Date: October 25, 2006
To: Fannie Mae DUSTM Lenders
From: Randy Berdine, Vice President for HCD Credit Policy
Subject: Lender Memo 06-08 -- New Underwriting Due Diligence Requirements for
Property and Borrower/Key Principal Analysis and Revised Form 4243
Announcing the streamlining of certain underwriting requirements for:
Property specific underwriting analysis and documentation,
Key Principal/Borrower specific underwriting analysis and
Announcing revised Certification to Project Rent Roll and Instructions
The purpose of this Lender Memo is to announce the streamlining of several
requirements associated with underwriting loans to be sold to Fannie Mae. These new
procedures were developed in concert with and based on feedback received from our
DUS Lenders in our continuing effort to improve DUS process efficiency.
The changes below address revisions to existing DUS Guide requirements. The
relevant DUS Guide sections are indicated below. Underwriting due diligence items not
discussed in this Lender Memo remain unchanged.
The streamlined underwriting analysis and documentation requirements are approved
for use with all loans committed with Fannie Mae on and after October 25, 2006.
The revised Form 4243 is approved for use with all loans committed on or after October
25, 2006. The use of the revised Form 4243 is mandatory after December 1, 2006.
Loan Underwriting: The modified requirements for the underwriting analysis and
documentation apply to all new origination or refinancing of conventional DUS loans,
fixed-rate and adjustable-rate cash or MBS transactions, except:
o Tier II Loans equal to or greater than $25 million
o Tier III Loans equal to or greater than $35 million
o Tier IV loans equal to or greater than $50 million
Loans in the Multifamily Affordable Channel (including Section 8, forwards
and bond credit enhancements)
Dedicated Student Housing
DUS Plus transactions
Manufactured Housing Communities as described in the DUS Guide Part
III, Chapter 15
Loans that include preferred equity, subordinate, mezzanine or other
financing from an entity affiliated with the originating Lender
DMBS and Structured ARMs
Use of the streamlined requirements is determined by Lender. The Lender must utilize
prudent business judgment in determining whether it is appropriate to utilize these
streamlined requirements, or whether more detailed analyses should be utilized.
Certification to Project Rent Roll: The revised Certification to the Project Rent Roll and
Instructions (Form 4243) applies to all new DUS loans.
I. Property Specific Items
A. Management Fee (DUS Guide, Chapter 4, Section 403.05)
This Section states that if the Lender desires to underwrite a management
fee of between 3.5% and 3%, then the Lender is required to obtain letters
from three local management firms confirming that such management
firms would be willing to manage a property for a fee not less than the
underwritten management fee. Lenders are now permitted to waive
obtaining such letters when underwriting a management fee between
3.5% and 3%. In the DUS Underwriter’s Narrative submitted as part of
Folder III of the Mortgage Loan Delivery Package submitted via Multidoc
Express, the Lender must justify usage of management fees between
3.5% and 3% based on the requirements of Section 403.05,
subparagraphs (i) and (ii) under the heading "Management: All off-site
B. Termite Inspection Report (DUS Guide Part III, Chapter 3, Section 304)
The DUS Guide currently requires the Lender to provide a termite
inspection report or a termite bond or other evidence of adequate
coverage. The Lender is not required to submit a termite inspection report
or bond if the project construction is steel or concrete and the Lender
provides documentation of such fact. If the project construction is not
steel or concrete, then in lieu of a termite report or bond the Lender must
submit one of the following:
1. A letter from the current pest control company providing regular
service to the Property, stating that the Property has been regularly
treated to prevent termite and other wood boring insect infestation
and, to its knowledge, there is no current infestation, or
2. A letter from a qualified engineer (which engineer must be the
same engineer performing the physical needs assessment)
indicating that there is no evidence of termite or wood boring insect
infestation. In order to be a "qualified" engineer, such engineer
must have completed termite inspection training and certification
and must provide evidence of such.
C. Funding Schedules for Replacement Reserve Agreement (DUS Guide
Part III, Chapter 3, Section 310)
This section is modified to permit the Lender to allow negative balances in
funding schedules to be inserted in the Replacement Reserve Agreement.
The Lender must provide sufficient justification in the Underwriter’s
Narrative for the negative balances. Scheduled funding in years
subsequent to the negative balances, however, must provide sufficient
funds to eliminate the negative balances and cover all anticipated
Replacement Reserve expenses for the entire term of the loan.
D. Survey Shelf Life (DUS Guide Part III, Chapter 1, Section 113)
The DUS Guide currently requires the Lender to obtain an acceptable as-
built survey of the Property for review as part of the Lender's underwriting
analysis. Lender is now permitted to accept a survey dated more than 90
days prior to the date the Security Instrument is recorded subject to the
1. any such survey may not be dated more than one year prior to the
date the Security Instrument is recorded,
2. the Borrower certifies that there have been no material changes to
the Property since the date of the survey, and
3. all requirements for waiving an as-built survey in the states of
Arizona, California, Nevada, Oregon, and Washington as set forth
in the DUS Guide in Part III, Chapter 1, Section 113 must be met.
II. Borrower/Key Principal Items
A. Financial Statement Shelf Life (DUS Guide Part III, Chapter 6, Section
605.01, Subparagraph a).
Audited or unaudited statements continue to be acceptable. For either
audited or unaudited statements, the following will apply:
Audited or unaudited financial statements may be up to one year
old on the application date, but must be accompanied by a
statement of no adverse change that is no more than 90 days old
at Commitment. No waiver beyond the one year requirement will be
B. Federal Income Tax Returns (DUS Guide Part III, Chapter 6, Section
605.01, Subparagraph b)
Borrower Federal Income Tax Returns: The Lender can choose to
eliminate the requirement to receive Federal income tax returns for the
Borrower when the Borrower provides unaudited financial statements
certified by a senior officer authorized to sign tax returns for the Borrower.
The certification must indicate that the financial statement is true, correct
and complete in all substantial respects and was prepared by a person
competent in the preparation of financial statements. If financial
statements, certified as required above, are not provided by the Borrower,
then the Borrower's Federal income tax returns must be obtained as
provided in the DUS Guide.
Key Principal Federal Income Tax Returns: The Lender can choose to
eliminate the requirements to receive Federal income tax returns for each
Key Principal for all Tier 1 transactions and for all single-asset waivers
(see DUS Guide Part III, Chapter 6, Section 602.02) when each Key
Principal provides unaudited financial statements containing the same
certification as provided above for the Borrower and signed by a senior
officer authorized to sign tax returns for the Key Principal. If certified
financial statements are not provided by each Key Principal, then each
Key Principal must provide Federal income tax returns as required by the
DUS Guide. Federal income tax returns continue to not be required for
Key Principals in Tier 2, Tier 3 and Tier 4 transactions unless the Lender
determines that such additional verification is warranted.
C. Bank References; Mortgage Payment History (DUS Guide Part III, Section
The Lender, subject to its prudent business judgment, can:
eliminate the requirement of contacting all bank references
provided by the Borrower and its Key Principals
eliminate the requirement to sample mortgage payment histories
for any non-single-asset Borrower and all Key Principals.
If the Property is being refinanced, the requirement to obtain a certified
two-year record of the Borrower's mortgage payment history remains.
III. Certification to Project Rent Roll and Instructions (DUS Guide, Form 4243)
A. The sections listed below were removed from page 1 and page 2 of the
Form 4243. The content of these sections are now incorporated into the
requirements for Exhibit A of the Form 4243, the project rent roll.
Section A. Occupancy
Section B. Monthly Residential Rental Unit Income
Section C. Non-Revenue Units, Concessions and Delinquencies
Section D. Rent Concessions
B. Instructions for the Form 4243 and its Exhibit A were modified to include:
enhanced request for breakout of subsidy, concession and
employee, office and model unit monthly rent payments
enhanced request for utility confirmation
enhanced instructions for calculating subsidies and concessions in
unit mix data
C. The use of the new Form 4243 is mandatory after December 1, 2006.
The updated Form 4243, including instructions, will be posted to
efanniemae.com/multifamily on or before the above date. It is also
attached to this Memo.
D. Fannie Mae will provide training on the revised Form 4243, as well as on
guidance delineating business rules for entering various property types
into the eRents application, via an internet training session to be held in
November. Further information and scheduling will be provided.
For further information, please contact Randy Berdine, Vice President for HCD Credit
Policy at (301) 204-8043, or via e-mail at firstname.lastname@example.org.