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Fitting the pieces together.


Fannie Mae's delegated underwriting and servicing program (DUS) has celebrated its one-year anniversary. The DUS program's aggressive pricing and attractive loan terms have made DUS credentials an important competitive edge for government-oriented multifamily lenders.

There is every reason to assume that this program will be around for a long time, and lenders - and their attorneys - should become familiar with its particulars.

From a legal standpoint, closing the DUS loan is different than closing a Freddie Mac or a HUD loan. Indeed, the process is even different than closing a Fannie Mae loan under the prior approval program that preceded DUS.

The prior approval program gave lenders and their lawyers the luxury of knowing upfront, whether or not their legal documentation was acceptable. Fannie Mae reviewed the documents before closing and pointed out areas that required attention. Attorneys had the security of knowing the papers were automatically acceptable. This prior approval effectively limited potential surprises when Fannie Mae reviewed the final loan purchase package.

Under DUS, counsel is mostly on its own: the essence of the DUS program is the delegation of the project underwriting and legal processes to the private sector. The loan is closed without material Fannie Mae intervention. The delivery package is shipped and one awaits comments, which may or may not be forthcoming.

Piecing together the disparate elements of a DUS closing requires assembling many different parts quickly. Indeed, the Fannie Mae mandatory delivery commitment issued under the DUS program requires the complete loan package to be delivered typically within 30 days of its issuance.

Considering these time constraints, we have found that the best way to bring a flawless closing together is to control as many aspects of the closing process as possible and to monitor compliance with Fannie Mae's requirements continually and carefully. That is to say, we like to be involved in the production of the lender's commitment, handle the physical closing, process, prepare and file the complete delivery package (including underwriting exhibits) with Fannie Mae, coordinate the clearing of any exceptions that may come out of Fannie Mae (whether legal or underwriting) and prepare both the borrower and lender closing dockets. The following are details you should understand, watch out for and take care of to close a Fannie Mae DUS loan.

It's not all in the guide - The latest version of the Fannie Mae Guide incorporates changes through November 15, 1989. It publishes only a portion of Fannie Mae's legal requirements. To the extent that they are published at all, other legal requirements are contained in a series of lender letters, tucked among sundry underwriting issuances as well as in previously superseded guides. Nonetheless, it is important to accumulate and to follow whatever is published.

Regional differences - Fannie Mae has divided the United States into five regions, each served by a regional office.

A DUS loan is delivered to the regional office serving the area where the project is located. And what is required in one regional office may not necessarily be required in another.

Regional personnel who review the documents tend to have strong views as to what should or should not be included in loan delivery packages. These views are sometimes a function of variations required by jurisdictional differences; they are sometimes matters of personal preference.

Whatever the genesis of the position, it is essential, before closing a loan for the first time on a project in a jurisdiction, or before the first delivery to a particular regional office, to get a sense of that office's unique concerns or preferences by speaking to the legal personnel who will review the document package.

Don't close with exceptions - Fannie Mae conducts a detailed review of loan documents. There is little room for faking and little likelihood that legal review personnel will miss or overlook something.

This scrutiny is distinguished from other governmental loan closings such as HUD coinsurance or Freddie Mac.

Be that as it may, the goal of the lender's counsel is to have a purely ceremonial closing: sign here and let's have lunch. And the post-closing Fannie Mae delivery process should be routine. To achieve this end requires a substantial amount of up-front work. How much work, of couse, depends on a number of variables, including the sophistication and compliancy of the borrower and the borrower's lawyer and the complexity of the transaction.

Work through exceptions upfront and do not close with them. Certainly, in this regard, one of the luxuries of working with a Fannie Mae closing, or indeed any governmental program, is being able to shrug your shoulders with the likes of borrower's counsel or title insurance companies and say that there is nothing you can do - Fannie Mae requires it.

However, sometimes exceptions to the rules have to be dealt with, because each project is different. In such cases, Fannie Mae's legal personnel has to be consulted and solutions coordinated, before you close.

Experience tells the closing lawyer where there is flexibility and where there is none. For intance, there is no flexibility in making creative revisions to the preprinted mortgage forms; there is some room in the section for the opinions of counsel.

One of the blessings and curses of working with Fannie Mae multifamily programs is that everyone on the house legal staff knows what the staff is doing and what it wants. The staff is extremely professional and by and large accessible and helpful. Closing the Fannie Mae loan should never be viewed as an adversarial process, which is rather unique to many lawyers, particularly those with aggressive commercial loan transaction mind-sets. A corollary to the transaction being nonadversarial is that you cannot pummel Fannie Mae into submission. Indeed, the converse is more likely.

The point is that there are knowledgeable people at Fannie Mae with whom you work. They are a resource that should be used in resolving issues. Fannie Mae's legal staff also recognizes the tight time constraints endemic to a DUS closing. This is of major concern to a lawyer charged with getting the loan closed as fast as possible.

How to do it

In a sense, closing a DUS loan is a lot like putting together a jigsaw puzzle: the pieces have to be kept together; they have to be put in the right places; you can't cut off corners to make the pieces fit; and the exercise is fruitless if all the pieces are not there.

Like a puzzle, a DUS closing requires both an obsessive attention to real estate lending and Fannie Mae required detail, and an overall sense of perspective as to what the end-product must be - a loan delivery package that Fannie Mae can purchase. There is no allowance for sloppiness.

From the pure legal standpoint, the basic documents are the note, the addendum to the note, the mortgage/deed of trust, the mortgage assignment to Fannie Mae, the title insurance policy, financing statements, assignments of financing statements to Fannie Mae, the estoppel certificate, escrow agreements, opinions of borrower's and lender's counsel, letters of credit, assignment of leases, rents and profits (if applicable) and the assignment of same to Fannie Mae.

Complications arise if there are variations on the basic theme, such as cases involving leasehold estates or New York-style documentation with a consolidation agreement and the additional papers needed to support this approach.

In any event, counsel must observe one immutable rule in addressing a number of issues under any situation - no modifications to forms or published guidelines are allowed without Fannie Mae's prior approval.

Notes and mortgages

With respect to notes and mortgages, Fannie Mae/Freddie Mac uniform forms be used. Separate forms are published for each jurisdiction. Lender's counsel must be sure that not only the right form is used but that the latest version is used. Lender's counsel must also incorporate whatever special variations may be required by regional counsel in the standard forms, such as special modifications required for Washington State.

The note is a straightforward document with fill-in-the-blank lines. Nonetheless, Fannie Mae requires that certain paragraphs be marked out and the deletions initialed. The paragraph dealing with prepayments (covered in the addendum) is deleted as well as the final paragraph dealing with the obligations to pay interest only prior to commencement of amortization. Fannie Mae is also explicit about the language required for the lender's endorsement of the note to Fannie Mae.

The uniform security instrument (mortgage), likewise, is a fairly straightforward form document. The bulk of the form is comprised of uniform covenants, which means that the same language is contained in all security instruments used nationwide. Jurisdictional variations are seen in the introductory paragraphs and in the final "non-uniform covenants" dealing with such local matters as acceleration and foreclosure procedures applicable to the particular jurisdiction.

Also, as is the case in the note, certain paragraphs should be deleted with the deletions initialed. These marked deletions relate to such matters as construction loan provisions and leasehold estates, if dealing with a straight fee simple estate.

Only Fannie Mae's own addendum to the note and rider to the mortgage can be used. The Addendum to the note deals with such matters as prepayments, yield maintenance and exculpation. The term of the yield maintenance is a function of the note's balloon date. For example, if the note has a balloon at ten years, the yield maintenance period is seven years. How to fill in the blanks involved in calculating the prepayment premium is found in Fannie Mae's commitment to the lender. We will leave an explanation of the formula included in the addendum for calculating the prepayment premium to other heads. Suffice it to say, unless masochistic, the borrower will not want to prepay.

Fannie Mae requires one addition to the form instrument. Language must be added to the lender letter indicating that no prepayment penalty is due for full prepayments made within 90 days of the maturity date.

The rider to the multifamily instrument, in many respects, parallels the language in the addendum to the note. In other areas, it is uniquely its own, treating such matters as the monthly payment to the replacement reserves (gleaned from the underwriter), environmental hazards, hazard insurance and restoration of property and policy regarding property transfers and assumption.

Title policy and survey

One particularly sensitive area is in complying with Fannie Mae's requirements regarding the title policy. As a practical matter, compliance frequently involves being tough with the title company in the interest of meeting Fannie Mae standards. While Fannie Mae's requirements, as set out in the guide, are fairly extensive, several points should be emphasized: * The title insurer must be big

enough (check with Fannie Mae if

there are any doubts); * The amount of insurance must be

equal to the amount of the loan; * Fannie Mae, its successors and assigns

must be named as insured,

not "Lender and Fannie Mae as

their interest may appear" or some

such; * The ALTA form must be used (not,

for example, the New York Board of

Title Underwriters form) with few

exceptions, (e.g., Texas); * The date must be the date of assignment

to Fannie Mae; * No survey exceptions are allowed

as a rule, or, if there are some, affirmative

insurance is required against

loss or damage from the excepted

facts; * No exceptions are allowed for taxes

and other lienable items, except if

marked "not yet due and payable;" * Any other exceptions (e.g., easements,

rights of way or covenants,

conditions and restrictions) must be

insured over; * In all cases, an environmental protection

lien endorsement is


The bottom line, insofar as the title policy is concerned, is that a complete mortgagee's policy must be delivered, with all exceptions addressed and all recording information filled in. Procedurally, we have found it best to close with a complete pro forma policy minus the recording data. This information is plugged into the final policy and should be available within one day of closing.

As is the case with title, Fannie Mae is explicit in terms of survey requirements. For example, a survey acceptable to Fannie Mae must be no more than 90-days old and must be certified to the lender, to Fannie Mae and to the title insurance company. Additionally, a surveyor's certificate (Fannie Mae provides a form) must be provided covering a number of points including conformance of the survey to national standards.


In terms of delivery of recorded loan instruments (e.g., mortgage, rider to mortgage, UCC financing statements, assignment of leases, rents and profits and the assignments of these documents to Fannie Mae), the general rule of thumb is to give Fannie Mae the maximum available in the jurisdiction. For instance, in some North Carolina counties, recorded originals are immediately available; in other places, such as upstate New York, recorded stamped copies are immediately available; in New York City, you have to deliver with title company certified copies. Fannie Mae does recognize these jurisdictional variations in accepting loans for purchase. You cannot, in any event, simply deliver with signed copies.

UCC-1 financing statements and assignments to Fannie Mae remain a fixture in all government-related loan programs, including Fannie Mae's. As a rule, these are filed both with the county where the project is located and with the state (in some places, custom or practice dictates three filings). Evidence of a UCC-1 filing with the state frequently represents the one issue between full purchase of the loan and not. Lender's counsel should use all services and mechanisms available to provide evidence of filed UCC-1s.

The Fannie Mae DUS program requires the establishment of escrows for such items as an achievement escrows (wherein a lender can make a loan larger than a "base loan" if the economics of the project meet certain underwriting standards), completion/repair escrows (to cover moderate rehabilitation, repairs on an existing project or, in a new project, minor punch list items) or operating deficit escrows (held until sustaining occupancy is reached).

Unlike many of the other closing instruments, Fannie Mae currently has no official forms to document responsibilities under these various escrows. Fannie Mae does, however, within the text of the DUS guidelines mandate that certain issues be addressed in the escrow agreements. Thus, it falls upon lender's counsel to develop escrow agreements that both incorporate Fannie Mae's requirements and provide sufficient detail to control the administration of these funds so that no questions arise in the future.

While the forms of the agreements are left to the lender's counsel, the acceptable form of the letter of credit collateralizing escrow agreements is not. Fannie Mae has its own required form of irrevocable letter of credit. This form, notwithstanding bank policies, bank letter of credit department practice, or bank counsel's preference, must be issued in the precise Fannie Mae form without deviation. Any variations on the basic form must be cleared by Fannie Mae regional counsel in advance. And, although as compared with GNMA, for instance, Fannie Mae tends to be flexible, the best practice is to resolve letter of credit issues in advance by requiring a pro forma letter of credit for review before closing. It is also a good idea for the delivery package to include documents showing that the rating of the issuing bank complies with Fannie Mae's standards.

Fannie Mae provides forms of opinion for both counsel to the borrower and counsel to the lender. These opinions are required elements in the delivery package.

The problem with these opinions is in getting the precise form of opinion from counsel to the borrower. Experience frequently shows that the larger the firm representing the borrower, the less the opinion offered and the more suffering to be endured. It is not a favorable omen to hear that a form of opinion has been sent to the firm's opinions has been sent to the firm's opinions committee for deliberation. In some cases, in fact, we have seen several firms involved, each willing to render various parts of the opinions with the expectation that the sum of the parts will result in a whole made up of "best knowledge."

In any event, before closing, the closing attorney should obtain advance draft copies of the opinion(s) to be rendered. If there are any deviations (substantive or non-substantive) from the form, they must be cleared by regional Fannie Mae counsel and possibly the Washington, D.C. office.

Fannie Mae's DUS program is a good product line for lender clients. It has been intelligently conceived and is intelligently and responsively administered. The program is likely to enjoy a long life. Therefore, it is very important that lenders' counsel become knowledgeable and adept in seeing this process through. Playing by the rules is the name of the game with this program so that counsel can help the lending institution come out as a profitable winner.

Robert B. Joselow is a partner in the Washington, D.C. law firm of Katz & Joselow.
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Title Annotation:Fannie Mae's delegated underwriting and servicing program
Author:Joselow, Robert B.
Publication:Mortgage Banking
Date:Jul 1, 1990
Previous Article:HUD's mystery program.
Next Article:Lending liability legislation.

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