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Lender Memo 09-09

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					                                                  HCD Loss Mitigation
                                                HCD Information Exchange




Date:        March 25, 2009

To:          Fannie Mae Servicers

From:        Larry LaGrone, Director, HCD Loss Mitigation
             Steve Bush, Director, HCD Loss Mitigation

Subject:     Lender Memo 09-09: HCD Information Exchange Update
             2009 Property Operating Statements and Property Inspections
             Submission Process

The purpose of this memo is to (i) provide guidance on the Quality Control
process for both Property Operating Statements and Property Inspections and (ii)
provide an overview and update on the submission processes for 2009.

Two of our goals in 2009 are to reach a 100% collection rate for Property
Operating Statements and reduce the number of Property Operating Statements
and Property Inspections requiring resubmission. The following will provide
additional information, guidance and feedback so that collectively we can meet
these goals.


                   Property Operating Statement Overview

As a reminder, the 2008 Annual Property Operating Statements/Analysis (Form
4254) is due to Fannie Mae on or before Monday, June 1, 2009. Applicable work
items have been established in the HCD Information Exchange and are available
for submission at any time.


Quality Control Process - Resubmissions Required

All submitted annual operating statements are reviewed or “scrubbed” against a
set of Financial Scrub Rules (see Exhibit 1). During the scrub process, if one or
more line items on the Form 4254 Financial Analysis (see Exhibit 2) trigger an
automated scrub rule, the operating statement is flagged for further review by the
Fannie Mae Quality Control (QC) Review team. At this point, the Servicer’s
comments are reviewed to determine whether the variances have been
adequately explained. If the commentary is adequate, the work item is marked


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“Satisfied” and no further action is required by the Servicer. If the commentary
does not adequately address the variance, the work item is marked
“Resubmission Required” and a Variance Review report is generated requiring
additional information or clarification from the Servicer.

The automated scrub process notes significant variances from year-to-year,
focusing on consistency and confirming that line items are trending in a logical
way. Any income or expense category with a significant variance (generally
20%-40%) requires a brief explanation in the General Comments section of the
analysis. A simple comparison to the prior year’s analysis may be all that is
needed. However, it is often difficult to determine the reason for the variance. If
the reason is indeterminable by comparing one year’s analysis to the other, the
Borrower may need to be contacted to obtain clarification for the variance and an
explanation included in the comment section.

The Quality Control or Variance Review process is based on comparing current
operating results to the most recent prior operating period data or underwriting if
no prior period is available. If you discover that the current reporting period is
being compared to data that is inappropriate, please contact the HCD Information
Exchange team to address the issue.

Based on Year-End 2007 operating results, several line items failed the
automated scrub and the Quality Control review process more frequently than
others as highlighted in the following table:


                                                     %
Flag                                               Failed
Administrative Expense Flag                          36%
Replacement Reserve Expense                          33%
Utilities Expense Flag                               25%
Management Expense Flag                              23%
Water Sewer Expense Flag                             22%
Payroll Expense Flag                                 21%
Net Operating Income (NOI) Flag                      16%
Real Estate Tax Expense Flag                         15%


Suggestions for addressing each line item in the above table are discussed
below:

Administrative Expense Flag: Administrative Expenses are required if prior
operating periods and/or underwriting included a figure . As a reminder,
Administrative Expenses can include the following: advertising/promotion, bank
charges, cable, satellite, credit charges, data processing, donations,
dues/subscriptions, food/dietary expenses, franchise tax, ground lease
payments, legal/accounting, licenses, maintenance units, model apartments,


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office equipment, office supplies, office unit, other converted units, pagers,
personal property tax, postage, printing, professional fees, referral/locator fees,
resident entertainment, security system, telephone, training, and travel/mileage.

Replacement Reserve Expense: Replacement reserves in the financial analysis
reporting are required. If the Mortgage Loan documents stipulate that the
Borrower fund replacement reserve deposits, the actual amount of the required
reserves must be included (whether or not the amounts are actually received). If
the requirement to fund deposits is waived, the amount utilized in underwriting
must be included. If the underwriting figure is unavailable, please use an
industry standard and document the source/rationale in the comment section.

Utilities and Water/Sewer Expense Flag: If utilities and water/sewer are
combined on the Borrower’s statement, please provide a breakdown, if possible,
consistent with historical reporting. If one of the line items is left blank and/or is
inconsistent with historical reporting, the statement could be marked with
“Resubmission Required”.

Management Expense Flag: A three percent (3%) minimum management fee of
Effective Gross Income (“EGI”) must be included in the financial analysis
reporting process. A management fee less than 3% of EGI will trigger a QC
review and resubmission. Management Fees must include annual on-site
management and leasing expenses. In the event the operating statement does
not include a management fee, please impute a fee based on the percentage
used in the most recent underwriting. If the fee percentage used in underwriting
is not available, a fee of no less than 3% of EGI is required. In the event the
Borrower’s statement included a management fee of between 0% and 3%, the
fee must be increased to a level deemed appropriate considering the specifics of
the transaction, but not less than 3%. In the event the Borrower’s statement
includes a management fee greater than 3%, the actual fee must be included
and no adjustments are necessary.

Payroll Expense Flag: If payroll is left blank and/or is inconsistent with historical
reporting, and no lender commentary is provided to support the variance from
prior operating periods or underwriting, the statement could be marked with
“Resubmission Required”. Common expenses included in payroll are wages,
benefits, health insurance, commissions, bonus, employee units, employee
education, leasing consultant, payroll taxes, security guard, temporary help,
unemployment insurance, and worker’s compensation.

Net Operating Income (NOI) Flag: This field is automatically calculated by
subtracting the Total Expenses from the EGI. A variance in NOI may likely be
addressed through comments provided to support the individual line item
variances in Income and Expenses. However, please provide comments on
significant variances in NOI in broad terms in the comment section, if
appropriate.


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Real Estate Tax Expense: This line item is calculated by dividing the annual
amount due (based on the best information accessible to the Servicer) by 12 and
multiplying by the number of months covered by the statement. Any penalties or
credits relating to prior periods must be excluded. If real estate taxes are not
escrowed, or if the Borrower paid the real estate taxes directly during the current
reporting year, the figure listed on the Borrower’s statement, if verified, may be
used. If the Property is tax-exempt, please indicate the tax-exempt status in the
comment section.

In addition to the items noted above, the Comment Box must include:

       Rent Roll - Please provide the date of the Rent Roll utilized in the analysis.

       Occupancy – Please discuss any significant changes from prior periods.

       Capital Expenditures – If there is a large dollar amount (generally greater
       than 10% of total Capital Expenditures) in the line item defined as “Other
       Capital Expenditures”, please provide a brief description in the comment
       section of the items that comprise this field.

       Recent Mortgage(s) – Please provide comments for any Mortgage Loan
       acquired by Fannie Mae within the last two (2) years if the DSCR for the
       current reporting period is less than the original underwritten DSCR.
       Comments must specifically identify reasons for the Property’s decline and
       describe steps that are being taken to resolve any identified performance
       issues.

       Maturing Mortgage Loans - If a Mortgage Loan matures within two (2)
       years after the ending date of the current reporting period, please discuss
       the Borrower’s intentions to refinance the Mortgage Loan on or before the
       maturity date, and/or identify any factors that are likely to be impediments
       to the refinancing of the Mortgage Loan.

       Other – Any other comments that are deemed pertinent (for example):
        Poor market conditions
        Physical property condition deterioration
        Ineffective property management
        Unanticipated expenses
        Concerns with Borrower or Principal(s) financial capability


2007 Audit Findings and Common Misclassifications

Issues noted during the random audit of the 2007 Year-End Property Operating
Statements generally centered on the misclassification of certain line items.


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Included below is a list of the most commonly misclassified items and
suggestions for future financial analysis reporting:

       Items that must not be included as Income:
        Insurance Proceeds, except for Rent Loss Proceeds
        Prepaid Rents
        Partnership Contributions

       Items that must be included in Payroll Expense:
        Contract Labor – Include in Payroll if related to temporary help
        Bonuses and Commissions
        Security Guard; however, a Property’s Security System must be
           included in Administrative Expenses


Debt Service Guidance

The debt service must be annualized and inputted manually (or uploaded via .csv
file) into the HCD Information Exchange. For clarificatio n, the debt service fields
are defined as follows:

First Mortgage Debt Payment – Fannie Mae’s first (1st) or primary lien Debt
Service (annualized). If the Mortgage Loan is interest only or an ARM, please
input the actual Debt Service paid (annualized).

Please include the calculation of Debt Service in the Comments Sections if
additional clarification is necessary.

Additional Fannie Mae Financing Debt Payment(s) – If there are additional
Fannie Mae liens on the Property, the debt service for the additional liens must
be entered into the “Additional Financing Debt Payment” field. If more than one
supplemental lien exists, the payments must be combined and entered into this
field. This field is to be used strictly for Fannie Mae supplemental liens,
except for Fannie Mae mezzanine debt, which must be included in “Other
Obligations”.

Other Obligations – Please include Mezzanine Debt Service payments (Fannie
Mae and/or third party Mezzanine Debt Service) plus any other debt obligations
(non-Fannie Mae) supported by Property operations.


Resubmission Required

Servicers with Mortgage Loans marked to Resubmission Required in the HCD
Information Exchange will receive a Variance Report via email. The standard


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turnaround time for addressing issues noted on the Variance Report is within ten
(10) business days after receipt of the report.

We recognize that one of the priorities is the collection and submission of annual
operating statements due to Fannie Mae by June 1, 2009. Therefore, any
Variance Reports received during the Annual 2008 reporting period (through
June 1, 2009) will not be due until July 15, 2009. After the extended deadline
has passed, the original turnaround time of ten (10) business days will be
reinstated.


Operating Statement Waiver Requests

Waiver requests must be submitted on a loan-by-loan basis via the HCD
Information Exchange. No bulk upload waiver option is available at this time.

A waiver must be submitted directly from the Waiver tab and not submitted from
the Form 4254. Submitting the waiver while in Form 4254 may cause the Gross
Potential Rent (GPR) to become a required field and inputting a ny number in
GPR will incorrectly flag the Mortgage Loan during the Loan Rating Engine
scoring process, negatively impacting the rating of the Mortgage Loan.

Please refer to the DUS Guide, Part V, Section 202.02: Waivers for a list of
acceptable waiver conditions. Please select the appropriate “Waiver Reason” in
the dropdown box located in the Waiver tab as a waiver may be denied if the
reason is not appropriate.

For Mortgage Loans being handled by Special Asset Management Servicing
(e.g., a Mortgage Loan in default) and the Borrower refuses to submit financials,
please use the waiver reason of “Other” and note in the Waiver Comment box
the status of the Mortgage Loan (default) and who the Fannie Mae Special Asset
Management contact person is (if known).

Details why a waiver was approved or denied can be viewed in the “History” tab
within each waiver request work item.

As noted previously, one of our key goals is to work with Servicers to increase
collection of operating statements and reduce the number of waivers granted.


Seniors Variances Comparison Data

In prior years, variances for Senior’s quarterly operating statements were based
on the prior reporting period (Q3 2008 was compared to Q2 2008). Since
implementation of the HCD Information Exchange, this procedure was changed



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and variances for Senior’s quarterly statements are now based on the prior years
same period analysis (i.e., Q4 2008 will be compared to Q4 2007).


Mortgage Loans with Multiple Assets

For multiple property Mortgage Loans, please break down the financial
information provided by the Borrower (if combined) by Property in accordance
with the financial data submitted at underwriting (i.e., if underwritten as legally
separate parcels, separate reporting is required).

The debt service payment amounts (both first (1st) mortgage lien and any
supplemental liens, if applicable) must either be allocated to each Property under
the Mortgage Loan or entered in full on the first Property operating statement. If
entered in full on the first Property operating statement, the remaining Properties
under the Mortgage Loan should not have a debt payment entered to avoid
double counting the debt service payments. Quarterly (three (3) months) debt
payment amounts are expected for quarterly statements and annual debt
payment amounts are expected for annual statements. All assets under a
particular Mortgage Loan will display a combined NOI and combined DSCR.

It is critical that each asset for Mortgage Loans with multiple assets receive its
own financial analysis as indicated by the separate Form 4254 templates
displayed in the portal unless the assets should be linked. If you feel that the
assets should be linked and underwriting supports that action, please send a
request to MF_OperatingStatements@fanniemae.com.


Watchlist and Loan Rating

In the past, Mortgage Loans on the Watchlist (requiring quarterly financials) were
added or removed during the reporting period due to rating changes. Those
fluctuations made it challenging for Servicers to obtain, analyze and submit
financial information by the established due date. In response to your feedback,
the operating statement requirements for Watchlist assets will be created at the
end of the quarterly reporting period and become a static list of Mortgage Loans
requiring action by the Servicer.


Borrowers with Non-Calendar Year Reporting Periods

We do not currently have an alternative for uploading non-calendar year
reporting information. The annual workitem will continue to reflect a 12/31/xx
period end date. The operating statement analysis must be uploaded to match
the system generated work items. Based on the number of non-calendar year



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Borrowers, we request that you continue to note the fiscal operating period for
these types of Borrowers in the comment section of the analysis.


Interest Reduction Payments (IRP) Reported as Income

IRP payments must be included in Income if Fannie Mae made the Mortgage
Loan against the IRP payments. If the existing IRP is staying on the Property,
the IRP would be considered subordinate debt.


Additional Information:

       With the increased focus on Property performance and Property condition,
       if Replacement Reserves are being collected, Servicers must include the
       replacement reserve account activity (Beginning Balance, Expenditures,
       and Additions) for the current reporting period (Annual or Quarterly) on the
       Financial Analysis (Form 4254).

       If the Mortgage Loan was acquired after June 30, 2008, no operating
       statement analysis is required for the 2008 reporting period. However, if
       the information is available, submission of the financial analysis can be
       completed by creating a work item via the Ad Hoc functionality, which is
       located in the “My Portfolio” tab accessible on the Home Page of the HCD
       Information Exchange.

For any questions related to the Property Operating Statement Analysis (Form
4254), please feel free to contact MF_OperatingStatements@fanniemae.com.


                   Property Inspection Overview
Quality Control Process for Inspections:

In 2008 we instituted a new quality control process for inspections with a
dedicated team performing the Quality Control reviews. A significant percentage
of inspections are reviewed and feedback was provided back to the Servicers.

The Quality Control process and review was implemented for inspections due to
the heightened importance of the inspection results. The five Comprehensive
Ratings and the Overall Rating directly impact the Mortgage Loan rating process.
Therefore it is extremely important that the data is accurate and reliable.

Inspection reports are reviewed for completeness and accuracy and either
marked as “Satisfied”, “Satisfied with Comments” or as “Resubmission
Required”. In the instances where a “Resubmission Required” occurs, the


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Servicer will receive a Variance Review form via e-mail. Resubmission of the
updated inspection report within ten (10) business days addressing any
deficiencies is required before the inspection can be deemed acceptable. The
QC team will review the additional information to determine if further review is
required. A waiver request explaining why a requirement could not be met may
also be submitted, if applicable.

A “Resubmission Required” Variance Report may be received if the following
criteria are not followed by the Servicer while completing an inspection:

       Correct Form Type Used (4260, 4262 or MBA per the Inspection Protocol
       Matrix).

       Required fields completed, including completion of the Seller/Servicer
       certification.

       Sufficient number of interior units inspected or a waiver explaining why the
       requirement could not be met may be submitted.

       Comments sufficient to support any rating or deficiencies noted. In
       addition to marking the appropriate boxes on an inspection report, please
       include comments explaining the findings when possible.

       The Overall Rating must be consistent with the Comprehensive Ratings.
       Additionally, please make sure the ratings on the inspection form match
       with those inputted into the HCD Information Exchange.


Property Photographs

Please include supporting Property photographs noting the general overall
Property condition as well as any deferred maintenance items noted. Supporting
photographs for deferred maintenance items must be included with special
emphasis on Life/Safety and/or large capital expense items. Photographs with
captions briefly describing the picture and issues noted are preferred.


Inspection Protocol Matrix

Additional clarification has been included to the attached inspection protocol
requirements matrix (Exhibit 3). A link to this information is also located on the
Home Page of the HCD Information Exchange under “Resource Library”.




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Origination Inspections

In accordance with the DUS Guide, the submission of the underwriting/origination
inspection is required. We have added the status of “Submission Required-
Origination Inspection” so that the Servicers can differentiate an origination
inspection from an ongoing asset management inspection requirement. If the
origination inspection is unavailable, the Servicer may submit a waiver to inspect
the Property within the first year after acquisition.


Calculating Due Dates

Due dates are originally set, or advanced, using the acquisition date (day/month)
and the existing protocol frequency. The same inspection anniversary date
(day/month) is used going forward to set next inspection due dates . However, if
an inspection is performed more than 90-days prior to the existing due date , the
next inspection due date is based on the actual last inspection date (day/month).


Geographic Concentration Realignment

Servicers are allowed to request a one time waiver to adjust the due
(anniversary) date of an inspection. Servicers may request a one time
realignment of inspections due in one geographic area, as long as the due dates
are not past due.


Mortgage Bankers Association (MBA) Form

Please note, Fannie Mae does not recognize or utilize the MBA ratings on the
MBA Form. Fannie Mae requires the addendum to be completed which contains
the five Comprehensive Ratings and the Overall Rating. Under the “Company
Name/Logo” section, when addressing the “Overall Property Rating”, please use
the Fannie Mae rating scale and not the MBA scale.


Additional Information

   2009 MBA inspection training courses are scheduled to be held : March 18th
   through 20th in Washington, DC, July 14th through 16th in Chicago, September
   15th through 17th in Phoenix and a TBD in October.

   Inspection attachment files in HCD Information Exchange are limited to
   20MB’s. Please remember to compress your pictures, if possible, therefore
   reducing the size of the file attachment.



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   Comment boxes on Form 4262 can be formatted to show all comments. At
   the bottom of the page above the photograph tabs, the “Format Form (Size
   Rows)” tab will expand the comment boxes to view all written comments.

   Calculation of the minimum units required to be inspected must always be
   rounded to the nearest whole number (i.e., less than .50 round down and
   equal to or greater than .50 is rounded up). For example 7.3 must be rounded
   down to 7 units, while 7.5 must be rounded up to 8 units. All property
   inspections completed on May 1, 2009 or after must follow this guideline.

   Origination inspection guidelines are slightly different than regular asset
   management inspections in regards to Mortgage Loan rating, form types,
   inspection frequency, minimum units to be inspected, and regarding the use
   of third- party inspectors. Please review the attached protocol matrix for more
   details.

   Mortgage Loans acquired in 2007 are still expected to have had their baseline
   or 2008 inspections completed and submitted on HCD Information Exchange.
   We have recently denied waivers from Servicers wanting to extend the due
   dates out two or three years from the 2007 acquisition date without submittal
   of any previous baseline inspections.




           HCD Information Exchange – General Updates

My Portfolio

As discussed during the recent HCD Information Exchange Training Session
(see Exhibit 4), the “My Portfolio” section, accessible from the Home Page, was
added in 2008 providing Servicers with approximately 40 additional search fields.
In this section, there is also the “Create Adhoc Requirement” function enabling
Servicers to create additional property inspection and/or operating statement
templates allowing the submission of additional information received on a
particular Property or Mortgage Loan. Please keep in mind, however, that the
Adhoc requirement does not satisfy current requirements.


Adhoc Feature Inspections– “Submission Optional”

When adding a new Adhoc requirement in the system for inspections, it is
important to create the work item so that the system will later display the
requirement as “Submission Optional” versus a “Submission Required” status. To
accomplish this you must do the following:



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      Click on “My Portfolio”
      Pull up the Mortgage Loan desired
      Click on “Primary Asset” box for Mortgage Loan desired
      Click on “Create Adhoc Requirement”
      Click on “Workitem Required: Select Value” dropdown
      Select “No” as the dropdown choice.
      Fill out all other necessary fields and click “Create”

As a reminder, the Adhoc function for inspections does not satisfy any current
inspection requirements.


Future Enhancements to HCD Information Exchange

The following enhancements are being developed for implementation in 2009:

       An “Inspection Modification Request Tab”, which will allow submission of a
       request to change the due date or the minimum number of units to be
       inspected. This will simplify the two most common waiver request types.
       Once implemented, the Servicer will use this new tab instead of the
       existing waiver request tab for these two items.

       An “Advanced Search Filter” similar to what currently exists in “My
       Portfolio” will also be added to both the inspection and financial
       dashboards.

       Submission of information will be allowed related to Bond Credit
       Enhancements, Structured Transactions (Operating Statements), Credit
       Facilities and Bulk Delivery transactions.

       A new .csv file will be provided for the Structured Transaction portfolio.


We appreciate your assistance and value any feedback.

Please    contact Steve Bush at      (972) 773-7623       or email at
Steve_Bush@fanniemae.com if you have any questions regarding the contents
of this memo.

If you have any specific questions about Property operating statements or
Property inspections, please send an email to the appropriate group mailbox:

MF_OperatingStatements@fanniemae.com
MF_Inspections@fanniemae.com,

Thank you!!


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Attachments:
Financial Scrub Rules (Exhibit 1)
4254 Financial Analysis Power Point (Exhibit 2)
Inspection Matrix Protocol (Exhibit 3)
HCD Information Exchange Training Power Point (Exhibit 4)




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