11 8 25 

HMDA 147 250 216 320 369 584 647 2533 

Total 155 251 219 326 372 595 659 2577 

Chicago, IL PMSA 

Fannie Mae 259 15 568 3 1 54 15 915 

Freddie Mac 0 2 0 1 0 3 0 6 

HMDA 2216 2159 1636 2043 2003 2794 2862 15713 

Total 2475 2176 2204 2047 2004 2851 2877 16634 

Dallas, TX PMSA 

Fannie Mae 3 5 2 0 3 3 6 22 

Freddie Mac 0 3 0 4 2 18 5 32 

HMDA 38 40 87 97 105 131 108 606 

Total 41 48 89 101 110 152 119 660 

Although the GSEs’ activity in Chicago in this period accounted for only 6 percent of total 

activity, in one year, 1995, Fannie Mae financed more than a third of small multifamily 

mortgages. This appears to have been the result of several purchases of pools of small 

multifamily mortgages, and activity in following years fell to insignificant levels. In fact, 

without the unusual activity in 1995, the GSEs would have accounted for only about 2 

percent of small multifamily financing in 1993-1999. 

As might be expected given the GSEs’ preference for newer housing stock and larger 

multifamily properties, the GSEs’ purchase activity in Boston and Chicago represented a 

very small portion of overall multifamily financing activity in those markets – about 9 

percent in Boston and 6.3 percent in Chicago. In contrast, the GSEs’ purchases accounted 

for more than a third of multifamily financing activity in Atlanta and Dallas. 

In general, it does not appear that GSE purchases are any more concentrated in low minority 

areas than non-GSE activity in these four cities. Exhibit 6-3 shows that taken together, the 

multifamily properties the GSEs financed in 1993-1999 were less concentrated in lowminority census tracts than properties financed by other market participants in every city 

Chapter 6 – Background on Lender Interview Sites and GSE Activity 79 
examined here except Dallas. The GSEs’ low concentration in low-minority areas relative to 

other market participants is unexpected, because it is in contrast to the GSEs’ performance 

generally. As discussed in Chapter 5, overall, the GSEs’ purchases are more concentrated in 

low-minority areas than are all multifamily originations in the market. Exhibit 5-7, 5-8, and 

5-9 show that of the GSEs’ multifamily purchases, just over 70 percent are in census where 

minorities make up less than 30 percent of the population. In contrast, about 64 percent of all 

multifamily originations are in low-minority census tracts. 

Exhibit 6-3 

Fannie Mae, Freddie Mac, and HMDA: 1993-1999 

Percent of Multifamily Loans Financed by 1990 U.S. Census Tract Percent Minority 

Dallas Chicago Boston Atlanta 

Combined FNMA and FHLMC 

less than 10 percent 6.4 10.2 16.8 9.3 

10-30 percent 51.1 30.1 38.1 39.9 

31-50 percent 20.1 22.3 22.1 12.1 

51-80 percent 17.1 17.4 11.5 16.5 

greater than 80 percent 5.3 20.1 11.5 22.2 

Fannie Mae 

less than 10 percent 6.0 9.9 8.0 10.4 

10-30 percent 57.1 29.1 38.0 37.5 

31-50 percent 18.2 23.1 18.0 13.9 

51-80 percent 13.1 17.8 16.0 16.0 

greater than 80 percent 5.7 20.1 20.0 22.2 

Freddie Mac 

less than 10 percent 7.2 15.6 23.8 7.7 

10-30 percent 39.4 51.1 38.1 43.3 

31-50 percent 23.9 4.4 25.4 9.6 

51-80 percent 25.0 8.9 7.9 17.3 

greater than 80 percent 4.4 20.0 4.8 22.1 

HMDA 

less than 10 percent 7.7 16.2 28.2 10.3 

10-30 percent 39.5 27.8 31.1 41.0 

31-50 percent 18.5 18.3 16.4 13.2 

51-80 percent 26.2 19.2 13.9 13.7 

greater than 80 percent 8.2 18.4 10.5 21.9 

Financing for all market participants was concentrated in low-minority census tracts. In all 

four cities, at least 60 percent of both GSE activity and non-GSE activity reported in HMDA 

data was concentrated in census tracts where minorities represent less than half of the 

80 Chapter 6 – Background on Lender Interview Sites and GSE Activity 
 

population.123 Forty percent or less of multifamily financing activity in 1993-1999 was in 

census tracts where minorities accounted for more than half the population. 

In comparing the role of the two GSEs, Exhibits 6-6 and 6-7 also show that Fannie Mae 

played a far greater role in multifamily financing in Dallas and Chicago than Freddie Mac. 

In Atlanta (Exhibit 6-4), the GSEs’ levels of multifamily purchases were more similar than in 

Dallas and Chicago, although Fannie Mae also played a greater role in this market than did 

Freddie Mac. Boston (Exhibit 6-5) was the only one of the four markets examined here 

during 1993-1999 where Freddie Mac purchased more multifamily mortgages than Fannie 

Mae did. 

The following sections describe the four markets based on the comments of both the national 

experts and the lenders interviewed. Most of the experts and lenders interviewed had a 

national perspective of the multifamily market. In the Chicago market, however, the 

majority of interviews with local lenders (who had negotiated unsuccessfully for years with 

one or both GSEs) focused on the “local” market perspective. 

6.1 Atlanta 

The multifamily housing stock in Atlanta divides into several sub-markets: the high-rise 

towers and walk-ups within the city and the sprawling garden apartments (mostly) in 

suburbia. Among the four sites, Atlanta is the one with the newest multifamily housing 

stock. Approximately half of the Atlanta multifamily stock was built since 1970, and there 

has been considerable expansion in the past decade. Despite high levels of multifamily 

construction in 1999, which threatened to overbuild the market, Atlanta’s strong job creation 

and migration of people to fill those jobs kept vacancy rates low. Through September 2000, 

vacancy rates in the Atlanta MSA had fallen to 6.55 percent from 1999’s level of 7.4 percent 

(Crawford, 2000). 

The map of Atlanta shows the geographic distribution of multifamily loans acquired by the 

GSEs in Atlanta. The same data is presented by year of purchase in Exhibit 6-4. This exhibit 

and the map show that between 1993-1999, about 60 percent of the GSEs’ acquisitions were 

in census tracts where minorities accounted for 50 percent or less of the population. HMDA 

data show that activity for non-GSE participants in the Atlanta market was actually slightly 

more concentrated in low-minority census tracts than the GSEs’ activity. 

123 The tract minority population levels are based on the 1990 Census data. 

Chapter 6 – Background on Lender Interview Sites and GSE Activity 81 
Exhibit 6-4 

Atlanta, GA (DeKalb and Fulton Counties), Fannie Mae, Freddie Mac, and HMDA: 

1993-1999 

Number of Loans by Year and 1990 U.S. Census Tract Percent Minority 

1993 1994 1995 1996 1997 1998 1999 Total 

Fannie Mae 

less than 10 percent 1 2 4 2 0 2 4 15 

10-30 percent 6 8 7 9 7 9 8 54 

31-50 percent 0 1 3 5 3 5 3 20 

51-80 percent 0 4 1 5 3 5 5 23 

greater than 80 percent 0 4 12 3 3 3 7 32 

Total 7 19 27 24 16 24 27 144 

Freddie Mac 

less than 10 percent 0 0 0 1 1 2 4 8 

10-30 percent 0 2 5 6 6 12 14 45 

31-50 percent 1 0 1 0 0 5 3 10 

51-80 percent 1 0 1 0 2 10 4 18 

Greater than 80 percent 1 1 2 2 2 9 6 23 

Total 3 3 9 9 11 38 31 104 

HMDA 

less than 10 percent 2 0 3 3 10 16 11 45 

10-30 percent 10 16 21 24 36 49 24 180 

31-50 percent 1 1 8 7 10 17 14 58 

51-80 percent 3 8 10 11 4 8 16 60 

Greater than 80 percent 5 11 8 12 13 26 21 96 

Total 21 36 50 57 73 116 86 439 

6.2 Boston 

The Boston multifamily market is considered a “mature” multifamily market, with most of its 

stock developed prior to 1950. This is unlikely to change in the near future, as very few new 

apartments are built in Boston each year. In 1999, Boston ranked 36th among housing 

markets for the number of multifamily permits issued despite being the sixth largest housing 

market. This was not a result of lack of demand: in 1999, occupancy rates reached 97.9 

percent – the second highest occupancy rate in the nation (Pikramenos, 2000). 

In addition to the age of Boston’s multifamily housing stock, according to the lenders 

interviewed, much of the Boston rental housing stock is small and does not meet Fannie 

Mae’s and Freddie Mac’s typical scale for an approvable “multifamily” deal. Forty-five 

percent of the Boston’s rental stock is defined as single family. (Twenty percent of the rental 

stock is in properties with one to two housing units. Another 25 percent of the rental stock is 

in properties with three to four housing units.) Thirty percent of the rental stock is in 

82 Chapter 6 – Background on Lender Interview Sites and GSE Activity 
multifamily properties with between five and 20 units. The remaining rental stock (25 

percent) is in properties with greater than 20 units. 

There is little GSE activity in the Boston market except for refinances. Exhibit 6-5 and the 

corresponding map show that more than 75 percent of the GSEs’ activity in 1993-1999 in 

Boston was in census tracts where minorities accounted for 50 percent or less of the 

population. HMDA data show a similar concentration of multifamily financing activity in 

low-minority census tracts for non-GSE participants in the Boston market. 

Exhibit 6-5 

Boston, MA (Suffolk County), Fannie Mae, Freddie Mac, and HMDA: 1993-1999 

Number of Loans by Year and 1990 U.S. Census Tract Percent Minority 

Fannie Mae 

less than 10 percent 

10-30 percent 

31-50 percent 

51-80 percent 

Greater than 80 percent 

Total 

Freddie Mac 

less than 10 percent 

10-30 percent 

31-50 percent 

51-80 percent 

Greater than 80 percent 

1993 

1 

2 

0 

4 

5 

12 

0 

0 

0 

0 

0 

1994 

0 

4 

1 

0 

0 

5 

0 

0 

1 

0 

0 

1995 

0 

1 

4 

2 

4 

11 

0 

1 

0 

0 

0 

1996 

0 

5 

2 

0 

1 

8 

8 

0 

1 

0 

0 

1997 

0 

0 

0 

1 

0 

1 

0 

0 

1 

3 

1 

1998 

0 

1 

2 

1 

0 

4 

3 

19 

8 

2 

1 

1999 

3 

6 

0 

0 

0 

9 

4 

4 

5 

0 

1 

Total 

4 

19 

9 

8 

10 

50 

15 

24 

16 

5 

3 

Total 

HMDA 

less than 10 percent 

10-30 percent 

31-50 percent 

51-80 percent 

Greater than 80 percent 

0 

20 

16 

15 

8 

3 

1 

29 

36 

23 

9 

8 

1 

39 

35 

12 

11 

9 

9 

44 

46 

27 

19 

9 

5 

47 

40 

26 

19 

21 

33 

75 

94 

38 

43 

29 

14 

61 

81 

43 

46 

38 

63 

315 

348 

184 

155 

117 

Total 62 105 106 145 153 276 269 1119 

6.3 Chicago 

Like Boston, Chicago is another “mature” multifamily market. Neither the housing stock nor 

the structure of the typical multifamily loan documents are generally consistent with Fannie 

Mae’s and Freddie Mac’s purchase standards, according to lenders interviewed. The typical 

affordable multifamily housing property is a three-story walkup that is over 40 years old. 

These properties neither offer what the GSEs consider “standard” amenities – vanity under 

the sink, swimming pool and parking on site – nor do the GSEs agree with what local lenders 

Chapter 6 – Background on Lender Interview Sites and GSE Activity 83 
 

consider amenities. For example, Chicago developed one of the early (and efficient) public 

transportation systems. According to the local lenders, the local population considered the 

rail system an amenity. Even affluent single family property owners considered close 

proximity to the trains as an advantage. But lenders say that Fannie Mae and Freddie Mac 

regard this as a negative factor.124 

Chicago also has several large financial institutions with a long track record of supporting 

community development lending in the low- and moderate-income neighborhoods. What 

began as CRA initiatives have taken on a life of their own. After five years, experience has 

proven that multifamily lending in Chicago is a real and profitable line of business. Chicago 

lenders have offered borrowers aggressive pricing including “free forward [commitment] 

rates, construction periods of up to 18 months, ARMs with a 5 percent lifetime cap, 20 to 30 

year terms and 25 to 30 year amortization.” In addition they offer “low fees including a $250 

application fee, two points for the entire transaction and no prepayment penalties.”125 

The aggressive pricing for these community development activities has been satisfactory for 

the lenders; the loans are performing and the lenders are making the margins they expected. 

However, the GSEs and the lenders have found it difficult to close deals for the GSEs to 

purchase the mortgages. Many of the loans are not underwritten to the GSEs standards, nor 

are the margins sufficient to cover the costs of the transactions with the GSEs. 

The map of Chicago shows that the GSEs have found some loans to purchase, mostly along 

the Lake Michigan shoreline, which is currently being redeveloped. Exhibit 6-6 shows that 

approximately 63 percent of the GSEs’ purchase activity in Chicago was in census tracts 

where minorities represent 50 percent of the population or less. HMDA data show slightly 

greater concentration of multifamily financing activity in low-minority census tracts for nonGSE participants in the Chicago market. 

124	 The GSEs’ perception of proximity to public transportation as a negative factor may be changing. In 1999, Fannie Mae 

introduced a single-family mortgage product called the Location Efficient Mortgage in several densely populated cities. 

This product recognizes the savings from the purchase of a home near public transportation and allows a portion of the 

potential savings to be used as additional borrower income in qualifying for a mortgage. Although the Location 

Efficient Mortgage is a single-family product, it may be a signal that proximity to public transportation could be a 

positive factor in underwriting multifamily mortgages as well. (www.fanniemae.com/news/pressreleases/0678.html) 

125	 Correspondence from a consortium of community development lenders in Chicago to Fannie Mae, November 3, 1994. 

84 Chapter 6 – Background on Lender Interview Sites and GSE Activity 
Exhibit 6-6 

Chicago, IL (Cook County), Fannie Mae, Freddie Mac, and HMDA: 1993-1999 

Number of Loans by Year and 1990 U.S. Census Tract Percent Minority 

1993 1994 1995 1996 1997 1998 1999 Total 

Fannie Mae 

less than 10 percent 24 1 59 0 2 6 1 93 

10-30 percent 78 2 127 17 4 23 22 273 

31-50 percent 73 5 129 2 1 6 1 217 

51-80 percent 48 5 95 1 1 15 2 167 

Greater than 80 percent 33 10 107 0 3 36 0 189 

Total 256 23 517 20 11 86 26 939 

Freddie Mac 

less than 10 percent 0 0 0 0 0 3 4 7 

10-30 percent 0 2 1 3 0 10 7 23 

31-50 percent 0 0 0 1 0 1 0 2 

51-80 percent 0 1 1 1 0 0 1 4 

Greater than 80 percent 0 0 1 5 1 2 0 9 

Total 0 3 3 10 1 16 12 45 

HMDA 

less than 10 percent 380 352 236 307 299 384 436 2394 

10-30 percent 671 565 415 535 490 701 723 4100 

31-50 percent 392 374 277 332 364 496 463 2698 

51-80 percent 380 378 304 364 352 503 549 2830 

Greater than 80 percent 287 288 298 355 366 515 608 2717 

Total 2110 1957 1530 1893 1871 2599 2779 14739 

6.4 Dallas 

The economy of Dallas has been driving expansion in all economic levels of the multifamily 

market. New construction has been apparent, especially at the luxury end, leading to softness 

in the Class A market in 2000. Vacancy rates in this market were about 10.4 percent through 

the first half of 2000, compared with vacancy rates in the Class B segment of about 4.8 

percent (Holland, 2000). The demand for affordable multifamily market has continued to 

expand and ensure high occupancy in the older buildings despite the high turnover rate. 

The Dallas multifamily market is currently encountering a shortage of affordable units for 

housing seniors. The full range of facilities is needed from independent living through 

assisted living and nursing homes. To date, the housing authority has been the only source 

for funding. The units needed must reach people whose income levels are such that they can 

afford approximately $400 per month. The developers who invest in this opportunity will 

have to be very patient to recover their investment or find a subsidy for the tenants. 

Chapter 6 – Background on Lender Interview Sites and GSE Activity 85 
The map of Dallas shows that both Fannie Mae and Freddie Mac have found deals in this 

rapidly expanding market, especially as the north Dallas area is being developed. Exhibit 6-7 

shows that, as in the other markets, GSE purchases in Dallas are concentrated in lowminority census tracts. About 78 percent of the GSEs’ purchases in 1993-1999 were in 

census tracts where minorities represented 50 percent or less of the population. Dallas is the 

only market of the four examined here where non-GSE activity in the multifamily market 

was less concentrated among low-minority census tracts than GSE activity. Compared with 

the GSEs’ 78 percent of purchases in low-minority census tracts, about 66 percent of nonGSE activity was in low-minority census tracts (those where minorities represented 50 

percent or less of the population). 

Exhibit 6-7 

Dallas, TX (Collin, Dallas, and Denton Counties), 

Fannie Mae, Freddie Mac, and HMDA: 1993-1999 

Number of Loans by Year and 1990 U.S. Census Tract Percent Minority 

Fannie Mae 

less than 10 percent 

10-30 percent 

31-50 percent 

51-80 percent 

greater than 80 percent 

Total 

Freddie Mac 

less than 10 percent 

10-30 percent 

31-50 percent 

51-80 percent 

greater than 80 percent 

1993 

4 

16 

15 

5 

2 

42 

0 

0 

0 

1 

0 

1994 

3 

24 

4 

7 

5 

43 

0 

5 

3 

3 

0 

1995 

3 

21 

5 

6 

2 

37 

0 

5 

3 

0 

0 

1996 

8 

45 

8 

4 

2 

67 

2 

6 

1 

3 

1 

1997 

3 

34 

11 

11 

2 

61 

2 

10 

7 

3 

2 

1998 

0 

28 

12 

9 

2 

51 

4 

28 

20 

24 

5 

1999 

0 

33 

9 

4 

5 

51 

5 

17 

9 

11 

0 

Total 

21 

201 

64 

46 

20 

352 

13 

71 

43 

45 

8 

Total 

HMDA 

less than 10 percent 

10-30 percent 

31-50 percent 

51-80 percent 

greater than 80 percent 

1 

7 

33 

7 

8 

5 

11 

3 

19 

16 

10 

9 

8 

6 

55 

18 

25 

10 

13 

5 

51 

20 

37 

3 

24 

14 

70 

42 

35 

16 

81 

16 

62 

26 

82 

13 

42 

19 

71 

40 

43 

19 

180 

70 

361 

169 

240 

75 

Total 60 57 114 116 177 199 192 915 

86 Chapter 6 – Background on Lender Interview Sites and GSE Activity 
Chapter 6 – Background on Lender Interview Sites and GSE Activity 87 
88 Chapter 6 – Background on Lender Interview Sites and GSE Activity 
Chapter 6 – Background on Lender Interview Sites and GSE Activity 89 
90 Chapter 6 – Background on Lender Interview Sites and GSE Activity 
Chapter 6 – Background on Lender Interview Sites and GSE Activity 91 
92 Chapter 6 – Background on Lender Interview Sites and GSE Activity 
Chapter 6 – Background on Lender Interview Sites and GSE Activity 93 
94 Chapter 6 – Background on Lender Interview Sites and GSE Activity 
 

Chapter Seven 

Findings from Interviews with National Experts and 

Multifamily Lenders in Four Markets 

Chapter 3 described the GSE’s underwriting requirements, policies, and programs as they are 

written in the GSEs’ written Guides. The goal of this chapter is to shed light on how these 

requirements, policies, and programs were understood by those who had to implement them, 

and how they were implemented in practice. 

The policy issues considered in the interviews for this exploratory study include 

investigations into whether there is any evidence of: 

•	 Credit gaps in segments of the multifamily market; 

•	 Impacts of GSEs’ underwriting and appraisal requirements and standards on the 

availability of multifamily mortgage loans; 

•	 GSEs’ underwriting and appraisal requirements and standards having a 

disproportionate adverse impact on protected classes; 

•	 GSEs’ underwriting and appraisal requirements pertaining to the age or location 

of the property or age of neighborhood having a discriminatory effect. 

Two sets of interviews were conducted for this study, as described in detail in Appendix B.126 

The interviewees included 26 individuals selected as national industry experts and 24 lenders 

who are representatives of various segments of the multifamily financing market and active 

in at least one of the four local markets described in Chapter 6.127 

126	 The discussion below is a compilation of both sets of interviews and reflects the opinions of the informants. Where 

specific comments (or sets of comments) help to explain the general tenor of the informants’ responses, they are set off 

with bullets. An “N” indicates the response was from the national experts and an “L” from the local multifamily 

lenders. Most of the comments are paraphrased; quotes are shown with quotation marks. 

127	 It is important to note that most of the interviews with the national industry experts were conducted in April 1998 and 

the interviews with lenders were conducted in May 1998. During this period, the capital markets were actively seeking 

multifamily investments. As one lender said, “The competition in the capital markets is the fiercest I’ve ever seen it. 

There is just a whole bunch of money out there chasing [investments in multifamily properties], due to the astronomical 

growth of the conduits in Wall Street.” By the end of August 1998, the capital markets changed as the conduits 

dropped out of investments in multifamily properties due to the increased spreads demanded by investors and 

substantial losses in their portfolios bulging with loans made at lower spreads. Two additional interviews were 

conducted in 2001. 

Chapter 7 – Findings from Interview with National Experts and Multifamily Lenders in Four Markets 95 
 

Section 7.1 describes the multifamily market segments, the primary and secondary market 

lenders in each segment of the market, and the views of the informants regarding Fannie 

Mae’s and Freddie Mac’s leadership in the multifamily market. Section 7.2 first summarizes 

the informants’ views of whether there are credit gaps in multifamily housing finance and the 

GSEs’ perceived effects on any such gaps. This section also reviews perceived flexibilities 

and inflexibilities in the GSEs’ underwriting practices, and effects on credit availability. 

Section 7.3 briefly reviews the informants’ comments on the GSEs’ underwriting 

requirements and impacts on the intent of the Fair Lending Laws. 

7.1	 Multifamily Market Segments and Availability of Loans on 

Affordable Properties 

The interviews first focused on the segments of the multifamily market and identifying the 

dominant players in each segment. Then impressions of Fannie Mae’s and Freddie Mac’s 

leadership in this market were discussed. 

Market Segments 

Informants were asked to discuss the segments in the multifamily market and identify the 

dominant players within the following segments: affordable housing, small properties, older 

properties, properties located in urban inner cities, properties in need of rehabilitation, and 

projects developed under the Low Income Housing Tax Credit Program (LIHTC). 

One of the important findings was that interviewees said the key market players varied by 

segment and region/local area. Each dominant player had had numerous previous 

experiences with the GSEs—both positive and negative. Therefore, HUD’s influence in each 

of the market segments and markets would ultimately depend on understanding the dynamics 

between the dominant players and the GSEs. Illustrative experiences for each market 

segment are presented below: 

Affordable Housing Segment. Within the affordable market segment, the definition of 

“affordable” was very important. Many informants were very careful to separate “affordable 

housing” from “targeted affordable housing” (a Fannie Mae Multifamily Product).128 As 

some informants indicated (and many of the others agreed): 

•	 (L) “When I say targeted affordable housing, it generally means tax credit 

properties and by Fannie Mae’s definition, it is a rent-restricted property.” Fannie 

Mae’s “targeted affordable housing” program has more lenient underwriting 

standards that are needed to get these deals done, e.g., 90 percent LTV, DSC ratio 

128	 Freddie Mac began listing “targeted affordable housing” as a multifamily product in its 1999 web site revision. 

96 Chapter 7 – Findings from Interviews with National Experts and Multifamily Lenders in Four Markets 
 

of 1.1, and more flexibility on credit requirements. Most of these deals have 

some proportion of equity investment from Fortune 500 companies (for tax-credit 

deals). 

•	 (L) Most [targeted] affordable housing is going to have “subordinate debt, tax 

credits, funny money all over the place, and that’s not necessarily bad.” 

•	 (L) “The targeted affordable deals become big negotiations; everyone wants to do 

it, but everyone has their own lending agenda. These deals can have many layers 

of subordination, so you have to have everyone around the table. The role of the 

mortgage banker is as negotiator.” 

•	 (L) There are plenty of other properties that are affordable to people who are at or 

below the median income for the area. These properties do not include tax 

credits, but can include other forms of subordinate financing. 

In the overall affordable segment of the multifamily market, the dominant players are 

typically local depositories (banks and thrifts) and conduits.129 Depending on the market, 

other players include the state housing finance agencies, lending consortia, and the Federal 

Home Loan Banks. In several of the markets, lenders with a national presence were 

mentioned (e.g., ARCS, Bankers Mutual, and Citicorp). State housing finance agencies were 

cited as active players in California and Massachusetts. In the 1998 interviews, the GSEs 

were rarely viewed as playing a leadership role in the affordable segment of the multifamily 

market. 

In 30 to 40 markets across the U.S., consortia of large banks, smaller thrifts, and insurance 

companies are operating in separate, mostly metropolitan (or statewide) markets. These 

consortia of lenders typically play a large role in the multifamily market. Three markets have 

very large consortia: New York, Chicago, and the State of California. The Community 

Preservation Corporation (CPC) has been serving the New York City and several upstate 

markets since 1974. More recently, CPC has forged relationships with non-profit housing 

developers to finance affordable multifamily housing. The Community Investment 

Corporation (CIC), in Chicago, founded in 1974, spent its first decade focused exclusively on 

the single family market, then changed to focus exclusively on the multifamily market 

beginning in 1984. The Saving Associations Mortgage Company, founded in 1971, is 

statewide in California and has 90 members. In the beginning, it provided both construction 

and permanent financing for single family housing exclusively. Since 1985, it has originated 

multifamily mortgages exclusively. 

Other major contributors to funding affordable housing are the Federal Home Loan Banks 

(FHLBs). These are large cooperative or wholesale banks that access the capital markets, 

129	 Conduits are entities that pool mortgages and sell interests in these pools to investors. 

Chapter 7 – Findings from Interview with National Experts and Multifamily Lenders in Four Markets 97 
 

raise funds by issuing debt instruments (notes and bonds), and then lend funds (“advances”) 

to their members at favorable rates. The FHLB system funds its members to carry out two 

community programs—the Affordable Housing Program (AHP)130 and the Community 

Investment Program (CIP).131 Since 1990, ten percent of the FHLB’s earnings have been 

available as a subsidy for affordable housing under the AHP. The 12 FHLBs (through 

approximately 6000 member banks) will have awarded $639 million in subsidies and 

completed 4500 projects by the end of 1998.132 

Small Properties Segment. Historically, the smaller properties segment (5 to 50 units) was 

the domain of the savings and loans (S&Ls) and commercial banks that used this market 

segment to meet their CRA goals. In many markets, mortgage companies, credit companies, 

small consortia, and conduits are also small multifamily mortgage originators. 

Several informants indicated that many of the dominant players are the same as for 

affordable housing. Another informant indicated that these loans are typically dominated by 

regional entities. For example, in California, the players include California Housing Finance 

Agency, Bankers Mutual, and those banks with CRA motivation (Bank of America, Wells 

Fargo, and Bank of the West). Another informant identified FHA originators like First 

Maryland Mortgage. Others mentioned TRI and Berkshire Mortgage, Nomura, Daiwa, 

Countrywide and Citibank. In New York, Apple Bank is a small loan portfolio lender and 

Key Bank serves the up-state area. In Chicago, LaSalle Talman, Harris Bank, Northern 

Trust, and Southshore Bank are all players. In Boston, the dominant player is Massachusetts 

Housing Partnership. 

One national lender133 recognized the financing gap in the small property segment and 

aggressively began advertising a product that was competitive in the following ways: 

•	 Fast (closing in 6-8 weeks); 

130	 The AHP program was authorized by FIRREA in 1989. AHP supports multifamily projects aimed at rental housing 

development for low-income families with incomes not exceeding 80 percent of AMI. 

131	 The CIP program was originally initiated by several of the FHL Banks in 1978 and extended by FIRREA in 1989. The 

Congressional legislation stated that CIP was to support “community-oriented building” with multifamily loans for: 

•	 Rehabilitation of housing occupied by families with incomes not exceeding 115 percent of area median 

income (AMI); 

•	 Commercial and economic development activities that benefit low- and moderate-income families or located 

in low- and moderate-income neighborhoods; and 

•	 Projects that include a combination of these activities. 

132	 See U. S. Department of Housing and Urban Development. (1994). Report to Congress on the Federal Home Loan 

Bank System, Volume II: Analytic Studies. HUD-6371, April. 

133	 This lender has recently dropped out of lending in the small properties segment for reasons related to overall business 

strategy, but unrelated to this segment of the multifamily market. 

98 Chapter 7 – Findings from Interviews with National Experts and Multifamily Lenders in Four Markets 
•	 Cost effective (total closing costs are $10,000 on a multifamily property— 

including all third parties, legal, and underwriting); 

•	 More competitively priced; and 

•	 Doing the deals non-recourse. In mid-1998, they were closing $10 to $20 million 

per month in their small multifamily loan program. 

Several of the mortgage bankers indicated that occasionally they receive an application for a 

loan under $1 million. These (rare) applications are usually from a current customer and 

processed as a favor to the customer. If possible, the applications are passed on to a 

subsidiary that does CRA-type lending and has experience with this segment of the 

multifamily market. The lender’s end strategy for this type of loans is to pool and eventually 

sell them to Fannie Mae. 

Other informants provided comments that explain reasons why this segment of the 

multifamily market is viewed as difficult to finance and service. 

•	 (L) Small properties are very underserved from the permanent side; it’s a lot of 

work for very little return and it’s usually an unsophisticated borrower. There is a 

huge market here, but it has to be streamlined. These borrowers are accustomed 

to appraisals (of their own house) that take a week to do, but they are not 

accustomed to a three-week narrative appraisal with an engineer’s report on the 

gas station next door. 

Fannie Mae, Freddie Mac, and FHA have all introduced small loan programs. Freddie Mac 

offers a small loan program (from $300,000 to $999,999) through its Conventional Cash 

Program. Fannie Mae replaced its small loan pilot in May 2000 with a permanent product, 

the 5-50 Streamlined Mortgage, offered to DUS lenders. As of 1998, 19 lenders were 

authorized to provide the product. 

According to informants, these small programs have been difficult for the three agencies to 

implement. The FHA program was created to meet a need, but no one is using it because of 

processing difficulties. Similarly, Fannie Mae’s small loan pilot had not succeeded by May 

1998; it was not appealing to the DUS lenders or the borrowers as shown in the examples 

below: 

•	 (L) We [a DUS lender] declined the invitation to participate [in the small projects 

program]. With the amount of work required to do Fannie Mae underwriting, and 

with the pricing offered, we did not think it was competitive, nor could we make 

any money on it. 

Chapter 7 – Findings from Interview with National Experts and Multifamily Lenders in Four Markets 99 
 

•	 (L) Fannie Mae tried a small program that failed because borrowers did not 

understand recourse provisions to the borrower. Instead, borrowers are going to 

their banker down the street, whom they trust will not be as heavy-handed. 

•	 (L) Fannie Mae’s loans would have been recourse loans.134 In some markets, 

(e.g., New York City), the savings banks offer the small loans without recourse. 

This issue would make Fannie Mae’s program uncompetitive there. 

Fannie Mae’s 5-50 Streamlined Mortgage product is too new for lenders to have extensive 

experience with it, but one DUS lender, who is approved to use the 5-50 product, noted: 

•	 (L) There are lots of attempts to do these great things [in small multifamily 

financing], but we’re still not convinced that it’s going to happen. Not because of 

lack of trying – part of the issue is that this business is just too difficult to do. I 

see no reason to believe [the 5-50 product] will be more successful [than past 

attempts to do more small multifamily financing]. I don’t know that we will do a 

lot of [5-50 product] business. 

Older Properties Segment. In this segment of the multifamily market, many informants 

indicated that the profile of lenders was the same as for the affordable segment: 

•	 (L) One informant recalled that a contingent of HFAs through the National 

Council of State Housing Finance Agencies attempted to develop a risk-sharing 

initiative/pilot with Fannie Mae that would address many problems, including 

underwriting older properties. The initiative was never implemented, mainly (as 

stated by the informant) because of the exorbitant fees that would have to have 

been charged for each party to feel that the deals were profitable, Fannie Mae’s 

inflexibility in their underwriting standards, and the inability to agree on terms of 

subordination. 

•	 (L) Another informant indicated that lack of flexibility was not a problem 

currently with Fannie Mae, under their terms and conditions. Fannie Mae’s 

underwriting standards previously were stricter for properties that were more than 

ten years old. Today, practically every property in affordable housing areas is a 

“B” or “C” property between 10 and 30 years old. Fannie Mae is participating in 

some of these deals but has stricter requirements than for “A” properties. 

•	 (L) A third informant did not believe that the GSEs’ underwriting guidelines were 

biased against older properties. However, he expressed his impression that 

Freddie Mac’s pricing for older properties was more expensive than for newer 

134	 Fannie Mae’s permanent small loan program is offered without recourse. 

100 Chapter 7 – Findings from Interviews with National Experts and Multifamily Lenders in Four Markets 
 

properties. He thought this was a result of the additional competition for 

mortgages on newer properties, for example from insurance companies. 

Inner-city Properties Segment. In the multifamily segment of properties located in urban 

inner cities, the profile of the dominant players is a combination of those in the affordable 

housing and smaller property segments, discussed above. 

•	 (L) We handle many properties that have rent control or rent stabilization, (e.g., in 

New York and New Jersey). Our [mortgage] rates are not contingent on whether 

the property is affordable or otherwise. It depends on cash flows and on the 

results of underwriting. 

Properties in Need of Rehabilitation Segment. In the multifamily segment of properties in 

need of rehabilitation, the consortia are the dominant players, but in a limited set of markets. 

In many markets, banks seeking CRA credits have been the dominant players. The Housing 

Finance Agencies have also been flexible and willing to take the risk on these transactions. 

In general, many informants indicated that this segment is still not well served. 

Properties Developed with LIHTC Program. For projects developed under the Low Income 

Housing Tax Credit (LIHTC) Program, the dominant players were originally thrifts that 

made the loans with subordinate financing provided by state LIHTC programs. Currently, 

the development community is relying more heavily on deals that include tax-exempt-bondfinancing. 

In all markets, the LIHTC deals require layered financing. According to informants, these 

deals vary considerably among market areas (e.g., CPC is not involved in New York,135 but 

CIC is very involved in Chicago). In Boston, the Massachusetts Housing Investment 

Corporation, a Boston-based affordable housing consortium focuses on the LIHTC projects. 

More recently, several informants said the dominant players are “anybody and everybody 

from state HFAs to Wall Street, to non-profits.” There are currently many organizations who 

are supporting lifting the cap on tax credits set in 1986 as $1.25 per capita at the state level. 

Many of the LIHTC loans are sold in the secondary market. According to the informants, 

investors in the equity side of the LIHTC include many corporations. 

Other Special Needs Segments. Within the multifamily market for rental apartments, several 

of the informants indicated that there were segments of the market that were currently “left 

out,” with an apparent credit gap in both the primary and secondary multifamily markets.136 

The following describes the segments that were identified by some informants: 

135	 CPC has developed a successful model using New York State pension funds and state-supplied mortgage insurance. 

136	 This impression was reinforced by informants who speculated which of the multifamily market segments could become 

“new targets” for the conduits seeking mortgages to securitize (prior to August 1998). 

Chapter 7 – Findings from Interview with National Experts and Multifamily Lenders in Four Markets 101 
 

•	 (L) Seniors housing currently needs considerable attention—the whole range from 

independent living to skilled nursing. 

•	 (L) One of the biggest needs in the affordable housing area is for the 

“dispossessed”—the deinstitutionalized (e.g., those with mental health problems, 

developmental disabilities, physical handicaps, and others who are homeless). 

Others are vulnerable to becoming homeless—older people with AIDS, abused 

spouses, and drug abusers. 

•	 (L) Another group that will emerge is the current residents of public housing 

whose units will be destroyed without one-to-one replacement. 

GSE Leadership in the Multifamily Market 

According to the national industry experts and lenders whom we interviewed, the GSEs have 

made progress in their contributions to affordable lending in the multifamily market. Both 

Fannie Mae and Freddie Mac have forward commitment programs that support the 

construction or rehabilitation of multifamily properties, typically using the LIHTC and/or 

other forms of subordinated financing. Both of the GSEs also offer bond credit 

enhancements, thereby supporting tax-exempt bond programs for refunding, acquisition, or 

rehabilitation of multifamily properties. 

The GSEs’ leadership in the multifamily market is characterized narrowly in terms of setting 

the standards for underwriting and financing multifamily properties. Depending on the 

informant, sometimes Fannie Mae is given more credit for this form of leadership than 

Freddie Mac and sometimes Freddie Mac is recognized for its role, but neither is viewed as 

“leading the market.” For example: 

•	 (N) Historically, Freddie Mac137 claims, and one of the national experts (with 

years of experience in financial services) concurs, it was viewed as the 

neighborhood secondary market source for the smaller and older properties, while 

Fannie Mae was viewed as the secondary market source for the larger, complexsize apartment buildings in the city. Freddie Mac, in the early 1990s, ran into 

problems with their multifamily portfolio and underwriting practices. After they 

reduced their commitment to the multifamily market for a few years, they have 

never fully returned to their previous prominence in the multifamily market. 

•	 (N) Fannie Mae set the early underwriting requirements and standards for the rest 

of the industry when they developed the Delegated Underwriting and Servicing 

(DUS) network in the late 1980s. Freddie Mac also developed underwriting 

requirements and standards that were considered part of the “industry standard.” 

137	 Freddie Mac, 1998. 

102 Chapter 7 – Findings from Interviews with National Experts and Multifamily Lenders in Four Markets 
 

Other financial institutions followed their lead. Until five years ago, other 

financial institutions’ LTVs and DSCs were similar to those of the GSEs. 

None of the informants interviewed in 1998 identified either of the GSEs as leaders in any of 

the multifamily market segments. Consistent with their generally conservative approach to 

the multifamily market in general, the GSEs have provided leadership in development of 

underwriting requirements, but not in developing programs and products especially for the 

affordable market. Other financial services entities have led the way in affordable lending. 

The following is a brief summary of the lender informants’ perceptions: 

•	 (L) Neither have been leaders. They typically fall way behind the state housing 

finance agencies in affordable lending.138 

•	 (L) Freddie Mac has been super cautious since 1993. At some point, they have to 

dare to be a leader again. 

•	 (L) We were selling loans to the GSEs years ago. You had to do it their way or 

not at all. 

•	 (L) They do not work in the same markets that we work in; we do not do 

swimming pool deals.139 That is what I think they do. 

One lender we re-interviewed in 2001 believed that the GSEs had substantially increased 

their efforts to serve the affordable housing market: 

•	 (L) The last couple of years there has been a sea change in [the GSEs’] 

willingness to work harder to get things done. Freddie Mac is at least trying, and 

Fannie Mae is making the rhetoric closer to the reality. I think they will 

eventually achieve leadership in affordable housing. 

Differences between the GSEs remain. While Fannie Mae is viewed as being more 

responsive among many of the informants, there are differences among the market areas. 

One respondent pointed out that in the New York City market, it is much easier to deal with 

Freddie Mac, since the regional office is staffed with people who really understand 

underwriting in that market. 

Inferences on Multifamily Market Segments 

According to the informants interviewed in April and May 1998, the multifamily market 

segments were fairly well covered. In each of the four markets visited (Atlanta, Boston, 

138	 The term “affordable lending” used in the multifamily-housing context means loans to support the purchase of 

multifamily properties with units that are affordable to lower-income families. 

139	 This informant used “swimming pool deals” as shorthand for newer, more costly rental properties. 

Chapter 7 – Findings from Interview with National Experts and Multifamily Lenders in Four Markets 103 
Chicago, and Dallas), multifamily deals were being made, frequently with competition from 

several secondary market sources. The informants also provided anecdotal evidence of the 

extent of the competition with commentary on how close the basis point spreads were among 

the winners and losers in some of the deals. Three basis point spreads were described on 

several occasions. 

Despite the high level of activity in each of the market segments, Fannie Mae’s and Freddie 

Mac’s offers were frequently not the secondary market choice of the borrower. Instead there 

were numerous examples from the lenders about the slowness of the GSEs’ offers, the 

amount of additional work required of the borrower to meet the preliminary requirements of 

the GSEs, and the fact that some of the borrowers had prior experience with one or both of 

the GSEs and did not want to repeat the experience. Given the reports provided by the 

informants, the GSEs could not be considered leaders in the affordable multifamily lending 

market in these four markets. At the end of 1998, there has been some increased 

participation by the GSEs in the multifamily market, after the volatility in the economic 

conditions in late August 1998. 

Lindstrom (1998) quotes Douglas Dear of WMF Washington Mortgage, who comments at 

the end of the summer of 1998: 

“In these market conditions, it’s very comforting to have Fannie Mae as one 

of your investors. Day in and day out, they’re in the market. With rates 

dropping but spreads increasing, a lot of lenders are pulling out of the 

market.” 

The GSEs’ both had record years in 1998. Fannie Mae volume increased by about 80 

percent to $12.5 billion in 1998 from about $7 billion in 1997. Freddie Mac’s business 

increased by about 140 percent to about $6.5 billion in 1998 from about $2.7 billion in 1997. 

This pace was not sustained in 1999, although multifamily volume for both GSEs was the 

second largest on record that year. 

Going forward, the issue for the GSEs will be whether they can continue to increase their 

level of participation in all segments of the multifamily market. 

7.2	 GSE Underwriting Requirements: Impacts on Credit 

Availability 

The respective GSEs (and their consultants) periodically scrutinize the GSEs’ formal Guides 

of underwriting and appraisal requirements and standards, especially as they relate to the 

safety and security of each institution’s investments. Generally, the content of the GSEs’ 

underwriting and appraisal requirements and standards appear to us (within the level of 

104 Chapter 7 – Findings from Interviews with National Experts and Multifamily Lenders in Four Markets 
 

analysis described in the scope of work for this project) to be descriptions of sound and 

sensible business practices. 

The written contents of the Guides do not provide the GSEs’ interpretation of the contents of 

the Guides in practice. For example, the informants who are DUS lenders and/or Program 

Plus lenders made it clear that all of the required documents (to the extent they exist) must be 

delivered for underwriting. However, they also indicated that waivers sometimes were 

permitted and some flexibilities were negotiable and allowed. 

Any Presence of Credit Gaps 

The issue of GSE underwriting impacts on credit availability can be examined from a 

broader, more global perspective as well as a micro, business practices perspective. The 

informants differed in their perceptions of the existence and magnitude of credit gaps. Most 

insisted that under the then current market conditions (late Spring 1998) no gaps exist, while 

others identified credit gaps in particular segments of the multifamily market, and still others 

identified niche gaps that occur under a specific set of conditions within a segment of the 

multifamily (e.g. for small properties in a state with a weak HFA).140 Because of capital 

market cycles, the credit gaps could be alleviated somewhat if there were high investor 

demand for multifamily mortgages (of any size) and there were conduits purchasing 

mortgages in that state’s market. 

Those who saw no current gaps said: 

•	 (L) Lately I have not seen any gaps. When we started doing loans, of anywhere 

from half a million to two million dollars, I think there were credit gaps. Now 

there are at least those numbers of interested parties in every deal that we do. 

They are bidding for the mortgages, so there are no gaps any more. 

•	 (L) Fannie Mae’s credit enhancements of tax-exempt bonds have eliminated a gap 

that was seen when it was no longer possible to get a 9 percent LIHTC. This 

remains their best execution. 

•	 (L) Take 1991, for example. There was very good coverage during that 

multifamily mortgage slump. Although the GSEs were not providing secondary 

market liquidity to the multifamily market, HUD was continuing to lend and 

insure under several HUD programs. This is one of the reasons that some 

mortgage bankers value their HUD license; when all else is quiet, HUD will still 

be there to offer multifamily mortgages. 

140	 In this example, the market segment is small properties and the niche is small properties within a geographic area with 

a weak FHA. 

Chapter 7 – Findings from Interview with National Experts and Multifamily Lenders in Four Markets 105 
•	 (L) There’s plenty of money to shape the deals; the GSEs are only one source. 

•	 (L) Right now, the market does not need anything. It just doesn’t! 

Some of those who saw credit gaps still present in the multifamily market, indicated that they 

were not seen everywhere, but in particular niches of the market segments. For example, one 

informant questioned whether some rural and smaller metropolitan areas were being denied 

equal liquidity in the secondary market. Another indicated that there are credit gaps for 

construction loans for affordable properties for both rehabilitation and new construction. 

Others stated the evidence of credit gaps differently, for example: 

•	 (N) [An informant who is very active and aggressive in the small property 

segment of the multifamily market pointed out that] there might be a gap for 

unsophisticated borrowers who are unaware of the benefits of refinancing an 11 

percent loan for one at 8 percent. 

•	 (N) Although there are no census tracts in this city in which we [a large multimarket bank] do not lend and no census tract in the city that is held back from a 

pool of loans we sell to Fannie Mae, there are properties that cannot support the 

required financial ratios, e.g., a loan approved on the LTV ratio but, because of 

the cash flows, there is a gap between the appraised rentals and DSC requirement. 

There are a couple of programs in the city where there are soft seconds and gap 

loan programs to manage the disconnect between the appraised values and the 

cash flows of the buildings. Whether these deals can survive an economic 

downturn is unknown. 

•	 (N) There are gaps where there should be; for example in older buildings where 

there is no value left. In these cases, it’s important to reconceptualize the property 

and add value. Use of the FHA Section 223(f) program, adding services, can 

reestablish value to support the deal. 

Presence of Credit Gaps by Locality 

Although there was little evidence of widespread credit gaps as identified by the informants 

in the national experts and multifamily lenders groups, the presence of credit gaps by locality 

was also investigated. In response to an inquiry whether there are neighborhoods in the four 

MSA study areas from which the GSEs do not buy loans, the informants provided a variety 

of comments. 

•	 (N) On the positive side, rating agencies were said to consider geographic 

diversity (e.g., Boston, Chicago, etc., markets) and a variety of property types as a 

positive factor in rating loan pools. 

106 Chapter 7 – Findings from Interviews with National Experts and Multifamily Lenders in Four Markets 
•	 (N) In some areas, however, there is no “fit” between the area and the GSEs’ 

regular book of business. For example, Chicago is a market where the 

Community Investment Corporation and commercial banks tend to make loans 

that are originated, held in portfolio, and never offered to the GSEs. Loans from 

commercial banks could be available to the GSEs provided they had a product 

that is appropriate for the local market. This may or may not apply to all markets. 

Getting waivers approved to adjust the product to the community can be difficult, 

especially when the approval process is the responsibility of the GSE 

headquarters staff who have little or no familiarity with the community. 

Many informants pointed out that reluctance to lend in some geographic areas might be 

transitory and justified because of higher risk. Some of these areas may become more 

attractive over time with more competition among lenders. 

•	 (N) For example, there have been recent periods when New York City and 

Portland, Oregon have had little attention from Fannie Mae and Freddie Mac, at 

least temporarily. 

Finally, another secondary market player (not a GSE) indicated that there are few areas 

where they would not buy loans. 

•	 (N) Among them are properties with serious environmental problems on the 

property or nearby and properties with 100 percent deferred maintenance. In both 

cases, it is not worth the high associated risks. 

Flexibility in GSEs’ Underwriting Requirements 

Both Fannie Mae and Freddie Mac say they have given their underwriting requirements 

considerable scrutiny to ascertain whether they are clear and applied consistently in similar 

situations. Despite all of the GSEs’ statements to the contrary, some respondents questioned 

how flexible the GSEs are. 

•	 (N) A respondent expressed frustration regarding the disparity between GSE 

claims regarding underwriting flexibility and actual performance. Our [very 

large] consortium spent one year trying to make a deal work with either Fannie 

Mae or Freddie Mac, but in the end neither GSE would take the deal because it 

did not conform—the year’s worth of effort was wasted. The deal either has to fit 

within the GSEs’ respective boxes or they won’t take it. “Out-of-the-box” deals 

are unacceptable. 

On the other hand, the more experienced and approved DUS lenders have another view. 

Chapter 7 – Findings from Interview with National Experts and Multifamily Lenders in Four Markets 107 
•	 (L) There is flexibility with a “whole series” of requirements but it takes 

experience with the program to know what the important requirements are and 

which can be waived. As one respondent said of Fannie Mae, “I think they have 

their own little waiver book somewhere.” 

Other informants agreed that it depends on your perspective and size because underwriting is 

about reputation. 

•	 (N) For the large lenders, who deliver a lot of product, the underwriting 

specifications of both Fannie Mae and Freddie Mac are requirements, but waivers 

are possible. For the smaller lenders, whom they do not know, then the standards 

are closer to requirements that are explained as the GSEs’ way of providing a 

standard product nationwide. While the public relations position is that the 

requirements are negotiable, few, if any, multifamily deals are approved that do 

not fit the standards. 

Receiving a firm answer from the GSEs can reportedly be very time consuming. Fannie Mae 

and Freddie Mac can take a long time to disapprove a waiver request that requires starting 

over. It can also take a long time to be approved. 

•	 (N) For example, the route to becoming a DUS lender for Fannie Mae is by doing 

at least three transactions under a precommitment review. However, three may 

only be the beginning. In some cases, even eight transactions may not be 

sufficient for qualification, if Fannie Mae is “not quite convinced” that you 

understand how they do business. (See Cummings and DiPasquale, 1998b for 

more information). 

According to some informants, the time required to sell the loans to the GSEs was only part 

of the frustration. 

•	 (N) Relative to other options, selling to the GSEs is sometimes not worth the cost 

or trouble. The GSEs tend to be more rigid in their requirements relative to cash 

flow requirements, environmental checks, and annual reviews of properties. 

There is also more bureaucracy in the servicing of the loans (e.g., requiring 

exhaustive forms and monthly reports), once they are sold. 

•	 (L) First the GSEs will rush out and announce they are going to support the 

project. But when it comes to really doing the deal, they either back out, back up, 

or change the terms and conditions of that deal. After the deal is negotiated, 

someone (usually a regional representative of Fannie Mae or Freddie Mac) will 

say “Yes, we’ll do it,” and then the next thing you know, it’s still “Yes, we’ll do 

it, but, we need this, we need that, we need this, and we need that, and we are 

going to have to change this agreement; otherwise it is no deal.” 

108 Chapter 7 – Findings from Interviews with National Experts and Multifamily Lenders in Four Markets 
Other informants used the time delays to work around the GSEs by doing their own 

underwriting and servicing. This experience provided an opportunity for lenders to better 

understand and appreciate the value and economic benefits of the mortgage servicing 

associated with these loans. Once the internal systems for underwriting and servicing were 

mastered, and with no shortage of cash to lend for multifamily properties, the lenders decided 

to hold these loans in portfolio. 

Perceptions of High Risks and Pricing. The perceptions of high risks in the multifamily 

market and the usefulness of risk-based pricing are continuing debates. Several informants 

insisted that the real problem is agreeing on what constitutes a risk. Numerous examples, 

cited by the informants, underscore the GSEs’ reluctance to take risks. Even in situations 

where other “experts” were involved, one of the GSEs would “see risk all over the place.” 

Other informants say that high-risk markets occur in areas that have very expansive 

economies, for example, where multifamily building starts begin before planning is carefully 

evaluated. Las Vegas is an example where buildings for the elderly quickly outdistanced 

demand in the last building cycle. In such areas, planning in the real estate market is always 

two years ahead. By that time, you can easily under- or over-shoot the market. 

Because there is no multifamily market database, there is no common agreement on what the 

determinants of risk are in this market. So the determinants of risk depend on lender’s 

experience in the multifamily market, even by segment. One informant provided the 

following examples: 

•	 (N) CPC will tell you about their tens of thousands of units that they have already 

done and they have never had a default. However, someone else will look at what 

they do and decide “this looks risky.” This is similar to a transaction that I 

watched Freddie Mac price in the early 1990s. A very successful lender had 

priced a transaction, but when Freddie Mac reviewed it, they saw risk 

everywhere. 

•	 (N) The Enterprise Mortgage Investments Inc. (EMI) program with Fannie Mae 

was supposed to be able to deliver to the tax credit market both permanent 

mortgage loans and a bridge-financing product for the tax credit equity. The latter 

is a very lucrative business in which EMI would cross subsidize the program on 

the permanent lending side. However, they could not get a competitive price 

from Fannie Mae on the bridge loan. When a corporation like Fannie Mae has 

never done something before and has no experience, the price skyrockets. Others 

who know the business had been doing bridge financing on tax credit equity for 

many years, pricing it very differently and making money on it. 

Chapter 7 – Findings from Interview with National Experts and Multifamily Lenders in Four Markets 109 
 

Risk-based pricing is built into Fannie Mae’s four-tier system,141 but are others using a riskbased pricing system? Not many of the informants offered a comment or opinion on riskbased pricing. However, their best guess was the most sophisticated lenders were probably 

doing risk-based pricing using various portfolio products. 

Risk Mitigation and Recourse Agreements. Fannie Mae’s DUS deals have recourse 

requirements with the originating DUS lender where the lender is responsible for at least up 

to 11 percent of any loss for the term of the loan. Sometimes the recourse to the lender is 

higher, depending on decisions made during the underwriting and waiver process. However, 

not all lenders are sanguine about recourse agreements. Informants express their opinions in 

a variety of ways: 

•	 (N) Recourse agreements are unacceptable; negotiated transactions under the 

MBS program with credit enhancements are more acceptable. Other preferable 

options include direct purchase programs (offered by Freddie Mac) and private 

placements of securities. This informant stated, “We treat our multifamily 

portfolio as a mortgage banking portfolio, which we only sell on an opportunistic 

basis for the best execution (price).” 

•	 (N) The major problem with the recourse agreements is they are costly in terms of 

the amount of work, the amount of time, and the price. According to one 

informant, “It just isn’t worth it!” 

•	 (L) We sell loans to Fannie Mae non-recourse, with the exception of the usual 

carve-outs [for fraud]. Almost none of the GSEs’ competitors’ permanent loans 

are recourse. 

•	 (L) We do not sell loans to Fannie Mae and Freddie Mac because ours are nonrecourse. 

Another separate issue is recourse to the borrower. This is most likely to occur when a small 

multifamily property is involved. Some informants provided the following comments about 

this situation: 

•	 (L) If you have a borrower who has only dealt with HUD previously, then they 

don’t like recourse. But if you have people who are used to bank loans, it is not 

an issue. You just have to explain to them what it is, how limited it is, and that 

it’s just an industry standard. 

•	 (L) Recourse helps, but it is hard to get from the borrower. There are times when 

you could not do the deal otherwise. Even if it is partial recourse for a short 

141	 See Chapter 4, Exhibit 4-1, for an explanation of Fannie Mae’s 4-tier pricing system. 

110 Chapter 7 – Findings from Interviews with National Experts and Multifamily Lenders in Four Markets 
 

period of time (six to 12 months), it helps a great deal with the lender, at least 

until the borrower can prove that they can operate the property. On the smaller 

deals, there may be partial recourse for the entire loan period. 

•	 (L) [There are two points of view. Some think recourse is not bad.] I think there 

is too much emphasis on the non-recourse loans on the debt side of things. 

Inflexibilities in GSEs’ Underwriting Requirements 

There are other loan structures that are typically unacceptable to the GSEs. Some of the 

informants illustrated these concerns as follows: 

•	 (L) Subordinate financing is difficult or impossible to place unless the first 

mortgage has seasoned for two years and the property will underwrite within the 

original underwriting parameters for the first mortgage (with the first and second 

mortgages combined). Otherwise, even if we guarantee the FHA share of the risk, 

Fannie Mae is not interested. 

•	 (L) Borrowing against the 20 percent equity, for some of our very good clients 

who want to reinvest the capital in another acquisition (in the short term), has not 

been possible because, as a Fannie Mae servicer, we cannot allow that amount of 

leverage. 

•	 (L) Fannie Mae developed their conduit program142 to be competitive with other 

conduit lending. This program cannot use tax credits deals because the conduits 

want 10-year terms (and Fannie Mae wants at least a 15- to 18-year term so the 

borrower does not have to refinance in the middle of the compliance period). 

In addition, some loan structures are very costly for lenders: 

•	 (L) Institutions that use Fannie Mae’s forward commitment program143 feel that 

the take-out requirements are too onerous (risk-based capital requirements of 

posting a line of credit during the construction period of 12-24 months is very 

costly). 

•	 (L) The major issue is the cost of execution; it is very expensive with Fannie Mae. 

142	 The Fannie Mae Aggregation Facility is described in Appendix C. 

143	 Both of the GSEs have forward commitment programs. These programs are offered as part of the LIHTC program and 

provide fixed-rate forward commitments for permanent financing of newly constructed or substantially rehabilitated 

properties after completion of construction and occupancy at an agreed upon level. This means that the permanent 

mortgage interest is agreed upon before the beginning of construction. 

Chapter 7 – Findings from Interview with National Experts and Multifamily Lenders in Four Markets 111 
 

Yield maintenance premiums or prepayment penalties are also issues according to some of 

the informants. The purpose of the yield maintenance premium is to protect investors in the 

event a borrower decides to prepay the entire loan balance before the term of the loan 

expires. The advantage to the investor is that multifamily securities, as opposed to 

commercial MBS, include a yield maintenance premium that is accrued and due to the 

investor if the property is prepaid. 

Flexibilities in the GSEs’ Competitors’ Underwriting Requirements 

Several of the informants observed that the GSEs were not in the best position to undertake 

both risk-based pricing and the necessary flexible underwriting for the small complex deals 

in some segments of the multifamily market. The inherent conflict is that risk-based pricing 

implies that risks can be reliably assessed and priced similarly for the same configuration of 

risks. Flexible underwriting for small complex deals means assessing risks to the extent 

possible and finding a way to make a one-of-a-kind deal work. Since there may never be 

another deal exactly like this, the solution found may be unworkable for all other deals. 

Other examples that informants provided include: 

•	 (N) The consortia and the HFAs are much more successful with the required level 

of “hand holding” (intensive and personable servicing of the borrower) and they, 

at the same time, are gaining familiarity with the performance of these types of 

loans. This may ultimately give them a real advantage with better in-depth 

insights into loans in certain multifamily segments. 

•	 (N) [From a GSE secondary market competitor] Some still do a standardized 

credit assessment and make their decision according to requirements, which, in 

the end, are much more aggressive and more price competitive than the GSEs’. 

•	 (N) [Having explored the conduit market] we have explored the conduit market 

for their loans and noted that the conduits were more likely to “tweak” a deal to 

accommodate a difficult transaction. This informant noted that it would be 

interesting to observe in the future whether the competitors’ strategies in the 

secondary market will have an impact on changing the GSEs’ strategies with 

“customers” in the future. 

Similarly, the HFAs’ underwriting requirements are viewed as being more flexible with 

respect to the primary market. For example, to accommodate specific program requirements, 

some state HFAs, (e.g., the Massachusetts HFA), have modified the “industry standard.” 

MHFA developed its own standards, which Fannie Mae allowed them to keep as a “DUSlike lender.”144 Although the loans originated under this program were sold to Fannie Mae, 

the final negotiations on the deal were very protracted. 

144	 A “DUS-like lender” uses many of the requirements and standards included in Fannie Mae’s Guide, but not all. 

112 Chapter 7 – Findings from Interviews with National Experts and Multifamily Lenders in Four Markets 
 

•	 (N) 30 out of 48 HFAs currently participate in HUD’s risk-sharing program.145 

The program is voluntary, and the insurance/credit enhancement is allocated 

based on a “demand basis.” Most are the “Top-tier” or rated HFAs who 

participate mainly because the premiums are cheaper and the Delegated 

Underwriting Process is comprehensible. 

•	 (N) One state HFA prefers to use FHA’s risk-sharing program versus other GSE 

credit enhancements because: 

- It’s less expensive in terms of fees and other third party costs; 

- The underwriting is more flexible based on the amount of risk the HFA is 

willing to take; and 

- HFAs in general like the “partial payment of claim”146 component of the risksharing program in terms of mitigating loan defaults or if the loan gets into 

some “other” trouble, like market downturn, partnership problems, etc. 

According to one informant, more recently, HFAs have offered debt products for long-term, 

low-income multifamily housing debt. They have adjusted the features of their products to 

address the needs of the multifamily market. 

•	 (N) The HFAs have been willing to originate 30-year mortgages for affordable 

multifamily housing and the terms are more lenient: HFAs approve a debt service 

coverage ratio (DSC) of 1.1 and rely on operating subsidies (such as the SHARP 

program in Massachusetts) to apply to income. HFAs may also allow zero 

coupon bonds to leverage debt.147 As this informant stated emphatically, “This is 

unheard of at Fannie or Freddie!” In addition, HFA staff also seem to better 

understand the needs of affordable housing developers. 

Another GSE competitor, the FHLB, is another source of multifamily market liquidity 

(available to small banks and thrifts). 

•	 (N) It [FHLB] is following the CRA model with its Community Investment 

Program (CIP). The CIP program is less expensive than those offered by Fannie 

Mae or Freddie Mac. The FHLB also has a grant program that makes subsidized 

advances that can cut the CIP loan rate. The FHLB has been criticized for being 

more conservative than the GSEs with respect to collateral requirements. 

145	 This refers to a specific risk-sharing program between the FHA and the state HFAs that was developed to help the 

HFAs undertake a multifamily demonstration program without incurring all of the risk. 

146	 FHA has a policy of making “partial payment of claim” for each claim when filed. The amount of the partial payment 

is typically 90 percent, with the remainder paid after other mitigating factors are taken into consideration. 

147	 A “zero coupon bond” requires no payments for principal or interest until specified maturity date, much like Treasury 

notes. The GSEs require payments to subordinate financing to be paid on schedule. 

Chapter 7 – Findings from Interview with National Experts and Multifamily Lenders in Four Markets 113 
 

More recently, growing competition has led some institutions to lower underwriting 

standards, allowing higher LTVs and lower DSC ratios, for example. While the GSEs are 

not competing on these dimensions, they are lowering their spreads relative to comparable 

maturity Treasuries on mortgage loans they are willing to purchase. 

Inferences on Credit Availability 

As discussed earlier, a credit gap refers to a situation where the demand for credit exceeds 

the supply at market interest rates because of disparities in the information available to 

borrowers and lenders with regard to credit risk. Under normal competitive-market 

circumstances, lenders would be expected to respond to excess demand for funds by raising 

interest rates to a market clearing equilibrium. However, because of their inability to fully 

evaluate borrowers’ credit risk, lenders cannot raise interest rates, as higher interest rates 

would increase the credit risk of applicants and lower profits. 

Evidence on the presence or absence of credit gaps in the primary mortgage market is 

inconclusive, from our interviews with national industry experts or multifamily lenders. 

Some informants stated that in the current market, there are no credit gaps. Other informants 

said there are still niches within multifamily market segments with credit gaps, but these are 

typically limited to specific geographic areas. Among the credit gaps mentioned by the 

informants are the following: 

•	 Mortgage loans in rural areas; 

•	 Mortgage loans in small metropolitan areas; 

•	 Loans for rehabilitation; and 

•	 Loans for construction projects for seniors or other special needs populations. 

At the secondary market level, according to Dinsmore (1998), market segments that are 

typically not included in CMBS are: 

•	 Construction loans; 

•	 Small multifamily loans;148 

•	 Government-subsidized or regulated properties; 

•	 Mixed-use properties; and 

148	 There are a few companies targeting small multifamily mortgages (e.g., Daiwa Finance Corporation, an investment 

bank), with the intention of securitizing these loans and selling the securities. 

114 Chapter 7 – Findings from Interviews with National Experts and Multifamily Lenders in Four Markets 
 

•	 Projects with unconventional risks. 

Much of the current rationale for excluding such loans from CMBS may be based on the lack 

of expertise of lenders and developers, who need assistance from experienced project 

managers to ensure the success of certain development projects. However, other 

organizations (e.g., Neighborworks® organizations in the single-family market) have hired 

the expertise (e.g., from architects, engineers, and project managers) to oversee rehabilitation 

construction for the majority of the single-family projects they undertake. Such experience 

may also be applicable to multifamily. 

In the segments of the multifamily market that are well served by the secondary market, 

which primarily include the purchase and refinance of larger multifamily properties, the 

GSEs have been subject to strong competitive pressures from conduits and other national 

lenders. Consequently, the underwriting requirements and standards of the GSEs do not limit 

financing opportunities for properties in these market segments. The competitive pressure 

facing the GSEs is evidenced by the fact that both GSEs have reevaluated their underwriting 

requirements and reduced some standards for specific and limited products, in terms of LTV 

and DSC ratios. According to one lender with a nationwide market: 

“Fannie Mae has been very reactive to the competition. They have lowered 

their prices a lot in the last couple of years in order to keep up with the 

competition. . . . In the financing of the affordable housing what they have 

done in the forward commitment program I think has been very significant.” 

Freddie Mac has eliminated the requirement for funding replacement reserves in connection 

with loans to creditworthy borrowers. That is, their underwriting requirements and standards 

have changed but only in very minor ways. Freddie Mac has been willing to compete on 

price. According to a respondent: 

“Since their prices were generally higher than those of their competitors, this 

was a reasonable place to compete without changing the risk profile.” 

In contrast, the origination costs for small multifamily properties are still substantially 

different when comparing the GSEs and their chief competitors. Although the GSEs have 

made an effort to reduce origination costs, they have been unwilling to modify the third-party 

reports required.149 Thus per unit costs, especially for a small multifamily property, are still 

substantially greater than for a single family property with one- to four- units, where thirdparty reports are not required. 

149	 The third party reports include engineering reports, environmental report, appraisal, credit investigation, and 

management review. 

Chapter 7 – Findings from Interview with National Experts and Multifamily Lenders in Four Markets 115 
 

7.3	 GSE Underwriting and Appraisal Standards: Fair Lending 

Issues 

Fair lending is a complex subject, as evidenced by the discussion in Section 5.2. In the 

interviews conducted for this research, most of the informants were reluctant to express an 

opinion in response to an explicit question about whether the GSEs’ underwriting and 

appraisal requirements have a disproportionate impact on protected classes.150 

A few of the informants could express an opinion in response to a question of whether there 

were geographic areas where the GSEs do not buy mortgages. These few informants could 

identify areas in which the GSEs were “inactive” or where their product was not attractive 

(due to terms and pricing). These areas included the inner city, low-income areas (especially 

areas below 60 percent of median income), places where there were a lot of small and 

affordable apartments, rural areas, and small metropolitan areas. The remainder of the 

informants either claimed having no knowledge or a preference for making no comment. 

The areas identified by the informants were likely to be the neighborhoods in a community 

that offered the most affordable rents and were therefore housing some of the persons with 

the lowest incomes. If those with low incomes were also in a protected class (e.g., minority), 

then the GSEs’ inactivity in those areas could be said to have a disproportionate adverse 

impact on the (protected class) residents in those neighborhoods. However, this would not, 

by itself, amount to legal discrimination, which also involves issues of business necessity for 

the GSEs’ actions and the possibility of less discriminatory alternative business practices that 

would satisfy the GSEs’ business objectives. Section 5.2 discusses this, and Chapter 8 

presents suggestions for ongoing HUD monitoring. 

150	 Only three of the informants, who were familiar with the Fair Lending Laws and implications for protected classes, 

responded. It was clear to these three respondents that the laws apply to borrowers. They did not understand, however, 

that the laws could cover either the effects of the GSEs’ underwriting on tenants in the multifamily properties or the 

residents of the neighborhood who were in protected classes, and they answered accordingly. 

116 Chapter 7 – Findings from Interviews with National Experts and Multifamily Lenders in Four Markets 
 

Chapter Eight 

Monitoring Recommendations 

There are several areas of GSE activities that HUD could monitor to become better informed 

about the progress being made in the multifamily mortgage market, given HUD’s regulatory 

responsibilities. Each of these areas will require data collection. The recommendations for 

data collection and monitoring take account of informants’ comments as well as trade press 

commentary. 

8.1 Fair Lending Monitoring 

Fair lending analysis of the GSEs’ multifamily mortgage purchase activity is governed by a 

statutory framework similar to that governing the GSEs’ single-family activities. A basic 

issue is whether the GSEs’ underwriting or appraisal standards and guidelines have a 

disproportionate adverse impact on protected classes.151 An underwriting or appraisal 

standard may have an unfavorable effect on protected classes even if the requirements are 

imposed impartially. However, a finding of disproportionate adverse impact is not sufficient 

to support a finding of discrimination as this term has come to be defined by the courts. 

Follow-up research and analysis would be needed on whether the guidelines have a “business 

necessity,” and whether some other, less discriminatory alternative exists that would also 

satisfy the business necessity. Protected classes under FHEFSSA include race, color, 

religion, sex, handicap, familial status, age, or national origin. Also prohibited is any 

consideration of the age or location of the dwelling or the age of the neighborhood or census 

tract where the dwelling is located, in a manner that has a discriminatory effect. 

A monitoring strategy would include ongoing review of written guidelines and statistical 

analysis of the GSEs’ multifamily mortgage purchase practices. 

First, HUD should regularly review GSE underwriting guidelines with regard to special 

provisions governing specific geographic areas, minimum loan amounts, and age of property. 

Objectives of the review would be to determine whether there is any indication of disparate 

treatment, as well as to provide a basis for analysis on the question of disparate impacts. 

Second, with regard to GSE underwriting practices, a difficulty in evaluating the potential for 

disproportionate adverse impacts is the lack of data on protected-class characteristics of 

151	 The issue of disparate treatment of borrowers (for multifamily properties) with the same relevant underwriting features 

is essentially an issue at origination, by the lender, although it also would be theoretically possible for the GSEs to 

discriminate if their purchases differed for a member of a protected class from a non-protected borrower with a 

similarly qualified loan. 

Chapter 8 – Monitoring Recommendations 117 
 

tenants residing in the collateral property, either for GSE multifamily acquisitions or for 

properties that receive mortgage financing through non-agency secondary market sources or 

portfolio lenders. However, the data that are available on census tract characteristics may be 

correlated with race of tenant and/or the age of the property and could be used for a firststage analysis. Other data sources such as data from the survey of multifamily properties in 

compliance with accessibility requirements, by HUD’s Real Estate Assessment Center may 

provide some useful information. Given the limitations of the existing data, there are two 

main ways that HUD could monitor the GSEs in this regard: 

•	 Use of data at the census tract level to compare the demographic characteristics 

of the tenant population in census tracts where GSEs have purchased multifamily 

mortgages with the characteristics in tracts where multifamily properties have 

received mortgage financing through other sources.152 Relevant demographic 

characteristics include race of head of household and median family income. 

Characteristics of the neighborhood tenant population would be utilized as a 

proxy for the characteristics of multifamily tenants. 

•	 Use of data at the property level, to compare the characteristics of the properties 

collateralizing multifamily mortgages purchased by the GSEs with those held by 

portfolio lenders or purchased by non-agency (i.e., non-GSE) secondary market 

players. A predictive model would be built upon observed statistical relationships 

between property characteristics (such as age and affordability of property) and 

race of tenant. 

For the analysis of census tract level information, HMDA data would be utilized to identify 

the tract location of loans not sold on the secondary market, and the loan-level data provided 

to HUD by the GSEs would be utilized to identify the tract location of GSE purchases. 

Census data would be utilized to evaluate demographic characteristics of tracts in which such 

loans are located. Research should attempt to determine whether the racial composition of 

the tenant population in census tracts where GSE purchases are located differs significantly 

from that of multifamily loans not sold on the secondary market. 

For the analysis of property level information, a predictive model could be built using data 

from the American Housing Survey. The predictive model could be applied to data from the 

Multifamily Housing Institute in order to determine whether the “predicted” race of tenant in 

properties backing GSE multifamily purchases differs significantly from those of portfolio 

lenders. 

Another approach, requiring new data, would seek to determine whether GSE underwriting 

practices result in higher credit costs on properties in high-minority areas or in properties 

152	 While the population of the overall tenant population may differ somewhat from that of the tenant population residing 

in multifamily structures, characteristics of the tenant population may need to be used due to limitations of the data. 

118 Chapter 8 – Monitoring Recommendations 
 

where a large proportion of minorities are predicted to reside based on property 

characteristics, as discussed above. Successful implementation of this approach would 

require that the GSEs provide additional loan-level data to HUD on note rate, origination 

costs, and prepayment penalties so that HUD could calculate an annual percentage rate. In 

order to determine whether differences in the cost of credit are real or apparent, however, 

HUD would need to control for credit risk, and would therefore also need to be provided with 

data on LTV and DSC ratio as well. Ultimately, loan performance data would need to be 

analyzed, to address the issue beyond disproportionate impact. 

In addition, HUD could collect information regarding the geographic location of properties 

where the GSEs have approved waivers to their underwriting guidelines as discussed in 

Chapters 3 and 7. When the census tract location of such properties has been determined, 

HUD could analyze whether there is evidence that properties likely to be inhabited by 

members of protected classes have been approved for waivers less frequently than other 

properties, representing a potentially disproportionate effect of the GSEs’ waiver approvals 

(although it is not clear whether a positive finding would signify an adverse impact). 

HUD could also collect information regarding effects on protected classes of the streamlined 

GSE approval procedures for DUS and Program Plus lenders. HUD could utilize GSE and 

HMDA data to analyze whether these lenders are more or less active in high-minority or 

inner city neighborhoods, or in areas with an older housing stock, than are other lenders. 

DUS and Program Plus lenders could usefully be compared with all other lenders active in 

the multifamily market, or with minority-owned thrift institutions identified by the Office of 

Thrift Supervision.153 HUD could also evaluate whether the process by which the GSEs 

approve lenders for the DUS and Program Plus programs has disproportionate adverse effects 

on minority-owned lending institutions. 

Furthermore, HUD could request loan-level information on default risk and loan losses as 

well as factors entering the underwriting process such as LTV and DSC to determine the 

effectiveness of GSE underwriting standards in controlling credit risk.154 HUD could also ask 

the GSEs for any additional information pertaining to validation of their underwriting 

criteria. 

Finally, HUD could monitor GSE multifamily transaction volume involving originations by 

minority-owned thrift institutions. To the degree that loans originated by such institutions 

are backed by properties in high-minority areas, or owned by African Americans, expanded 

transactions volume would represent an opportunity for the GSEs to expand the benefits 

153 See Office of Thrift Supervision, “Policy Statement on Minority Owned Thrift Institutions,” May 25, 1999. 

154 Information would also need to be collected on credit enhancements in order to isolate the effectiveness of 

underwriting standards in mitigating loan losses, since credit enhancements may also have the effect of mitigating such 

losses. 

Chapter 8 – Monitoring Recommendations 119 
provided by secondary market access to such properties. Conversely, any significant 

reduction in transactions volume involving such institutions could call into question the 

GSEs’ commitment to fully serving the multifamily mortgage market. 

8.2 Pilot Programs 

The GSEs occasionally offer pilot programs to their DUS and Program Plus lenders to 

implement. According to the informants, some of these programs gain high visibility in the 

press but are seldom used in the marketplace. Some of these informants recommend that 

HUD closely monitor any pilot program, perhaps semi-annually through the first two years of 

its existence. From this information, HUD could determine whether the program is reaching 

hard-to-serve segments of the market. 

8.3 Small Multifamily Properties 

The GSEs’ treatment of “smaller” loans, in both urban and rural areas, especially for 

affordable multifamily properties with fewer than 50 units, needs closer examination, 

especially in light of evidence that such properties are disproportionately located in highminority areas and that ownership of multifamily properties by African Americans is 

concentrated among such properties. The GSEs continue to modify their underwriting 

approach to these loans, and are likely to be further encouraged to do so by HUD’s 2000 

Final Rule, which gives the GSEs bonus points for their purchases of small multifamily 

mortgages. HUD should continue to monitor the GSEs’ purchases of small multifamily 

mortgages to determine whether the 2000 Final Rule is effective in creating incentives for the 

GSEs to become more active in financing these properties. 

120 Chapter 8 – Monitoring Recommendations 
Appendix A
 

Bibliography
 

Appendix A - Bibliography 

Bibliography 

Berson, David (1998). Monthly Economic and Mortgage Market Report, Fannie Mae 

(November). 

Berton, Brad (1998). Verrone See Banks as “Safety” Net. Multi-Housing News, December. 

Bradley, Donald S. (1996). Rental market enters era of change. Secondary Mortgage 

Markets: A Freddie Mac Quarterly, 13 (4). 

Bradley, Donald S., Frank E. Nothaft, and James L. Freund (1998a). “Financing multifamily 

properties: A play with new actors and new lines.” Cityscape: A Journal of Policy 

Development and Research, Volume 4, Number 1, 1998: 5-17. 

Bradley, Donald S., Frank E. Nothaft, and James L. Freund (1998b). “Financing multifamily 

properties.” Urban Land, November. 

Coopers and Lybrand (1993). “Assessment of the Financial Condition of the Insured 

Multifamily Portfolio and an Estimation of the Required Insurance Reserves.” 

Cornwell, Ted (1996). “Multifamily Lending Approaches Record Level,” National 

Mortgage News (September 23). 

Crawford, Mike (2000). “Apartment Research Report,” Marcus & Millichap, September. 

Cummings, Jean L., and Denise DiPasquale (1998a). Building Affordable Rental Housing: 

An Analysis of the Low-income Housing Tax Credit. City Research, February. 

Cummings, Jean L., and Denise DiPasquale (1998b). “Developing a Secondary Market for 

Affordable Housing: Lessons from the LIMAC/Freddie Mac and EMI/Fannie Mae 

Programs,” Cityscape: A Journal of Policy Development and Research, Volume 4, Number 

1, 1998: 19-41. 

Dinsmore, Clement (1998). “The Impact of Public Capital Markets on Urban Real Estate,” 

discussion paper, Brookings Institution Center on Urban and Metropolitan Policy, July. 

DiPasquale, Denise, and Jean L. Cummings (1992). Financing multifamily rental housing: 

The Changing role of lenders and investors. Housing Policy Debate 3 (1), 77-116. 

Esaki, Howard, and Joseph Philips (1997). “Morgan Stanley’s Fixed Income and Mortgage 

Research: Investing in Multifamily MBS,” June. 

Appendix A – Bibliography A-1 
E&Y Kenneth Leventhal Real Estate Group (1998). Commercial Mortgage-Backed 

Securitization Update: 1997-1998, New York. 

Fannie Mae (1998). “Fannie Mae’s 1997 Annual Housing Activities Report to the Secretary, 

U.S. Department of Housing and Urban Development,” March 16. 

Foong, Keat (1998a). “Record Biz for Corton as CMBS Market Turns.” Multi-housing 

News, (October). 

Foong, Keat (1998b). Page, Crocker Prep for Uncertain Year Ahead. Multi-Housing News, 

December. 

Follain, James R., and Edward J. Szymanoski (1995). A Framework for evaluating 

government’s evolving role in multifamily mortgage markets. Cityscape: A Journal of 

Policy Development and Research 1,2: 151-174. 

Freddie Mac (1998). “We Open Doors for America’s Families,” Freddie Mac’s Annual 

Housing Report for 1997 to the Secretary, U.S. Department of Housing and Urban 

Development, March 16. 

Garza, Emilio M. (1996). Simms v. First Gibraltar Bank, 83 F.3d 1546 (5th Cir. 1996). 83 

Federal Reporter, 3rd Series, 1996. 

Goldberg, Lawrence, and Charles A. Capone, Jr. (1998). Multifamily mortgage credit risk: 

Lessons from recent history. Cityscape: A Journal of Policy Development and Research, 

Volume 4, Number 1, 1998: 93-113. 

Goldblatt, Jennifer (1998). Will REITs, mortgage-backeds make difference in downturn? 

American Banker, February 18. 

Goldman, Sachs (1990). Freddie Mac: Multi-family. New York: Goldman, Sachs. 

Goodman, David (1996). Financing for Multifamily. Units, November/December. 

Goodman, Jack (1997). Apartment Demographics: Good for the Long Haul? Real Estate 

Finance, Winter. 

Goodman, Jack (1998). The Multifamily Outlook. Urban Land, November. 

Goodman, Jack, and Brook Scott (1997). Rating the Quality of Multifamily Housing. Real 

Estate Finance, Summer. 

A-2 Appendix A – Bibliography 
Gordon, Sally (1997). Where Are We in the Capital Market Cycle? Presentation to the 

CSSA Annual Meeting, April 15. KPMG Peat Marwick. 

Harney, Kenneth R. (1998). Lenders Test System That Uses Risk to Set Rates. Washington 

Post, February 7. 

Herbert, Christopher (1999), “An Assessment of the Availability and Cost of Financing for 

Small Multifamily Properties – Task 1 Revised Draft Report,” Abt Associates Inc., 

November 23. 

Holland, Carrie (2000). “Apartment Research Report,” Marcus & Millichap, September. 

Holson, Laura M. and Charles V. Bagli (1998). “Lending Without a Net: With Wall Street as 

Its Banker, Real Estate Feels the World’s Woes.” New York Times, Money & Business, 

November 1. 

Holusha, John (1998). “As Financing Pool Dries Up, Some See Opportunity,” New York 

Times, November 1. 

Inside Mortgage Finance Publications (2000). The Mortgage Market Statistical Annual for 

2000, 1, 286. 

Interagency Policy Statement on Discrimination in Lending (1994). Federal Register, Vol. 

59, No. 73, Friday, Apr. 15, pp. 18266-18274. 

Lindstrom, Dorothy. (1998). Freeman, Levine Guiding Firms to Billion-Dollar Volumes. 

Multi-Housing News, October. 

Manchester, Paul B., Sue George Neal, and Harold L. Bunce (1998). “Characteristics of 

Mortgages Purchased by Fannie Mae and Freddie Mac, 1993-1995.” Working Paper No. 

HF-003. Office of Policy Development and Research, U.S. Department of Housing and 

Urban Development, March. 

Mortgage Bankers Association of America (1995). “FHA Multifamily Insurance Programs,” 

May 17. 

National Task Force on Financing Affordable Housing (1992). “From the Neighborhoods to 

the Capital Markets,” June. 

Pikramenos, Maria (2000). Market Not for the ‘Weak of Heart,’ Says Butler. Multi-Housing 

News, May. 

Appendix A – Bibliography A-3 
Schneider, Drew, and James Follain (1998). “A New Initiative in the Federal Housing 

Administration’s Office of Multifamily Housing Programs: An Assessment of Small Projects 

Processing.” Cityscape: A Journal of Policy Development and Research, Volume 4, Number 

1, 1998: 43-58. 

Scott, Esther (1992). “Innovation in Multifamily Housing Finance: Larry Dale at HUD and 

Fannie Mae.” Achieving Excellence in Government: Lessons from the Public and Private 

Sectors by the President and Fellows of Harvard College, 1992. 

Segal, William, and Christopher Herbert (2000). “Segmentation of the Multifamily Mortgage 

Market: The Case of Small Properties.” Paper presented to annual meetings of the American 

Real Estate and Urban Economics Association, January. 

Segal, William, and Edward J. Szymanoski (1997). “The Multifamily Secondary Mortgage 

Market: The Role of Government-Sponsored Enterprises.” U.S. Department of Housing and 

Urban Development, Office of Policy Development and Research, Housing Finance Working 

Paper Series No. HF-002, March. 

Segal, William, and Edward J. Szymanoski (1998). “Fannie Mae, Freddie Mac, and the 

Multifamily Mortgage Market.” Cityscape: A Journal of Policy Development and Research, 

Volume 4, Number 1, 1998: 59-91. 

Schnare, Ann B. (2001). “The Impact of Changes in Multifamily Housing Finance on Older 

Urban Areas,” discussion paper, Brookings Institution Center on Urban and Metropolitan 

Policy and The Harvard Joint Center for Housing Studies, June. 

Stiglitz, Joseph E. and Andrew Weiss (1981). “Credit Rationing in Markets with Imperfect 

Information.” The American Economic Review 71 (3), 393-409. 

Szymanoski, Edward (1998). “Guest Editor’s Introduction: The Evolution of Multifamily 

Financing.” Cityscape: A Journal of Policy Development and Research, Volume 4, Number 

1, 1998: 1-4. 

Taylor, Marshall (1997). “Capital Availability Fuels Commercial Market Growth,” Real 

Estate Finance Today, February 17. 

ULI (1998). “ULI 1998 Real Estate Forecast: Mid-year Outlook by Section, Area and 

Enterprise,” Urban Land Institute, Washington, DC (1998). 

Urban Land (1997). “Fannie Mae: An Advertising Supplement to Urban Land.” October. 

U.S. Department of Housing and Urban Development (1995). Office of the Secretary, 24 

A-4 Appendix A – Bibliography 
C.F.R. Part 81, The Secretary of HUD’s Regulation of the Federal National Mortgage 

Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie 

Mac), Final Rule, 60 Fed. Reg. 61846, December 1. 

U. S. Department of Housing and Urban Development (1998). HUD Press Release. April 

28. 

U. S. Department of Housing and Urban Development (1999). Waiting in Vain: Update on 

America’s Rental Housing Crisis, March. 

U.S. Department of Housing and Urban Development (2000a). 24 C.F.R. Part 81, HUD’s 

Regulation of the Federal National Mortgage Association and the Federal Home Loan 

Mortgage Corporation; Final Rule, Fed. Reg., 65:211, pp. 65044-65084, October 31. 

U.S. Department of Housing and Urban Development (2000b). “Economic Analysis,” for 

The Secretary of HUD’s Final Rule on HUD’s Regulation of The Federal National Mortgage 

Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie 

Mac), p. 2-6, August 22. 

U.S. General Accounting Office (1993). Housing Finance: Expanding Capital for 

Affordable Multifamily Housing. GAO/RCED-94-3, October. 

U.S. General Accounting Office (1996). Fair Lending: Federal Oversight and Enforcement 

Improved but Some Challenges Remain. GAO/GGD-96-145, August. 

Vandell, K.D. (1992). Predicting commercial mortgage foreclosure experience. Journal of 

the American Real Estate and Urban Economics Association 21(3), 211-246. 

Viccaro, Lynne (1999). Harrelson Eyes Growth, Niche Housing Opportunities. MultiHousing News, December. 

Wratten, Thomas F. (1996). Introduction to Commercial Real Estate: Secondary and 

Securitization Markets. Overland Park, Kansas: Principal Commercial Advisors, Inc., 

October. 

Appendix A – Bibliography A-5 

Appendix B
 

Research Methodology
 

Appendix B – Research Methodology 

Research Methodology 

The research strategy that Abt pursued for the Study of Multifamily Underwriting and the 

GSEs’ Role in the Multifamily Market has included four phases of data collection: 

•	 A review and summary of the existing related research studies and trade press 

accounts of financial services activities undertaken in the multifamily market; 

•	 A brief analysis, using the Property Owner and Managers Survey (POMS) and the 

GSE data supplied by HUD, of the major metropolitan markets where Fannie 

Mae and Freddie Mac have been purchasing multifamily loans, as well as the 

major metropolitan markets where multifamily loans are being originated 

regardless of GSE purchases. The four markets selected are: Atlanta, Boston, 

Chicago, and Dallas; 

•	 Telephone interviews with key national industry experts to assess potential 

impacts of the multifamily underwriting and appraisal standards and practices; 

and 

•	 In-person and telephone interviews with multifamily lenders (recommended by 

national experts), in the four selected markets, to probe in more depth the impacts 

of the GSEs’ underwriting and appraisal standards on the liquidity of the 

multifamily market as well as the potential impacts of the rapidly changing 

secondary market for commercial mortgages. 

The first two phases of data collection included an intensive review of the related research 

studies and the trade press and analysis of information supplied by HUD on the top 25 

metropolitan areas with multifamily market activity. Simultaneous with the second phase of 

data collection, Abt assembled a potential list of national industry experts and submitted it to 

Kerry Vandell (a project consultant) for his recommendations. Those recommended were 

contacted for a telephone interview. 

Prior to conducting the national expert interviews, we prepared an interview guide to assist 

the Abt team to capture similar issues about multifamily mortgage finance on four key issues: 

multifamily market segments and financing, underwriting and appraisal standards and 

practices, GSEs’ secondary market activities in various geographic areas, and 

recommendations for local lenders to interview during the next phase of data collection. 

Appendix B – Research Methodology B-1 
 

Ultimately, 26 individuals nominated as national industry experts were interviewed. Those 

included in the telephone interviews of national industry experts were representatives of the 

following multifamily financing market segments: 1 

•	 Community and advocacy groups (n=8); 

•	 Lender Consortia (n=5); 

•	 Mortgage bankers (n=3); 

•	 Investment houses (n=3); 

•	 Developers (n=2); 

•	 Housing finance agencies (n=1); 

•	 Rating agencies (n=1); 

•	 Academics (n=1); and 

•	 HUD Field Office representative (n=1). 

After conducting the first round of 26 interviews with national experts and prior to 

conducting the lender interviews, we revised the interview guide to capture similar issues 

about multifamily mortgage finance on four key issues: multifamily market segments and 

financing, underwriting and appraisal standards and practices, GSEs’ secondary market 

activities in various geographic areas, and recommendations for HUD and the GSEs. 

During the second phase of interviews (using in-person and telephone interviews with 

multifamily lenders), 20 interviews were conducted with 24 lenders2 who were 

representatives of the following multifamily financing market segments: 

•	 Wall Street conduits (n=5); 

•	 Depository institutions (n=5); 

•	 Mortgage bankers (n=7); and 

1	 During the telephone interview phase with the national industry experts, we determined that most of the experts were 

willing to participate and be forthright in their comments as long as they remained anonymous. Since some also 

requested to not be listed in the report, we have applied that request to all experts. As a consequence, some of the 

comments used in this report are very close to verbatim, but we do not identify either the individual or the organization. 

2	 Two interviews were held with more than one person participating. 

B-2 Appendix B – Research Methodology 
 

• Federal Agency Representatives (n=3).3 

Most of the interviews in both phases of the interviews were between 30 and 120 minutes 

long. The average was approximately 55 minutes. During these interviews, we also 

collected some background information to assist in understanding the context of the 

comments. Some of the experts were less knowledgeable about certain topics, so those 

interviews focused in more depth on topics related to their expertise. 

All three representatives are very involved with and knowledgeable about multifamily lending activities. 

Appendix B – Research Methodology B-3 

3 

Appendix C
 

Summaries of Fannie Mae’s and Freddie Mac’s
 

Multifamily Programs and Guidelines
 

Appendix C – Summaries of Fannie Mae’s and Freddie Mac’s Multifamily Programs and Guidelines 

 

Introduction 

Congress chartered the Government-Sponsored Enterprises (GSEs) — the Federal National 

Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation 

(Freddie Mac) in 1938 and 1970, respectively. Currently both GSEs are chartered as 

shareholder-owned corporations (since 1968 for Fannie Mae and 1988 for Freddie Mac), as 

specified in Sections 301(b) of the Freddie Mac Act and 303 of the Fannie Mae Charter Act. 

The following summarizes information by and about the GSEs: 

C.1 Fannie Mae 

Fannie Mae’s goal is to provide a constant source of multifamily financing in the nation’s 

urban, suburban and rural areas, targeting low- and moderate-income housing, underserved 

communities, and special affordable housing.4 In 2000, Fannie Mae exceeded the goals set 

for it by HUD for each of these targeted areas. In 2000, Fannie Mae financed $13.5 billion in 

multifamily housing, providing affordable renting housing for more than 266,000 families. 

(Fannie Mae 2000 Annual Housing Activities Report, March 16, 2001, p. 23.) Of loans 

delivered to Fannie Mae by its Delegated Underwriting and Servicing (DUS) network in 

2000 (described below), 65 percent served affordable housing needs, 20 percent were 

extended to underserved markets, and 40 percent addressed special affordable needs. Fannie 

Mae plans to expand availability of affordable multifamily housing through $16 in financing 

activities in 2001. (Fannie Mae 2000 Annual Housing Activities Report, March 16, 2001, p. 

23, 30.) 

Fannie Mae’s Multifamily Programs 

DUS - Since 1988, Fannie Mae has delegated loan origination, underwriting, closing, and 

servicing responsibilities to approved and experienced lenders with expertise in financing 

multifamily properties, without prior review by Fannie Mae. Currently 26 DUS lenders 

originate and service on Fannie Mae’s behalf. Under this risk-sharing partnership, DUS 

lenders can sell multifamily loans outright or swap multifamily loans for Fannie Mae MBS. 

Typically, DUS conventional loans: 

•	 Are either fixed-rate balloon mortgages with 5-, 7-, 10-, or 15-year terms or fixedrate fully amortizing loans with 25- or 30-year terms; 

•	 Are secured by income-producing, multifamily rental or cooperative buildings 

with at least five units and with occupancy rates of at least 90 percent; and 

4	 Urban Land, 1997. 

Appendix C – Summaries of Fannie Mae’s and Freddie Mac’s Multifamily Programs and Guidelines C-1 
•	 Are on buildings, existing or recently completed, or may require moderate 

rehabilitation; 

•	 Contain a loss sharing agreement between Fannie Mae and DUS lenders in case 

of default; and 

•	 Are on loans originated within six months prior to Fannie Mae’s purchase. 

Fannie Mae categorizes DUS loans into one of four credit ‘tiers’ based on debt service 

coverage (DSC) ratios and loan-to-value (LTV) ratios. Tier 4 loans have the highest credit 

quality, while Tier 1 loans have the lowest. Most DUS loans fall with in Tiers 2 and 3. 

DUS Underwriting Tiers are shown in Exhibit C-1. Tier 1 is seldom used because of its 

pricing. 

Exhibit C-1 

Tier Minimum DSC 

Ratio 

Maximum LTV 

Ratio 

1 1.15 80% 

2 1.25 80% 

3 1.35 65% 

4 1.55 55% 

Source: Fannie Mae Guide III, 403 (2/20/01) 

A main advantage found in Fannie Mae’s multifamily securities over other residential MBS 

is the prepayment protection. Most include a yield maintenance premium, in the event of 

early prepayment. Common yield maintenance terms are shown in Exhibit C-2: 

Exhibit C-2 

Balloon Term 

(years) 

Yield Maintenance 

Term (years) 

5 3 or 4.5 

7 5 or 6.5 

10 7 or 9.5 

15 10 

30 10 

Source: Esaki and Philips, p. 9 

C-2 Appendix C – Summaries of Fannie Mae’s and Freddie Mac’s Multifamily Programs and Guidelines 
 

After the end of the yield maintenance period, Fannie Mae still requires the borrower to pay a 

1 percent premium in the event of prepayment. During the last 90 days of the loan period, 

this premium is not charged in order to give the borrower a window to refinance. If the 

premium were charged during the last 90 days, the borrower would be required to make a 

choice between repaying the entire loan balance at maturity or paying a prepayment premium 

to Fannie Mae. 

Most DUS loans have recourse to the lender. The level of recourse varies with the “Loss 

Level,” or loss-sharing regime, entered into by Fannie Mae and the lender. Under the most 

common loss-sharing arrangement, Loss Level I, if a DUS loan defaults, losses up to the first 

5 percent of the unpaid balance are carried solely by the lender. Fannie Mae and the lender 

share losses in excess of 5 percent; however, the lender’s total loss share is limited to 20 

percent of the unpaid balance. Fannie Mae reported that as of year-end 2000, there had been 

88 defaults of the more than 7,000 DUS loans originated to that point. (Burnett, Herbert, and 

Maris, 2001, pp. 6.) In 2000, almost 65 percent of the multifamily units financed by Fannie 

Mae came through the DUS lender network. Of the loans that came through the DUS 

network in 2000, 65 percent served affordable housing needs, 20 percent were extended to 

underserved markets, and 40 percent addressed special affordable needs. (Fannie Mae’s 2000 

Annual Housing Activities Report, p. 23.) 

Alternative Credit Enhancement Structures (ACES) - The ACES program allows non-DUS 

lenders to swap multifamily loans for Fannie Mae securities. The collateral in ACES deals 

may be from seasoned portfolios or from new conduit originations. Two basic ACES 

structures are: 

•	 The Real Estate Mortgage Investment Conduit (REMIC)5

 structure which 

includes: 

- Wisconsin Avenue Securities (WAS) REMIC6

 – allows the lender to swap 

multifamily loans for senior (A) and subordinated REMIC certificates (B). 

- MBS REMIC – allows the lender to first swap multifamily loans for Fannie 

Mae MBS, which are then placed in a REMIC. A portion of the MBS 

certificates are held in a custodial account to provide first-loss protection (B) 

to senior securities (A). 

•	 The A/B grantor trust - lender swaps loans for MBS but a portion of the MBS (B) 

is set aside in a custodial account to cover losses. Only the interest cash flows of 

5	 A REMIC is a pass-through vehicle created by the Tax Reform Act of 1986 to issue multiclass mortgage-backed 

securities. REMICs offer issuers more flexibility; issuers can separate mortgage pools not only into different risk 

classes but also into different maturity classes as well. 

6 The WAS REMIC is more efficient than the MBS REMIC because the loans do not need to be first securitized before 

being put into the REMIC. In addition, it permits the creation of more liquid subordinate classes of loans. 

Appendix C – Summaries of Fannie Mae’s and Freddie Mac’s Multifamily Programs and Guidelines C-3 
the “B” piece are sold, and Fannie Mae retains its principal flows for a designated 

period of time. The “A” piece is sold in its entirety to investors and principal 

payments are guaranteed to be distributed monthly. 

MBS Swaps – Under this program, the lender swaps multifamily mortgages for Fannie Mae 

MBS with full, partial or no recourse to the lender. Recourse obligations must be 

collateralized with Fannie Mae approved collateral or backed by a corporate guarantee. 

Fannie Mae Aggregation Facility – This conduit-like lending program, begun in 1996, 

permits lenders to sell individual loans to Fannie Mae for cash on an ‘as originated’ basis. 

This program is available to approved DUS and Aggregation Facility lenders. Lenders 

participating in this program originate loans under standardized underwriting and origination 

requirements utilizing Fannie Mae Loan documents. Although Fannie Mae initially 

accumulated loans under the Aggregation Facility and issued WAS REMICs, Fannie Mae 

has subsequently held them in portfolio. (Burnett, Herbert, and Maris, 2001) 

Other Fannie Mae programs include equity investments in properties eligible for the LowIncome Housing Tax Credits (LIHTC), which have expanded access to equity capital for 

developers and community development organizations. These investments help to revitalize 

distressed urban areas and develop housing for homeless families and individuals. In 2000, 

Fannie Mae closed on over $1.3 billion in LIHTC commitments. (Fannie Mae’s 2000 Annual 

Housing Activities Report, March 16, 2001, p. 26.) 

Targeted Affordable Housing finances housing with affordability and occupancy restriction 

that meet or exceed the Federal LIHTC requirements of: 

•	 At least 20 percent of all units must have restricted rents affordable to households 

earning no more than 50 percent of area median income, adjusted for family size; 

or 

•	 At least 40 percent of all units must have restricted rents affordable to households 

earning no more than 60 percent of area median income, adjusted for family size. 

Under this program, Fannie Mae offers greater flexibility: 

•	 LTV ratios may be as high as 90 percent (compared to 80 percent) 

•	 DSC can be 110 percent (compared with 125 percent) 

•	 A wider range of subordinate financing is acceptable. 

C-4 Appendix C – Summaries of Fannie Mae’s and Freddie Mac’s Multifamily Programs and Guidelines 
 

Fannie Mae/HUD Risk-Sharing Program - Under this program, Fannie Mae reduces its 

guaranty fee to participating lenders by 10-20 basis points, which improves affordability. 

Fannie Mae uses the Targeted Affordable Housing product line with this program for newly 

constructed properties or substantially rehabilitated properties. 

Fannie Mae introduced the 5-50 Streamlined Mortgage Loan for small multifamily 

properties as a permanent product in May 2000. Fannie Mae reported that the product 

features streamlined underwriting and documentation requirements, designed to reduce the 

cost and time to finance small multifamily properties of five to 50 apartment units.7

 Fannie 

Mae plans to increase its investment in small multifamily housing by at least $1 billion in 

2001, at least in part through the 5-50 Streamlined Mortgage Loan product. (Fannie Mae’s 

2000 Annual Housing Activities Report, March 16, 2001, p. 30.) 

Fannie Mae’s Underwriting Guidelines 

Following is a list of the minimum documentation required by Fannie Mae for underwriting a 

loan. The lender must maintain these documents for each mortgage. 

Burnett, Herbert, and Maris, 2001, p. 14. 

Appendix C – Summaries of Fannie Mae’s and Freddie Mac’s Multifamily Programs and Guidelines C-5 

7 
Exhibit C-3
 

Fannie Mae’s Required Documentation
 

A. Borrower Structure and Experience 

1. Description of the borrower entity and for each borrower, key principal and 

principal, a copy of their certified multifamily ownership and loan history 

statement. 

2. Results of the experience checks for each borrower, key principal and principal. 

3. Organizational documents of the borrower and each principal that is not an 

individual and of any entity which owns an interest in the principal. Resumes for 

each key principal and each individual principal. 

B. Borrower Credit 

1. Signed financial statements to include name and location of property, property age, 

number of units; ownership interest, estimated value, amount and terms of debt and 

debt secured by property; maturity date of debt on secured property; property 

annual net operating income; and, income after debt service. 

2. Federal income tax returns as required by Section 605.01 of this Part. 

3. Credit reports. The credit reports must include a search of the public records 

4. Verification of significant deposits and noncash assets. 

5. Verifications of bank and trade references. 

6. The borrower’s mortgage loan payment record for the last two years, if the property 

is being refinanced. 

7. Appropriate borrower’s certificate regarding creditor’s rights and UCC filings. 

C. Property Management 

1. A property management plan. 

2. List of all property staff, their salaries and benefits, including any fee or discounted 

units. 

3. Statement indicating what costs, if any, are shared with other properties. 

D. Property Location and Condition 

1. Certificate of building code compliance or the results of recent code inspections. 

2. Evidence of compliance with zoning and land use laws and regulations. 

3. List major repairs and capital replacements for the property for the year to date and 

the previous three years. 

4. Termite inspection report, termite bond or other evidence of adequate coverage. 

5. For moderate rehabilitation and recently completed properties, an architect’s or 

engineer’s report. 

6. Aerial photograph of property. 

C-6 Appendix C – Summaries of Fannie Mae’s and Freddie Mac’s Multifamily Programs and Guidelines 
Exhibit C-3
 

Fannie Mae’s Required Documentation
 

(Continued) 

E. Underwriting Documents 

1. Certified project rent roll, certified by borrower, the management agent, and the 

lender. 

2. Appraisal with all attachments. 

3. Original operating statements, including profit and loss statements and balance 

sheets for the last three years, certified by borrower for any property to be 

refinanced. 

4. Copies of historical bills or assessments, as required by the lender. 

5. Copies of any reciprocal use agreements relating to recreational facilities, parking 

areas, or private streets, etc. 

6. Copies of laundry leases, if applicable. 

7. Copies of all material service contracts. 

8. If the property is subject to any federal, state, or local rent, occupancy and/or resale 

restrictions, a copy of the applicable laws or regulations. 

9. Ground lease analysis and copies of any ground lease. 

10. Lender’s commitment to the borrower. 

11. Underwriter’s narrative. 

12. Underwriter’s recommendation to the lender’s loan committee. 

13. Evidence that the loan was approved by the lender’s loan committee. 

F. Other Documents 

1. Lender’s form application from the borrower. 

2. Title insurance policy for this transaction and if obtained, any historical title 

insurance policies. 

3. Survey and surveyor certificate. 

4. Copies of the property sales contract, including all addenda, if the property was 

acquired during the 12-month period preceding the date of the borrower’s loan 

application. 

5. All documents, not listed here, that are part of the mortgage loan delivery 

documents, including closing documents and documents contained in the mortgage 

loan delivery package and the monitoring package. 

C.2 Freddie Mac 

Freddie Mac provides a range of financing products for the acquisition, construction, 

refinance or moderate rehabilitation of apartment buildings. In contrast to Fannie Mae, 

Freddie Mac reduced its role in multifamily market for nearly three years beginning in 1990. 

Since 1993, Freddie Mac has purchased more than $29 billion in multifamily mortgages, 

financing housing for 900,000 families. In 2000, Freddie Mac purchased $7.1 billion in 

multifamily loans, a 10 percent decrease from their 1999 record purchase activity. NinetyAppendix C – Summaries of Fannie Mae’s and Freddie Mac’s Multifamily Programs and Guidelines C-7 
 

two percent of the units in mortgages funded in 2000 were affordable to families with 

incomes at or below their area medians.8 

Freddie Mac Programs 

Freddie Mac ensures national coverage through a carefully selected network of lenders called 

Program Plus lenders (banks, pension funds, insurance companies, lending consortia, 

foundations, state and local housing agencies and low-income housing tax credit 

intermediaries). These lenders are pre-approved to sell and service loans in geographic 

territories where the lender has proven expertise. Freddie Mac works with these lenders to 

develop permanent financing for rental properties that are home to low-income families as 

well. To be eligible for purchase under Freddie Mac’s conventional cash purchase program, 

loans must be between $300,000 and $50 million9 and have the following characteristics: 

• Terms of 7, 10, 15, 20, 25 or 30 years 

• Maximum amortization period of30 years 

• Maximum LTV of 80 percent 

• Minimum DSC of 1.25 

In an effort to expand the availability of properties with affordable rent for low-income 

families, Freddie Mac also purchases multifamily mortgages either for cash or through its 

Negotiated Transactions Program in which it exchanges mortgages for Freddie Mac 

Multifamily Participation Certificates (PCs), a pass-through security where the principal and 

interest on each pooled mortgage is “passed-through.” The borrower pays the debt service, 

(principal and interest) to the lender, and the lender passes the remaining (after the servicing 

fee) principal and interest on to Freddie Mac. After Freddie Mac removes its guarantee fee 

for management and guarantees, it passes the remaining principal and interest on to the PC 

holder.10 In addition to the PC swap transactions, Freddie Mac Multifamily Negotiated 

Transactions includes the purchase of mortgages with credit support provided by the seller or 

borrower and/or credit enhancement of multifamily housing bonds on a pool basis and other 

non-standard mortgage purchase transactions. 

Freddie Mac’s Pilot Programs and Initiatives 

Senior Housing Program - provides long-term financing for rental housing that meets the 

needs of elderly residents. Eligible properties include rental housing accommodations that 

provide any combination of independent living, congregate care, and assisted living.(Freddie 

Mac’s Annual Housing Activities Report, March 16, 2001, p. 51.) In 2000, Freddie Mac 

8 www.freddiemac.com/news/archives2001/mfyearend.htm 

9 Waivers are required for loans larger than $50 million. 

10 www.freddiemac.com/function/fm-multi/prodlio1.htm 

C-8 Appendix C – Summaries of Fannie Mae’s and Freddie Mac’s Multifamily Programs and Guidelines 
 

financed $529 million, for 5,900 units, in seniors apartments, congregate care and assisted 

living housing. 

Forward Commitment Pilot LIHTC Execution - provides mortgage financing for 

multifamily properties that qualify for low-income housing tax credits. It provides a single 

source of construction and permanent financing for tax credit properties that are affordable to 

low-income families. The financing is fixed-rate during construction and provides a Freddie 

Mac commitment to buy the permanent loan upon construction completion and lease-up. 

Multifamily Housing Bond Credit Enhancement Program – announced in February 1998, 

provides credit enhancement for both fixed-rate bonds and variable-rate bonds. The credit 

enhancement can be used as a replacement of existing credit enhancement facility for taxexempt bonds for refundings, acquisition, and acquisition/rehabilitation (minimum 

rehabilitation only). Freddie Mac guarantees payment of mortgage principal and interest that 

is used to pay the bond investors. The minimum loan size per property is $3 million; the 

maximum loan size is $50 million. 

Low-Income Housing Tax Credit Investments - in 2000, Freddie Mac invested more than 

$272 million in LIHTC properties. By working with for-profit and nonprofit partnerships, its 

total low-income housing tax credit investments have surpassed $1.4 billion. (Freddie Mac’s 

Annual Housing Activities Report for 2000, March 16, 2001, p. 2.) 

Tax-Exempt Bond Investment - in 2000, Freddie Mac purchased $592 million in newlyissued multifamily mortgage revenue bonds that had been issued by state, county or city 

government agencies to finance mortgages for nonprofit borrowers or property owners who 

agree to keep rents at affordable levels. These bonds will finance approximately 12,800 units 

of affordable housing.11 

HUD/Freddie Mac Risk-Sharing Program - provides lender financing for up to 5,000 units 

of affordable rental housing through a unique risk-sharing partnership between Freddie Mac 

and HUD.12 Two projects have been funded through this program to date, a total of $14 

million for 652 units. 

Freddie Mac’s Underwriting Guidelines 

To be eligible for Freddie Mac’s programs, the lender must follow Freddie Mac’s 

underwriting requirements provided in Exhibit C-4 and Freddie Mac will re-underwrite these 

mortgages. 

11 Freddie Mac’s Annual Housing Activities Report 2000, p. 2. 

12 www.freddiemac.com/function/fm-multi/prodlio1.htm 

Appendix C – Summaries of Fannie Mae’s and Freddie Mac’s Multifamily Programs and Guidelines C-9 
 

Exhibit C-4
 

Freddie Mac’s Required Documentation
 

A. Delivery Location 

The seller must deliver to Freddie Mac, at the seller’s expense, the required documents and any 

required fees, subject to Freddie Mac’s approval. The seller must deliver the required 

documents to the applicable Freddie Mac Multifamily Regional Office serving the State where 

the Property is located. 

B. Organization of Underwriting Packages 

With respect to each delivery, the seller/servicer must: 

• deliver the documents simultaneously. 

• adequately secure the documents at the top right inside of a legal-sized manila folder. 

• arrange the documents in the order listed below, with the first item on top. 

C. Changes to Forms 

The seller may not make changes to any forms prescribed by Freddie Mac without prior 

written authorization from Freddie Mac. 

D. Copies of Forms and Documents; Delivery of Original Documents. 

The seller must submit only originally executed forms and documents unless otherwise noted. 

E. Certification 

Documents for which Freddie Mac requires certification must bear the following statement, 

executed by an individual who is authorized to legally bind the borrower or borrower principal: 

I hereby certify that the information contained in this documents is complete and accurate 

as of (Date) (Name of Entity) and (Signature). 

F. Financial Statements 

Financial statements must include, at a minimum, a balance sheet and an income statement. If 

the financial statements are audited, a statement of changes in financial position and all notes 

must also be included. If audited financial statements are not available, the party whose 

finances are summarized by the statement must certify that the statements are complete and 

accurate. 

C-10 Appendix C – Summaries of Fannie Mae’s and Freddie Mac’s Multifamily Programs and Guidelines 
Exhibit C-4
 

Freddie Mac’s Required Documentation
 

(Continued) 

G. Cooperative Analysis 

If the property is owned by a cooperative housing corporation, a cooperative analysis must 

include: 

1. Documentation required in Section C of Schedule IX of Form 506, Multifamily Risk 

Assessment. 

2. Current financial statements for any one owner that holds 20% or more of the 

Cooperative’s shares. If an owner of 20% or more is a corporation, partnerships or 

other legal entity, the seller must deliver financial statements for each officer, general 

partner or trust beneficiary, including sponsors and beneficiaries that hold unsold 

shares. 

3. Maintenance fee delinquency report for the previous 12 months showing the number of 

units delinquent for each month and the corresponding dollar value. 

4. Analysis of the sponsor’s current cash flow from unsold units (rent roll detailing rent 

and maintenance for each unit). 

5. Analysis of the sponsor’s ability to support negative cash flow from unsold units, if 

applicable. 

6. Analysis of pro forma Income and Expense Statements showing the economic results if 

the property were operated as a rental. 

7. Analysis of the estimated value of the Property as a Cooperative (Co-op) and as a rental 

project. 

8. Information on loans secured by unsold shares. 

H. Mortgage Transaction Narrative Analysis 

A Mortgage transaction narrative analysis is a narrative analysis by the seller describing the 

mortgage transaction and containing a discussion of the: 

1. Characteristics of the proposed mortgage that make it an investment quality mortgage, 

risk factors and the reasons the seller recommends the mortgage. 

2. Property’s physical description. 

3. Property’s financial analysis (profile and trend). 

4. Evaluation of balloon risk that includes the borrower’s ability to pay the unpaid 

principal balance (UPB) of the new mortgage at maturity. 

5. Surrounding property uses and physical condition, public facilities, shopping facilities 

and sources of employment. 

6. Market analysis (occupancy, supply and concessions). 

7. History of the borrower’s equity investment in the property and the borrower’s proper 

use of mortgage proceeds. 

Appendix C – Summaries of Fannie Mae’s and Freddie Mac’s Multifamily Programs and Guidelines C-11 
Exhibit C-4
 

Freddie Mac’s Required Documentation
 

(Continued) 

I. Rent Schedule 

Must be current and dated and include: 

1. Unit number or identification 

2. Tenant’s name 

3. Unit type 

4. Monthly rent 

5. Subsidies, if applicable (specify) 

6. Rent controlled or rent stabilized, if applicable 

7. Concessions, rebates or discounts given to tenant 

8. Furnished or unfurnished status 

9. Lease commencement date 

10. Lease expiration date 

11. Arrearages owed by tenant, if any 

12. Amount of security deposit held 

J. Credit Report 

Current credit report on the borrower and each borrower principal must: 

1. Be issued by an independent credit reporting agency acceptable to Freddie Mac 

2. Be dated within 60 days before delivery of the full underwriting package 

3. Verify debts listed on the financial statement submitted with the full underwriting 

package, including terms, balances and ratings 

4. List any other debts 

5. List all legal actions that involve the borrower or borrower principal and are 

disclosed by a search of public records 

K. Real Estate Schedule 

A real estate schedule (Form 1116) for all real estate in which the borrower or any borrower 

principal currently has a direct or indirect interest must be dated with 60 days of the 

submission and certified by the borrower as complete and accurate. 

For each parcel identified, the schedule must contain: 

1. Name of owner of each property identified on the schedule 

2. Role and ownership interest of each owner of the property 

3. Property name and address, including city, county, and state 

4. Property type 

5. Acquisition date of each property 

6. Identity of lenders, if any 

7. Freddie Mac loan number 

8. Current mortgage balance or balances 

9. Current market value as estimated by the borrower 

10. Date of the borrower’s value estimate 

11. Income and expense information for the property 

C-12 Appendix C – Summaries of Fannie Mae’s and Freddie Mac’s Multifamily Programs and Guidelines 
Exhibit C-4
 

Freddie Mac’s Required Documentation
 

(Continued) 

L. Incomplete or Improper Packages 

If the delivery is incomplete, if the documents have not been properly prepared, or if the 

documents do not, or the delivery does not, otherwise conform to Freddie Mac 

requirements, Freddie Mac cannot process the underwriting package. 

Appendix C – Summaries of Fannie Mae’s and Freddie Mac’s Multifamily Programs and Guidelines C-13 

Appendix D
 

Features of Selected Multifamily Finance Programs
 

Appendix D – Features of Selected Multifamily Finance Programs 

 

Appendix D – Features of Selected Multifamily Finance Programs

Exhibit D-1
 

Selected Multifamily Finance Programs: Fannie Mae
 

Name of 

Program 

Delegated Underwriting and 

Servicing (DUS) Product Line 

Prior Approval 

Product Line 

Targeted Affordable 

Housing Program 5-50 Streamlined Mortgage 

Description Under DUS, Fannie Mae purchases 

qualified multifamily mortgages 

from specially designated lenders. 

These DUS lenders have been 

delegated responsibilities for 

originating, underwriting, closing 

and servicing. Fannie Mae 

purchases multifamily mortgages 

without prior review by Fannie Mae. 

Individual transactions are 

submitted by approved Prior 

Approval lenders to Fannie 

Mae regional offices, where 

they receive full review prior 

to commitment. 

Underwriting standards are 

the same as DUS. 

This program is available through 

either the DUS or Prior Approval 

product lines. This program has 

specific affordability and 

occupancy restrictions similar to 

the LIHTC program. Current 

priority is given to targeted 

affordable housing transactions. 

Through this program, available 

through the DUS product line, Fannie 

Mae purchases small multifamily 

properties of five to 50 apartment 

units. Mortgages purchased through 

the program are eligible for 

streamlined underwriting 

requirements and processing and 

reduced costs. 

Loan Amount No minimum or maximum loan 

amount (average is $5 million). 

No minimum or maximum 

loan amount. 

No minimum or maximum loan 

amount. 

No maximum or minimum (average is 

$750,00013) 

Term and 5, 7, 10, 15, 25 years, or others by 5, 7, 10, 15, 25 years, or 5, 7, 10, 15, 25 years, or others by 5 to 30 years; amortization from 10 to 

Amortization request; others by request; request; minimum 18-year term 30 years. ARMs available also. 

25- or 30-year amortization or less, 25- or 30-year amortization for LIHTC properties; 

by request. ARMs available also. or less, by request. ARMs 25- or 30-year amortization or 

available also. less, by request. ARMs available 

also. 

Interest Priced daily; best prices to most Priced daily; best prices to Special pricing available for 80% for fixed-rate loans, 77.5% for 

Rates conservative transaction on a fourtier basis. Wall Street access. 

most conservative 

Transaction on a four-tier 

basis. Wall Street access. 

targeted affordable housing 

transactions. Wall Street access. 

ARMs. 

Rate Lock Option to lock at commitment Option to lock at 

commitment 

Option to lock at commitment 125% or higher for fixed-rate loans; 

100% at cap for ARMs. 

13 Burnett, Herbert, and Maris, 2001, p. 14. 

D-1 
D-2 Appendix D – Features of Selected Multifamily Finance Programs 

Exhibit D-1 (continued)
 

Selected Multifamily Finance Programs: Fannie Mae
 

Name of 

Program 

Delegated Underwriting and 

Servicing (DUS) Product Line 

Prior Approval 

Product Line 

Targeted Affordable 

Housing Program 5-50 Streamlined Mortgage 

Prepayment Numerous yield maintenance 

options depending upon execution 

chosen. 1% after yield maintenance 

term; last 90 days open. 

Numerous yield maintenance 

options depending upon 

execution chosen. 1% after 

yield maintenance term; last 

90 days open. 

Numerous yield maintenance 

options depending upon execution 

chosen. 1% after yield 

maintenance term; last 90 days 

open. 

The combined DSC and LTV of the 

first mortgage and the subordinate 

financing must conform with the DSC 

and LTV limits established for the 

underwriting tier of the first mortgage. 

Assumability Yes, under the conditions of the 

mortgage documents. 

Yes, under the conditions of 

the mortgage documents. 

Yes, under the conditions of the 

mortgage documents. 

The combined DSC and LTV of the 

first mortgage and the subordinate 

financing must conform with the DSC 

and LTV limits established for the 

underwriting tier of the first mortgage. 

Maximum 

Loan-toValue 

Ratio 

80% 80% Special underwriting, up to 90% 

for targeted affordable housing 

transactions. 

80% for fixed-rate loans, 77.5% for 

ARMs. 

Debt Service 

Coverage 

125% or higher for most loans. 125% or higher for most 

loans. 

For properties supported 100% by 

project-based Section 8 HAP 

contract is 110%; for other 

targeted affordable housing 

properties--115%. 

125% or higher for fixed-rate loans; 

100% at cap for ARMs. 

Fees Vary with DUS lender, 2% Fannie 

Mae fee refunded at closing (except 

$10,000, which is refunded when 

legal documents are cleared). 

Vary with transaction size. See DUS and Prior Approval 

product lines. 

Minimum of 1% of the original loan 

amount in origination fees; servicing 

fees for loans under $3 million may be 

higher than those for DUS pricing. 

Timing Varies with DUS lender, workload. 

No Fannie Mae review required. 

Depends on complexity of 

transactions and regional 

workload. 

See DUS and Prior Approval 

product lines. 

See DUS product line. 

Eligible 

Properties 

From premium to moderate, wide 

age range, central city or suburban, 

high rise or garden. 

Wide range, with priority to 

targeted affordable housing. 

Rental and co-op, new to 

moderate rehab. 

Wide range, with priority to 

targeted affordable housing. 

Rental and co-op, new to moderate 

rehab. 

Multifamily mortgages with 5 to 50 

units that are affordable under HUD 

guidelines. 
Appendix D – Features of Selected Multifamily Finance Programs 

Exhibit D-1 (continued)
 

Selected Multifamily Finance Programs: Fannie Mae
 

Name of 

Program 

Delegated Underwriting and 

Servicing (DUS) Product Line 

Prior Approval 

Product Line 

Targeted Affordable 

Housing Program 5-50 Streamlined Mortgage 

Escrow May need escrow for repairs if not 

completed by closing. 

May need escrow for repairs 

if not completed by closing. 

May need escrow for repairs if not 

completed by closing. 

Escrow funds may be required to 

ensure the timely completion of 

repairs, replacements, and/or 

improvements to the property. 

Replacement Depends on structure, but not Depends on structure, but not Full funding of replacement Funding of replacement reserves may 

Reserves automatically required for under 10­ automatically required for reserves at a minimum of $150 per be required if property condition is 

year transactions; may be waived for under 10-year transactions; unit per year. declining or taxes or insurance are 

certain transactions with over 1.35 may be waived for certain unpaid or if Borrower fails to file 

DSC. transactions with over 1.35 operating statement. For Tier 2 loans 

DSC. over $3 million, 50% funding of 

replacement reserves is required. 

Subordinate 

Financing The combined DSC and LTV of the 

first mortgage and the subordinate 

financing must conform with the 

DSC and LTV limits established for 

the underwriting tier of the first 

mortgage. 

The combined DSC and LTV 

of the first mortgage and the 

subordinate financing must 

conform with the DSC and 

LTV limits established for 

the underwriting tier of the 

first mortgage. 

The combined DSC of first 

mortgage and subordinate 

financing must be a minimum of 

105%. 

The combined DSC and LTV of the 

first mortgage and the subordinate 

financing must conform with the DSC 

and LTV limits established for the 

underwriting tier of the first mortgage. 

Main Cash-out, 80% LTV, 30-year Because of direct review by LTV ratio up to 90%; DSC can be Reduced transaction costs for thirdAdvantage amortization. MBS/DUS provides Fannie Mae’s Prior Approval, 110%; a wider range of party reports; reduced out-of-pocket 

access to Wall Street pricing. can handle a greater range of subordinate financing acceptable. costs to the borrower; streamlined 

complexities than other underwriting requirements; simplified 

product lines. business processes; reduced data 

submission requirements. 

Main 

Disadvantage 

N/A N/A N/A N/A 

Sources: Adapted from Multi-Housing News (August/September 1996), AllRegs, and Fannie Mae brochures. 

D-3 
Appendix D – Features of Selected Multifamily Finance Programs 

Exhibit D-2
 

Selected Multifamily Finance Programs: Freddie Mac
 

Name of 

Program Conventional Cash Program 

Forward Commitment Pilot LIHTC 

Execution 

Senior Housing and Assisted Living Pilot 

Program 

Description The program is for refinance, acquisition or 

moderate rehabilitation loans that 

demonstrate high investment quality. 

This pilot provides a single source of 

construction and permanent first mortgage 

financing for newly constructed properties or 

those being substantially rehabilitated that 

will receive 9 percent credits under the 

LIHTC program. It provides for a maximum 

of 36-month interest-only construction 

financing, followed by an 18- to 30-year 

amortizing permanent loan upon 

construction completion, lease-up, and 

property income stabilization. 

This pilot provides a source of first 

mortgage financing for rental housing that is 

exclusively for senior residents, including 

properties that provide assistance for 

residents with the activities of daily living. 

Loan Amount Small loan program: $300,00 - $999,999. 

Large loan program: $1 million - $50 

million. 

$1 million to $15 million per property. $3 million to $15 million per property. 

Term and 

Amortization 

5, 7, 10, 15, 25 years, or others by request; 

25- or 30-year amortization or less, by 

request. 

18 to 30 year term; 25 to 30 year 

amortization. 

7, 10, 15, 20, and 25 years (loans with terms 

of 20 years or longer must be selfliquidating). Standard amortization schedule 

is 25 years or less. 

Interest 

Rates 

Fixed for term of loan. Competitive rates 

based on risk-based pricing for each loan’s 

quality; Wall Street access for PC One 

Program. Rate reset mortgages fixed for 

each 5-year term. 

Fixed for term of the construction and 

permanent loan. 

Permanent fixed rate. 

Rate Lock Option to lock at commitment. Option to lock both the project loan and 

permanent loan rates at commitment. 

Option to lock at commitment. 

Prepayment Yield maintenance or fixed fee schedule. The standard yield maintenance period is 15 

years. The minimum prepayment premium 

due during and after the yield maintenance 

period is 1% of the amount prepaid. There is 

no prepayment premium during the last 90 

days of the term of the permanent mortgage. 

Fully prepayable with payment of applicable 

prepayment fee. 

D-4 
Appendix D – Features of Selected Multifamily Finance Programs 

Exhibit D-2 (continued)
 

Selected Multifamily Finance Programs: Freddie Mac
 

Name of 

Program Conventional Cash Program 

Forward Commitment Pilot LIHTC 

Execution 

Senior Housing and Assisted Living Pilot 

Program 

Assumability One time transfer allowed with consent of 

Freddie Mac. 

Yes, under the conditions of the mortgage 

documents. 

“Due on sale” with a waiver for independent 

living and congregate care properties. 

Loan to Value 

Ratio 

80%, based upon Freddie Mac value. 85% maximum; 90% with HUD risk sharing. 

(See subordinate financing). 

75% maximum. 

Debt Service 

Coverage 

125% for loans of $1 million or more; 130% 

minimum for loans under $1 million. 

115% minimum; 110% with HUD risk 

sharing. (See subordinate financing). 

135% minimum. May be as low as 125% 

for shorter amortization periods. 

Fees 0.10% application fee. Application fee is the greater of $3000 or 

.10% of loan amount. Commitment fee of 

2% of loan amount (refundable). Delivery 

assurance fee of 5 percent of loan amount 

(refundable). Conversion fee of .1% of loan 

amount. 

Application fee is the greater of $2000 or 

.10% of loan amount. 

Timing An average of 23 days between receipt of 

application and commitment issuance 

Freddie Mac will issue an indication quote 

within 10 working days of receipt of a 

complete preliminary underwriting package. 

Then the Seller/servicer has 90 days to 

prepare the Construction Loan underwriting 

package. 

An average of 23 days between receipt of 

application and commitment issuance 

Eligible 

Properties 

5+ units, garden, mid-rise, high-rise and 

cooperative properties in good condition 

with minimum occupancy of 90% for 

90 days. 

To-be-built or substantially rehabilitated 

garden or mid-rise apartments that have 

received a 9% tax credit allocation under 

Section 42 if the Internal Revenue Code. 

Independent care, congregate care, assisted 

living properties. Because of the need to 

support properties that allow for each 

resident to age in place, eligible properties 

may contain a mix of resident care with a 

limited amount of skilled nursing care. 

Private pay rental only. 

Escrow Tax and insurance escrows required. Tax and insurance escrows required. Tax and insurance escrows required. 

Replacement 

Reserves 

Replacement reserve escrows typically 

required. 

Replacement reserve escrow required. Replacement reserve escrow required. 

D-5 
D-6 Appendix D – Features of Selected Multifamily Finance Programs 

Exhibit D-2 (continued)
 

Selected Multifamily Finance Programs: Freddie Mac
 

Name of 

Program Conventional Cash Program 

Forward Commitment Pilot LIHTC 

Execution 

Senior Housing and Assisted Living Pilot 

Program 

Subordinate 

Financing 

Subordinate financing will be considered 

under certain conditions and circumstances. 

Subordinate financing allowed with consent 

of Freddie Mac: 

Hard: DSC of 110% minimum 

LTV of 90% maximum 

Soft: DSC of 105% minimum 

LTV of 100% maximum 

None. 

Main 

Advantage 

Competitive terms, conditions, process and 

rates. Early rate lock delivery option. 

25- to 30-year amortization. Long-term financing, nationwide program, 

flexible term, short turn-around time, and 

competitive rates. 

Main 

Disadvantage 

DSC is high compared with other conduit 

programs. Small loans have a 25% 

recourse. 

DSC is high compared with other conduit 

programs. 

N/A 

Sources: Adapted from Multi-Housing News (August/September 1996), Freddie Mac web page (www.freddiemac.com/multifamily/prodsh01.htm and 

www.freddiemac.com/multifamily/lowincome.htm), AllRegs, and Freddie Mac brochures. 
Appendix D – Features of Selected Multifamily Finance Programs

Exhibit D-3
 

Selected Multifamily Finance Programs: FHA
 

Name of 

Program FHA 221(d)(4) Program FHA 223(f) Program FHA 232 Program 

Description The program provides mortgage insurance 

for new construction or substantial rehab of 

rental or cooperative multifamily housing. 

(Substantial rehab when cost exceeds $6,500 

per unit adjusted by area high cost 

percentage, or when more than one major 

building component must be replaced.) 

The program is for acquisition or refinance 

of existing nursing homes and assisted living 

facilities. 

This program is for new construction or 

substantial rehabilitation of nursing homes 

and assisted living facilities. 

Loan Amount No minimum or maximum No maximum limits. Up to 90 % (95% for non-profit) of cost. 

Underwritten at 111% pro forma debt 

service coverage. 

Term and 

Amortization 

Up to 40 years, self-amortizing. Up to 35 years, self-amortizing. (75% 

remaining useful life). 

40 years, self-amortizing. 

Interest 

Rates 

Fixed for term of loan; based upon current 

market conditions; and set at the closing of 

the construction loan. 

Fixed for term of loan. Competitive rates 

based on risk-based pricing for each loan’s 

quality; access to Wall Street. Rate reset 

mortgages fixed for each 5-year term. 

Fixed for term of the construction and 

permanent loan. 

Rate Lock The rate lock is arranged with the security 

(GMAC) purchaser by payment of a 

reservation fee of 50-100 basis points 

(refundable). 

The rate lock, after acceptance of the HUD 

commitment and (up to 60 days) prior to 

closing, is arranged with the security 

(GMAC) purchaser by payment of a 

reservation fee of 50-100 basis points 

(refundable). 

The rate lock, after acceptance of the HUD 

commitment and (up to 60 days) prior to 

closing, is arranged with the institutional 

investor who purchases the whole loan or a 

GMAC security and usually requires a 

commitment fee of 50-100 basis points 

(refundable). 

Prepayment Negotiable, usually locked for 5 years then 

5%, 4%, 3%, 2%, 1% thereafter, at par. 

Negotiable, usually locked for 5 years then 

5%, 4%, 3%, 2%, 1% thereafter, at par. 

Negotiable, usually locked for 5 years then 

5%, 4%, 3%, 2%, 1% thereafter, at par. 

Assumability Yes, subject to HUD approval with a 

nominal fee of 0.05%. 

Yes, subject to HUD approval with a 

nominal fee of 0.05%. 

Yes, subject to HUD approval with a 

nominal fee of 0.05%. 

Loan to Value 

Ratio 

None for new construction; 90% for 

substantial rehabilitation. 

Up to 85% provided no cash out. Up to 79% 

with proceeds to the borrower. 

Up to 90% (95% for non-profit borrowers). 

D-7 
D-8 Appendix D – Features of Selected Multifamily Finance Programs 

Exhibit D-3 (continued)
 

Selected Multifamily Finance Programs: FHA
 

Name of 

Program FHA 221(d)(4) Program FHA 223(f) Program FHA 232 Program 

Debt Service 

Coverage 

111% for new construction. No change from 

original underwriting for rehab projects ; no 

performance requirements. 

117.6%. No change from original underwriting for 

rehab projects; no performance 

requirements. 

Fees Loan fee: none--included with construction 

loan. HUD application fee of .3% of 

mortgage amount. Initial processing fee of 

$15,000 to $20,000 upon acceptance of 

application. HUD mortgage insurance 

premium of .5% of mortgage amount. HUD 

inspection fee of .5% of mortgage amount. 

Financing and Permanent Placement Fees of 

up to 3.5% plus 1.5% of mortgage amount. 

Loan fee of 1-2% depending on loan size. 

HUD application fee of .3% of mortgage 

amount. Initial processing fee of $15,000 to 

$20,000 upon acceptance of application. 

HUD mortgage insurance premium of 1% of 

mortgage amount due at closing, then .5% 

per annum paid monthly with principal and 

interest. HUD inspection fee of 1% of 

required repairs or $30/unit. Financing and 

Permanent Placement Fees of up to 3.5% 

plus 1.5% of mortgage amount. 

Loan fee: none--included with construction 

loan. HUD application fee of .3% of 

mortgage amount. Initial processing fee of 

$15,000 to $20,000 upon acceptance of 

application. HUD mortgage insurance 

premium of .5% of mortgage amount. HUD 

inspection fee of .5% of mortgage amount. 

Financing and Permanent Placement Fees of 

up to 3.5% plus 1.5% of mortgage amount. 

Timing Although it can vary by specific office, 

processing time from HUD’s receipt of a 

complete submission ranges from 1-3 

months for site appraisal and market analysis 

to 3-12 months for a firm commitment.. 

Although it can vary by specific office, 

processing time for a 223(f) loan is generally 

within 90 days of HUD’s receipt of a 

complete submission. In most offices, this 

submission is under the Fast Track program. 

Although it can vary by specific office, 

processing time from HUD’s receipt of a 

complete submission ranges from 1-3 

months for site appraisal and market analysis 

to 3-12 months for a firm commitment. 

Eligible Multifamily properties. Units must have The project must be at least 3 years old and The project must contain five or more units 

Properties kitchens and baths and comply with local 

building codes. The program is geared 

toward market rate housing; however, 

subsidized, tax credits and moderate-income 

properties are not excluded. 

contain 8 or more apartment units for longterm residential use. Moderate rehabilitation 

is allowed, however, the total construction 

costs must not exceed HUD’s estimate of 

replacement cost upon completion by more 

than 15%. 

for long-term residential use and nursing 

homes must have at least 20 beds. 
 

Appendix D – Features of Selected Multifamily Finance Programs 

Exhibit D-3 (continued)
 

Selected Multifamily Finance Programs: FHA
 

Name of 

Program FHA 221(d)(4) Program FHA 223(f) Program FHA 232 Program 

Escrow Tax and insurance escrows required. Initial 

operating deficit escrow, if any. 2% working 

capital escrow, 4% GNMA escrow if 

required during construction 

Tax and insurance escrows required. Initial 

operating deficit escrow, if any. 2% 

working capital escrow (unused portion 

released after sustaining occupancy has been 

reached for three months. 

Tax and insurance escrows required. Initial 

operating deficit escrow, if any. 2% 

working capital escrow (unused portion 

released after sustaining occupancy has been 

reached for three months. 

Replacement 

Reserves 

Deposited monthly commencing with 

amortization and based on a percentage of 

structural costs. 

Replacement reserve escrows typically 

required. 

Replacement reserve escrow required. 

Subordinate 

Financing 

Subordinate financing will be considered 

under certain conditions and circumstances. 

In certain cases, second mortgages may be 

permitted where acquisition or refinancing 

costs are greater than the mortgage amount. 

The secondary debt may have no foreclosure 

rights and cannot exceed 7.5% of the 

project’s value, or: 

a) In a purchase transaction, 7.5% of costs. 

b) In a refinance transaction, 50% of the 

difference between total costs and the 

mortgage amount. 

Second mortgages are allowed subject to 

HUD review and provided that the 

secondary debt has no foreclosure rights. 

Main 

Advantage 

1.00-1.11 DSC. Long-term, fixed rate, full 

amortization, non-recourse, and competitive 

interest rates. Construction and permanent 

financing. 

Financing up to 35 years self-amortizing, 

assumable, no net worth minimums. 

Financing up to 90% (95% for non-profit 

borrowers) of cost. Construction and 

permanent loan in one. Amortization up to 

40 years, assumable, and no net worth 

requirements. 

Main 

Disadvantage 

Processing time in some offices; prevailing 

wage rates. 

N/A N/A 

Sources: Adapted from Multi-Housing News (August/September 1996); and Berkshire Mortgage Finance brochures. 

D-9 

Appendix E
 

Acronyms
 

Appendix E – Acronyms 

Acronyms 

AMI - area median income 

CIP - Community Investment Program 

CMBS - commercial mortgage-backed securities 

CRA - Community Reinvestment Act of 1977 

DSC - debt service coverage 

DUS - Delegated Underwriting and Servicing Program 

EMI - Enterprise Mortgage Investments Inc. 

FHEFSSA - Federal Housing Enterprises Financial Security and Soundness Act of 1992 

FHLBs - Federal Home Loan Banks 

FIRREA - Financial Institutions Reform, Recovery and Enforcement Act of 1989 

GSEs - government-sponsored enterprises 

HMDA - Home Mortgage Disclosure Act 

LIHTC - Low Income Housing Tax Credit Program 

LIMAC - Local Initiatives Managed Asset Corporation 

LTV - loan-to-value 

O&M - Operations and Management Plans 

POMS - Property Owners and Managers Survey 

REITs - real estate investment trusts 

RTC - Resolution Trust Corporation 

S&Ls - savings and loans 

Appendix E – Acronyms E-1