Change Can Be a Good Thing

For multifamily investors, things couldn’t get much better.  Demand for rental units is high, rents are up, and interest rates are historically low.  And the GSEs are more competitive than ever.

But some borrowers hesitate to use a GSE execution because they are leery of the new Fannie and Freddie loan documents and what they require of borrowers. We’ve found that the more you learn about the new documents, the more you realize that they’re very much like the old docs—only better. 

Change Was Long Overdue

At Beech Street, we have some insight into why the Fannie Mae loan documents were changed and how they changed.  Before she joined us, Marsha Baumgarner, our executive vice president and chief legal officer, was vice president and deputy general counsel at Fannie Mae and managed the team that developed the new Fannie Mae loan documents.

When she started work on the project, Fannie Mae’s loan documents hadn’t had an overhaul since the late 1990s.  Over the years the loan documents morphed into a multitude of note forms and modifications to the mortgage form to deal with all the new products.  This expansion created a burden for borrowers and impeded Fannie Mae’s ability to respond promptly to market changes. 

Simplify. Simplify. Simplify.

Fannie Mae’s approach was to change the form not the substance of the documents, making them easier to work with for everyone involved. Today, the core document is the new loan agreement.  It contains many of the same basic provisions found in the old loan documents, but now those provisions are consolidated into a single comprehensive document.  And rather than over 14 different note forms, today there is only one.

At the same time, Fannie Mae made a number of improvements.  The transfer provisions were rewritten so that they are clearer, while still providing the borrower with the same fundamental transfer rights as before.  To the extent Fannie Mae regularly approved a change, many of those changes were incorporated in the new loan documents.  Borrowers don’t have to ask for them time and time again, and that simplifies the closing process.

And both Fannie Mae and Freddie Mac made crucial changes that align their documents with the commercial real estate finance industry and protect the borrower. Freddie Mac too has started using a loan agreement as the core of its new document set.  In the past, the GSEs had always used the mortgage as the primary governing document, but since a mortgage is a matter of public record, anyone could access the business terms.  In the new Fannie Mae and Freddie Mac loan documents, the loan agreement is the controlling document—and it remains private.

In other words, the new GSE loan documents do a better job lowering your production costs, minimizing your recording costs, protecting your estate, and safeguarding your privacy. 

But as Marsha Baumgarner points out, they also require borrowers to take a more selective approach to asking for modifications.  Because Fannie Mae and Freddie Mac have recently taken a close look at their loan documents and analyzed what they believe are important provisions, they are more reluctant to make selective changes.  Further, both GSEs primary execution is securitization, where conformance is important.  As a result, borrowers will have more success in limiting change requests and prioritizing the three to five changes that are most important to them.  Borrowers should focus their efforts on those issues most essential to their business and to successfully operate their property. 

At Beech Street we can help you achieve the changes that will make the new documents work for you.  Because of our unique insight, we can ease your navigation through the “total confusion” and set the stage for you to get the deal you need to make your company, your business, thrive.