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Date:         April 7, 2005

To:           DUSTM Lenders

From:         Richard Lawch, Senior Vice President for Multifamily

Subject:      Lender Memo 05-02: Underwriting Modifications to DUS DMBS to
              implement the Stressed Refinance Test

    This Lender Memo revises and replaces Lender Memo 05-01, issued on
     March 15, 2005, with the following modifications:
        1) Elimination of the reporting requirement of updated property information by
           email to Fannie Mae.
        2) Revisions to terminology in the DUS DMBS Term Sheet regarding
           amortization, discounted proceeds, underwriting, and prepayment premium.

    This Lender Memo also restates and replaces Lender Memo 04-03, issued
     on February 13, 2004 in order to implement the Stressed Refinance Test
     underwriting requirements for the DUS DMBS product.
    The 103% of the comparable Fixed Rate proceeds limitation previously used
     to size DUS DMBS transactions is eliminated from the Base Loan Amount
    The Base Loan Amount calculation for DUS DMBS transactions will be
     subject to the Stressed Refinance Test.
    DUS DMBS transactions may use the Alternative SRT and the Lender
     Delegated Waiver to increase the Loan Amount of transactions constrained
     by the SRT.
    This Lender Memo applies only to mortgages collateralizing DUS DMBS.

The purpose of this Lender Memo is to implement the Stressed Refinance Test
underwriting requirements for the DUS DMBS product. This Lender Memo supersedes
in its entirety Lender Memo 04-03, issued on February 13, 2004. This Lender Memo
also restates and replaces Lender Memo 05-01 to eliminate the reporting requirement
of updated property information by email to Fannie Mae and to revise terminology in the
DUS DMBS Term Sheet regarding amortization, discounted proceeds, underwriting,
and prepayment premium.

Underwriting and Processing Requirements for Single Asset DMBS Transactions

The underwriting terms set forth below shall be used to underwrite DUS transactions
that are funded through the issuance of a Discount MBS (“DMBS”) security.

Minimum Loan Size:          $25 Million for a single asset.

                            $50 Million for a group of assets owned by a common
                            sponsor, backing a single DMBS. Such transactions require
                            additional documentation, such as a Master Agreement.
                            Phased loan deliveries must reach or exceed $50 Million
                            minimum within 12 months from initial closing.

Loan Term:                  5, 7 or 10 Year terms


The loan must be underwritten using the standard DUS underwriting requirements set
forth in the DUS Guide and the Variable Underwriting Rate (“Variable Underwriting
Rate”) described below. The variable rate amount shall be sized based on the rate in
effect on the date the loan is rate-locked (the variable rate is rate-locked on the date the
bid for the interest rate cap is accepted).

Variable Underwriting Rate:

The Variable Underwriting Rate shall be the rate that is the sum of (i) 3 Month LIBOR,
plus (ii) 300 basis points, plus (iii) the variable rate Guaranty and Servicing Fees, plus
(iv) if a cap for the full term of the DMBS is not purchased at closing, a cap cost factor
equal to 1/5 of the initial or estimated cap cost for the remaining loan term, plus the
appropriate amortization factor (see below).


The variable rate underwriting calculation shall include the appropriate 25 or 30-year
amortization factor based on criteria set forth in the DUS Guide. Tier 3 and Tier 4
Loans may be Interest Only Loans; however, such loans shall be underwritten with the
required amortization factor.

Loan Proceeds:

The DUS DMBS Mortgage Base Loan Amount is the lowest of:

       1.     The amount calculated using the applicable minimum Debt Service
              Coverage Ratio (set forth below) at the Variable Underwriting Rate;

       2.     The amount calculated using the applicable maximum Loan-to-Value Ratio
              (set forth below);

       3.     The amount based on the FHA Section 207(c)(3) limits (see Part III, Section
              402 of the DUS Guide);

       4.     the amount calculated as a result of the Stressed Refinance Test (“SRT”)
              set forth below; or

       5.     The amount determined to be appropriate by the Lender.

The minimum Debt Service Coverage and maximum Loan-to-Value Ratios for Base
Loans for each of the Tiers that are allowed under DUS/DMBS are as follows:

                                      Minimum                     Maximum
       Pricing Tier             Debt Service Coverage*            Loan-to-Value**
       Tier 2                           100%                        75.0%
       Tier 3                           110%                        65.0%
       Tier 4                           130%                        55.0%

 *Based on the Variable Underwriting Rate of the Mortgage.
**See Part III, Section 403.01 of the DUS Guide for further limitations.

Stressed Refinance Test:

The Lender will be required to test the Base Loan Amount for all DUS DMBS Loans
utilizing a Stressed Refinance Test (“SRT”). This will be accomplished by calculating a
DMBS SRT Loan Amount as outlined and defined below. The SRT is a benchmark
analysis to test the stressed refinance potential of the Loan at breakeven Debt Service
Coverage and at a specific refinance interest rate. The SRT must be performed for all
DUS DMBS Loans and documented in the Underwriting Narrative. The following
factors must be used:

              SRT Interest Rate:                  9.0%

              SRT Debt Service
              Coverage Ratio:                     100%

              SRT Net Operating Income:           In most cases, the underwritten Net
                                                  Operating Income (see note below).

              DMBS SRT Balance:                   The     expected  amortized      unpaid
                                                  principal balance of the Base Loan
                                                  Amount at its maturity calculated using

                                               the applicable Fixed Note Rate as
                                               described below in “Monthly Payments”.

The highest permitted Base Loan Amount that results in a DMBS SRT Balance that can
support the SRT Debt Service Coverage Ratio utilizing the SRT Net Operating Income
and the SRT Interest Rate (plus 25 or 30 year amortization determined in accordance
with Part III, Chapter 4, Section 403 of this Guide) is the DMBS SRT Loan Amount.
Therefore, if the SRT Loan Amount is greater than or equal to the Base Loan Amount
calculated using the DSC and LTV Ratio calculations described above, the Loan
passes the SRT. If the SRT Loan Amount is less than the Base Loan Amount
calculated using the DSC and LTV Ratio calculations described above, the DMBS SRT
Loan Amount is the highest permitted Base Loan Amount. See Alternative Stressed
Refinance Test for possible exceptions.

The SRT was developed for properties with normalized vacancy levels that are
representative of historic and expected vacancy levels, and projected future Net
Operating Income growth increases of 1.5% per annum. If individual circumstances
and facts (e.g. lower projected growth in Underwriting Net Operating Income due to
phase-in of real estate taxes, or market factors, or commercial lease rollover that
significantly impacts net operating income) affecting the Loan and Property indicate that
a more conservative estimate should be used in the SRT, the Lender should 1)
consider utilizing a SRT Net Operating Income that is lower than the underwritten Net
Operating Income based upon its analysis of year-to-year Net Operating Income over
the term, or 2) develop and document a more detailed year-by–year analysis to
evaluate the annual DSC Ratio over the term, in a detailed refinance exit analysis.

Fannie Mae recognizes that the SRT may not be appropriate for all properties, markets,
and loan terms. A Lender may determine that the SRT does not reflect the specific
circumstances that may result in increased refinance potential for a property over the
projected term of the Loan. In such event, the Lender may develop an Alternative
Stressed Refinance Test as described below in “Alternative Stressed Refinance Test”.

Since single-asset DMBS transactions are currently limited to Large Loans, Fannie Mae
also requires a more detailed exit analysis showing yearly income and expense
projections over the loan term.

Example of the SRT Calculation


             Tier 2 Loan
             Term                                     =10 years
             Amortization Period                      =30 years
             Underwriting Net Operating Income        =$2,000,000
             Underwriting Value                       =$33,333,334
             Minimum Debt Service Coverage            =100%

              Maximum LTV                                 =75.0%
              Variable Underwriting Rate                  =6.6375%
              Variable Rate Constant                      =7.6937%
              SRT Interest Rate                           =9%
              SRT Constant                                =9.6555%
              Fixed Note Rate                             =5.50%
              Monthly Fixed Note Rate                     =0.4583% (5.50%/12)

Base Loan Amount DSC             =$25,995,295 ($2,000,000/1.00/7.6937%)
Base Loan Amount LTV             =$25,000,000 ($33,333,334x75%)
Lower of Above                   =$25,000,000

Step 1: Calculate the NOI available for Debt Service Coverage at Maturity of the Loan
$2,000,000/1.0 = $2,000,000

Step 2: Calculate the maximum DMBS SRT Balance
$2,000,000/9.6555% = $20,713,582

Step 3: Calculate the DMBS SRT Loan Amount
The algebraic equation for calculating the DMBS SRT Loan Amount is as follows:

DMBS SRT Balance times ((1 + monthly Fixed Note Rate) Months Amortization minus 1)

divided by
                                Months Amortization
(1 + monthly Fixed Note Rate)                         minus (1 + monthly Fixed Note Rate)
      Months Loan Term

$20,713,583 x (((1 + .004583)^360)-1) / (((1+.004583)^360) – ((1+.004583)^120))=
$20,713,583 x (5.186768-1) / (5.186768 – 1.731007)=
$86,722,967/3.455761 =

Therefore, the DMBS SRT Loan Amount of $25,095,186 exceeds $25,000,000, the
Base Loan Amount derived from the DSC and LTV tests, and the Base Loan Amount of
$25,000,000 passes the SRT.

Note: The DMBS SRT Loan Amount may also be calculated through the use of an
amortization table and/or spreadsheet formulas.

Alternative Stressed Refinance Test:


      (i)     the Base Loan Amount is not limited by the applicable LTV and DSC
              Ratios described above, and

      (ii)    the DMBS SRT Loan Amount is limiting the Base Loan Amount
              calculation, and
      (iii)   the Lender can reasonably support a projected future Net Operating
              Income growth rate in excess of the base line 1.5% per annum growth


       the Lender may develop an Alternative Stressed Refinance Test (“Alternative

In such event, the Lender may be able to use the results of the Alternative SRT to
increase the DMBS SRT Loan Amount up to an amount that does not exceed the
required Tier DSC and LTV Ratios used in the Base Loan Amount calculation.

Fannie Mae will generally follow the SRT requirements to pre-review and approve
DUS/DMBS transactions and Lenders may use an Alternative SRT in their initial Large
Loan submission. Fannie Mae will consider adjustments to the SRT requirements in
appropriate circumstances based upon specific analysis of risks and mitigating factors.
Lenders proposing adjustments to the SRT requirements must contact their Large Loan

Unless an adjustment is approved in writing by Fannie Mae, the Lender must utilize the
SRT Interest Rate (9.0%) in the Alternative SRT. The Lender is only permitted to
adjust the Net Operating Income growth assumption in the Alternative SRT to produce
an Alternative SRT Net Operating Income. The Lender must provide justification for the
Net Operating Income adjustment in excess of the 1.5% per annum base line growth
rate in the Underwriting Narrative supported by specific, reliable evidence. In addition
the Lender must provide a detailed analysis showing how the increased Alternative
SRT Net Operating Income was derived. See Part III, Chapter 4, Section 403.08 of the
DUS Guide for additional guidance and requirements regarding the Alternative SRT

The Lender must exercise prudent business judgment when electing to use the
Alternative SRT. The Lender must provide, in the underwriting narrative, a detailed,
written justification of the specific circumstances that support the Alternative SRT.
Justification should include a specific analysis of risk and mitigating factors, including
property characteristics, market conditions, and any consultation with third parties or
Fannie Mae personnel.

       Fannie Mae will review and approve the Lender’s Alternative SRT submission.
Failure to adequately justify the use of an Alternative SRT may result in denial of the
Lender’s Loan Sizing Waiver or Large Loan submission. In order to ensure that the
Alternative SRT is properly identified, Lenders must enter the Alternative SRT in the
Multifamily Deal Management System as a Loan Sizing Waiver. This submission must

indicate the effect that the Alternative SRT has had on Loan proceeds.         Delegated
Waivers are not permitted on DMBS transactions.

Interest Rate Cap:

An interest rate cap must be purchased from an approved counterparty. The cap must
(i) obligate the counterparty to make floating rate payments using 3 Month LIBOR as
the floating rate index, (ii) have a minimum term equal to five years, and (iii) have a
strike rate that after adding the Guaranty Fee and Servicing Fee, the cap cost factor (if
applicable) and amortization (if applicable) produces the Tier required Variable Rate
DSCR of the loan (1.00, 1.10 or 1.30).

If a Cap is not purchased with a term equal to the term of the loan, a cash reserve for
the purchase of the next Cap shall be established over the initial sixty-month term of the
loan. The Cap reserve shall be sized at 125% of the current estimated cost of a Cap
with the required strike rate and a term equal to the remaining term of the loan. The
reserve account shall be funded with each monthly mortgage payment and the monthly
reserve payments for the first twelve-month period shall be 125% of the estimated Cap
cost divided by 60 months. The sufficiency of this escrow shall be evaluated at the end
of each twelve-month period and increased as necessary to ensure that sufficient funds
will be available for the purchase of the next cap. No adjustment shall be made to the
monthly reserve payment if Cap costs remain the same or have decreased.

Monthly Payments:

Monthly payments are required on all DUS DMBS transactions. The monthly payment
shall include the following components:

   (i)     a discount deposit equal to 1/3 of the discount on the current DMBS security,

   (ii)    the scheduled amortization payment determined at the time the loan is
           originated based on the applicable amortization term using a 30/360 accrual
           method; the scheduled amortization payment shall be the principal
           component of a level debt service schedule using the Note Rate of the then-
           current DUS Fixed Rate Loan with the same Tier and maturity as the interest

   (iii)   the Guaranty Fee plus the Servicing Fee, and

   (iv)    if applicable, the Cap cost reserve.

Accumulated amortization will be used to reduce the outstanding principal amount of
the DMBS rounded down to the nearest thousand at the time of each rollover of the
security. The Guaranty Fee is to be passed through to Fannie Mae on a monthly basis.
The discount and amortization amounts are to be remitted to Fannie Mae on a quarterly
basis at the time the DMBS rolls over or matures.

Conversion To Fixed Rate:

Loans can convert to a 7-Year Fixed Rate Loan with 5 or 6.5 years of yield
maintenance, or a 10-Year Fixed Rate Loan with 7 or 9.5 years of yield maintenance.
Loans can convert to fixed rate loans only on the rollover date of the outstanding
DMBS. The Loan must meet the minimum Tier required DSCR at the fixed rate and
meet the legal documentation requirements. If the Loan was Interest Only it must start
amortizing, based on the converted fixed rate, at conversion.


Fannie Mae’s Guaranty Fee will be the rate set forth in the DUS Pricing Memo.


Loans may be prepaid on any DMBS rollover date, with two prepayment options, each
due at the time of prepayment.

      Fee Maintenance, which is the greater of the present value of the Guaranty Fee
       and Servicing Fee or 1%. The Fee Maintenance Period is through the end of the
       5th loan year for a 5 or 7 Year Term or through the end of the 7th loan year for a
       10 Year Term (with 1% payable years 8 through 10) , or

      1% throughout the life of the loan. Please refer to the DUS Pricing Memo for
       pricing associated with this option.

      Prepayment notification must be received by at least
       10 business days prior to the prepayment or 30 days prior for payoffs by

Election of the prepayment option must be made at the initial closing of the loan.

No Fee Maintenance is due for a conversion or for prepayments that occur within 3
months prior to the end of the Loan Term.

Term of DMBS:

Three-month term only.

Payment of Discount:

The discount amount necessary to pay off the maturing DMBS will be drawn from the
monthly deposits collected by the Lender based on the discount of the maturing DMBS.
If the discount of the rollover DMBS is greater than the amount of deposit there will be a
shortage. The Lender will determine if there is a shortage at the time the discount on

the rollover security is locked. If this occurs the borrower must pay the amount of the
shortage to the Lender 2 business days before the maturity of current DMBS. If the
discount of the rollover DMBS is less than the amount of the discount deposit, the
surplus shall be taken into account in the Lender’s calculation of the new deposit
amount. Fannie Mae will draft the necessary discount amount and amortization
payments (if any) from the Lender on the rollover date of the DMBS. The sum of the
discount, the amortization payment and the proceeds received from the new investor
must equal the face amount of the maturing DMBS.

Underwriting Process Changes:

      Single Asset DMBS loans will now be registered in Deal Management.
      Waivers must be submitted in Deal Management.

Single-Asset DMBS Loans will be pre-reviewed subject to the new Large Loan definition
contained in Part III, Chapter 1, Section 102.01 and Section 102.03 of the DUS Guide,
as per Lender Memo 03-06 (December 31, 2003).

As a reminder, Loans, that are equal or greater than the following amounts will be
subject to pre-review by the Large Loan Group.

       $25 million for Tier 2 Loans;
       $35 million for Tier 3 Loans;
       $50 million for Tier 4 Loans.

Expanded Delegation will also be available for the following Loans:

       From $25 million to less than $35 million for Tier 3 Loans.
       From $35 million to less than $50 million for Tier 4 Loans.

Waivers will be reviewed and approved by the Large Loan representative.


Until the Multifamily Structured Facility Management System (“MSFMS”)
accommodates commitment requests, Lenders may request commitments to issue
DMBS on new loans (i.e., not rollovers) by contacting Abby T. Nathans (301-204-8067)
in Fannie Mae’s Legal Division at least eight business days prior to settlement, even if
pricing information is not yet available.


Collateral for DUS DMBS is delivered on MSFMS at least 7 business days prior to
settlement. Securities are delivered via MSFMS and must be submitted at least 3
business days prior to settlement.


DDF submission in the same manner as other MBS deliveries.


Lender’s counsel prepares all documentation, employing standard DUS DMBS forms,
including Fannie Mae’s approved form of rate cap agreement. Fannie Mae Regional
Counsel will provide forms on request. Fannie Mae Regional Counsel must approve
any variation from standard documentation for loan or interest rate cap.


DMBS Trades:

At the time of each DMBS trade (initial and rollovers) Lenders must report the following

        UPB
        Date of trade (i.e., date on which discount is set)
        Issue date of security
        Term of security (in days)
        Delivery date of security
        Identity of bidders with bids (as a percentage of par)
        Winning bidder

This information should be provided by e-mail to Anita Verghese at If you wish to access periodic reports of all Fannie
Mae DMBS trades, request this by e-mail to Anita Verghese.

Effective Date:        These changes are effective upon issuance of this memorandum.

General Information:    For additional information or answers to questions regarding
DMBS transactions, please contact Jon Siegel at (301) 204-8026 or

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                                  Lender Memos

All Lenders Memos except those listed below have been superseded by previous Guide
Updates. The Lender Memos listed below will be incorporated into the DUS SM Guide as
the applicable sections are updated.

• 97-12 (12/08/97) Refinance Enhancements

• 98-12 (06/02/98) New Choice Loan Refinance Guidelines; Structured DUS and
                   Rapid Refi Changes (ESP)

• 98-17 (07/23/98) Single Asset Seniors Housing Product Line

• 98-24 (11/17/98) Loan Limits

• 99-05 (08/24/99) Live Pricing   for   Cash     Commitments/MCODES     Commitment

• 00-01 (02/24/00) Mezzanine Equity

• 01-02 (01/16/01) Manufactured Housing Community Loans

• 01-05 (05/02/01) Modifications to Underwriting Guidelines for Seniors Housing

• 01-10 (07/18/01) Consolidation of the 5-50SM Streamlined Mortgage Loan Product
                   with the DUS Small Loan Product

• 01-14 (10/04/01) 3MaxExpressSM Update

• 01-15 (11/27/01) Actual/360 Interest Accrual

• 02-06 (09/13/02) Changes to Underwriting Guidelines

• 02-08 (10/16/02) Forward Commitments

• 03-02 (04/17/03) Changes to Forward Conversion Worksheet (Form 4212)

• 03-03 (05/07/03) Guidelines for Physical Occupancy and Economic Vacancy

• 03-04 (09/11/03) Ninth Multifamily Assured Schedule Payment TrustSM

• 03-05 (11/05/03) Changes to Principal Analysis

• 03-06 (12/31/03) Large Loan Definition
• 04-01 (02/09/04) Terrorism Insurance Guidelines

• 04-04 (03/04/04) New DUS Lender Capital Standards and Requirements

• 04-05 (03/19/04) Establishment of Lender Delegated Waiver Authority to Reduce the
                   Underwriting Floors Applicable for Fixed and Variable Rate Bond
                   Credit Enhancement

• 04-06 (05/24/04) Preferred Delegation Memo

• 04-07 (06/03/04) Preservation and Section 8

• 04-08 (12/03/04) Preferred Delegation Memo, Manufactured Housing Expansion

• 05-01 (03/15/05) Underwriting Modifications to DUS DMBS to implement the
                   Stressed Refinance Test


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