Underwriter`s Narrative

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Exhibit III-2
Underwriter's Narrative
UNDERWRITER'S NARRATIVE
The Underwriter's Narrative must discuss all of the material reviewed and each of the
decisions made by the Lender in underwriting the Mortgage, and must indicate the Lender's
overall findings regarding the Mortgage, the Property, the Borrower, and its Key Principals
and Principals. Particular emphasis should be placed on any decision made by the Lender
with respect to unusual or aggressive elements of the transaction. In addition to any specific
requirements in the Guide that the Underwriter's Narrative must address, the Underwriter's
Narrative for each Mortgage must include a discussion of the following items:
1.
Borrower, Key Principals, and Principals:
(a)
(b)
(c)
(d)
(e)
2.
The structure and management of the borrowing entity, including a detailed
discussion of any special features such as tiered partnerships, foreign investors,
or trusts.
The experience and qualifications of the Borrower, Key Principals, and
Principals. Detailed justification is required for any Borrower, Key Principal, or
Principal whose history includes bankruptcies, defaults, or foreclosures.
The Borrower's, Key Principals', and Principals' acquisition of the Property,
willingness, and capacity to support the Property, as evidenced by the condition
of the Property and any other properties inspected by the Lender, the equity in
the transaction, and the Borrower's, Key Principal's, and Principals' track
record, credit reports, and bank, and trade references.
If the Property is being refinanced, discuss the payment history on the Property.
If the Borrower is a non-single-asset Borrower, discuss the payment history for
other properties owned by the Borrower.
Conclusion on the creditworthiness, experience, capacity, attitude, and
motivation of the Borrower, including results of Fannie Mae experience check
on MORNET®.
For each Key Principal:
(a)
(b)
(c)
Discuss the rationale for selection of each Key Principal.
Experience and qualifications.
Net worth and liquidity, indicating the amounts verified and the verification
method used.
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(d)
(e)
(f)
(g)
(h)
3.
For each Principal:
(a)
(b)
(c)
(d)
4.
Credit history and public records search.
Experience and qualifications.
Solvency, character, past credit experience with special emphasis on any
experience with Fannie Mae.
Verification of financial statements, if the Key Principals do not evidence
sufficient financial capacity to support the transaction.
Property Management:
(a)
(b)
(c)
(d)
(e)
5.
For properties directly owned by a Key Principal or held in a separate
ownership entity in which the Key Principal is a general partner, significant
shareholder, or otherwise has a significant ownership interest or management
responsibility, indicate the payment history and discuss the analysis of financial
statements, tax returns, operating statements, and any other information
regarding the financial performance of such properties.
Competing demands or liabilities, including other properties operating at a
deficit, contingent liabilities, upcoming refinancings, lawsuits, etc.
Credit history and public records search.
Solvency, character, past credit experience with special emphasis on any
experience with Fannie Mae.
Conclusion on the creditworthiness, experience, capacity, attitude, and
motivation of the Key Principals.
The management company's current activities (e.g., type and number of units
managed) and past experience with the Property. Discuss the management fee
for the Property. Indicate whether other properties managed by the same
company were inspected.
Indicate whether on-site staff is adequate (i.e., number, experience, and
qualifications) for the Property. Discuss any costs shared with other properties.
Discuss the salaries and benefits of the on-site staff.
If a change in management is contemplated, discuss in detail how future costs
were estimated and the ability of the new company to adequately manage the
Property based on those cost estimates.
Conclusion on the adequacy of the Property management.
Market:
(a)
The Lender's and the appraiser's opinion of the stability of the market area,
including basic industries and major employers, unemployment information,
and population growth and demographics. Discuss the Lender's independent
analysis of the market and any known market studies.
Exhibit III-2
(b)
(c)
(d)
(e)
6.
(d)
Prospects for new development (e.g., vacant land zoned for multifamily use).
Identify significant competition with the Property.
Access or proximity to employment centers, recreational facilities, shopping
centers, schools, public transportation, and major roads, etc.
Note any economic obsolescence, incompatible uses, or negative influences
(e.g., traffic problems, train tracks, construction-in-progress, high tension wires,
etc.) and their impact on the marketability of the Property.
Tenant Base:
(a)
(b)
(c)
8.
The status of the rental market in the Property's market area, including area
vacancy and absorption rates (include trends), current rent levels and rent trends
(increasing or decreasing), whether concessions are common in the market, and
potential or planned new construction.
The depth of the rental market, particularly for Properties in smaller markets or
if the Property has specialized or limited appeal.
Any significant difference in the Lender's and the appraiser's conclusions on the
overall condition of the rental market in the Property's market area.
Any question of concentration of loans in the area for either the Lender or
Fannie Mae.
Neighborhood Data:
(a)
(b)
(c)
7.
Underwriter's Narrative
Indicate whether the Property attracts a specific type of tenant (e.g., elderly or
family). Provide general age and employment information on the Property's
tenant base. Discuss any single tenant base issues (e.g., student or military
housing) and compliance with any special requirements for such tenancy.
Note any significant competition for the Property's tenant base, including home
ownership.
Indicate whether equal opportunity requirements are clearly in place.
Site:
(a)
Provide a narrative description of the site (e.g., landscaping, location of
amenities, available parking, etc.), visibility from major thoroughfares,
ingress/egress to the Property, and whether the Property is served by public or
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Underwriter's Narrative
(b)
(c)
(d)
(e)
9.
Compliance with zoning regulations. Attach a threshold evaluation, if
applicable. Ensure that any issue beyond density (e.g., set back and parking) is
discussed.
Property Improvements and Marketability:
(a)
(b)
(c)
(d)
(e)
(f)
11.
private streets and public utilities.
Easements or encroachments on to or off of the Property, including any
appurtenant easements.
Indicate whether the Property is located in a flood zone and whether flood
insurance is required.
Indicate whether the Property is located in a seismic zone and whether
earthquake insurance is required.
Indicate whether the Property is part of a phased development. If yes, discuss in
detail.
Zoning:
(a)
10.
Exhibit III-2
Describe improvements, including amenities (e.g., age, construction materials
and quality, single or multiple buildings, and unit mix, size and configuration).
Indicate whether significant improvements, repairs, or replacements are
planned;
Indicate whether the unit electrical capacity and overload protection is
adequate.
For Moderate Rehabilitation Properties, discuss and attach the architect's or
engineer's report.
For Recently Completed Properties, discuss and attach the soils report and the
architect's or engineer's report.
The marketability of the Property, including curb appeal, appropriateness of
unit mix, size, and configuration, functional obsolescence, common area, and
unit amenities relative to amenities in competing properties.
Physical Needs Assessment:
(a)
The quality (thorough, clear, complete, adequate sampling, etc.) of the Physical
Needs Assessment. Overall conditions and findings.
(b)
Any immediate repairs, replacements, or major maintenance items. Discuss
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Exhibit III-2
(c)
12.
(b)
(c)
(d)
Discuss the determination of the Total Reserve Amount (see Part III, Section
310, Replacement Reserves).
Discuss funding schedule (initial and on-going deposits).
Indicate whether the replacement schedule is reasonable based on the age of the
scheduled items compared to their remaining useful life.
Discuss the reasons for any waiver of all or part of the Replacement Reserve
funding requirement permitted in accordance with Section 310 of this Part,
subject to the Tier pricing requirements and Property age (e.g., Borrower's past
experience or financial strength, timing of expected repairs and replacements,
debt service coverage that provides additional cushion). Special attention must
be given to waivers granted in cash-out transactions.
Environmental:
(a)
(b)
(c)
(d)
14.
any deferred maintenance.
The Completion/Repair Agreement, if applicable. Discuss the estimated time
to complete repairs and the provisions for releasing funds (e.g., Lender
inspection required?), etc.
Replacement Reserves:
(a)
13.
Underwriter's Narrative
Quality of the report (e.g., thorough, complete, appropriately signed).
Any unusual local features.
Results of the Phase I Environmental Assessment and, if applicable, Phase II
Environmental Assessment.
Any Operations and Maintenance Plan and how it will be enforced.
Appraisal:
(a)
(b)
(c)
Whether all specific DUS requirements are satisfied (e.g., vacancy at or above 5
percent, Replacement Reserves at or above $150).
Discuss the appraiser's market survey, including the range of properties, most
comparable properties, etc.
Compare the appraiser's market conclusions with those from the Lender's
independent market survey.
The continued viability of the Property.
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Underwriter's Narrative
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
15.
Exhibit III-2
Whether the sales comparables and adjustments are acceptable and whether the
adjustments accurately account for differences between the sales comparables
and the Property.
Whether the value conclusion based on sales comparables is reasonable.
The appraiser's income estimate. Indicate whether rents are supported by
market comparables and reflect current and anticipated trends.
Whether rental concessions are identified and netted out.
The appraiser's expense estimates. Indicate whether the appraiser adequately
justified each line item and whether reasonable increases were applied to the
expenses.
The selected cap rate. Indicate whether the cap rate is supported by market
comparables, whether the band of investment assumptions are reasonable, and
whether the two approaches are appropriately documented.
Whether the appraiser has reconciled any sale of the Property during the past
three years with the current value conclusion.
Discuss the determination of value to be used in the underwriting value; how
was it determined, discuss differences from appraiser's value.
Justify any increase in Property value since acquisition.
Loan Amount Calculations:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
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The income estimate, including the method used (i.e., rent rolling or an
annualized rent roll), the analysis completed, and any assumptions made.
Specifically discuss any "other income" included.
The economic vacancy factor used. Specifically discuss the physical vacancy in
the Property and the market area, the Property's collection loss history, and any
other factors affecting the economic vacancy factor.
Effective gross income relative to previous year's effective gross income.
The expense estimates, including any assumptions made; justify each line item.
Discuss and justify any items which have been omitted from Lender's
spreadsheet analysis that appear on prior years' operating statements.
Net operating income relative to previous year's net operating income.
For 5- and 7-year loans, include the calculation of the highest permitted Base
Loan Amount at the Underwriting Floor and debt service coverage at the Gross
Note Rate.
Any other applicable factors indicated in Part III, Section 403, Base Loan
Amount and Part III, Section 405, Maximum Loan Amount.
For Interest-Only Mortgages, the calculation of the Interest-Only Base Loan
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Exhibit III-2
(i)
16.
Underwriter's Narrative
Amount.
Indicate minimum debt service coverage ratio and maximum loan-to-value ratio
for the applicable Tier and any adjustments to those ratios (e.g., to comply with
Special Risk Category Underwriting requirements or to offset any weakness in
the transaction). Indicate any underwriting adjustments for Small Loan Pricing
or 5- and 7-year Mortgages with a Gross Note Rate below the Underwriting
Floors.
Lender Waivers
Discuss in detail the rationale for any waivers of any requirements under the Guide for
which either (a) the Lender is permitted to make on its own, or (b) the Lender has
requested, and received Fannie Mae Approval. The Underwriter's Narrative must
include copies of any waivers granted by Fannie Mae.
17.
Chief Underwriter's Analysis and Conclusions
The expected analysis, and adjustments based on that analysis, are discussed in detail
in Part III, Section 409, Overall Underwriting Conclusions. The Underwriter's
Narrative must document the Chief Underwriter's analysis and clearly demonstrate that
the overall transaction is prudent and that each facet of the transaction is acceptable
given the overall transaction. In particular, the Underwriter's Narrative must discuss
the Chief Underwriter's overall conclusions on:
(a)
(b)
(c)
(d)
(e)
(f)
The strengths and weaknesses of the Property and any unusual features not
discussed elsewhere.
The strength and depth of the market and any identified trends.
The strength of the Borrower, including the Borrower's other obligations and
willingness and capacity to support the Property. Indicate the sources and uses
of all funds. Justify any cash-out transaction.
The condition of the Property, including any immediate repairs and the
Replacement Reserve.
The competitiveness of the Property based on the appraisal and the
underwriter's market survey. Rent comparisons, amenities, location, site,
design, and management must be considered.
The prospects for refinancing the Mortgage at the end of the Mortgage term;
include projections and assumptions. Indicate whether a reduced amortization
period or a fully amortizing loan was considered.
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Underwriter's Narrative
(g)
(h)
Exhibit III-2
The recommended combination of debt service coverage, economic vacancy
factor, and Replacement Reserve to be used in the loan underwriting and the
Replacement Reserve amounts to be funded by the Borrower. Decisions to
increase the debt service coverage or otherwise strengthen the loan structure to
offset specific weaknesses in the transaction.
If a loan above the Base Loan Amount is considered, specifically discuss why a
higher loan amount is justified (the Property Regional Office must approve any
loan amount which is higher than the Base Loan Amount, prior to the Lender's
request for a Commitment).
The above items are only basic topics which must be discussed in each Underwriter's
Narrative and are not expected or intended to comprise a complete list of topics to be
addressed in the Underwriter's Narrative.
Documents prepared for the Lender's loan committee and computer print-outs,
separate credit for appraisal reviews, or other reports may adequately cover specific topics that
must be discussed in the Underwriter's Narrative. The Lender may use such documents as
part of the Underwriter's Narrative, provided all concerns about the transaction are logically
and clearly addressed and all pertinent conclusions are cited and justified. Any changes to the
transaction made by the Lender's loan committee or conditions of approval may be included in
the Underwriter's Narrative or identified in an addendum to the Underwriter's Narrative.
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