Can't secure agency DUS debt due to bankruptcy from 12 years ago
Hey everyone, looking for some honest feedback from direct underwriting and credit risk people on why credit committees are choking out a performing deal.
We keep hitting a wall on a new build, stabilized multifamily asset because of a personal bankruptcy from 2014 on my partner, whose credit score now is above 800. We even structured the ownership entity so the principal with the legacy bankruptcy holds less than a 20% stake, but that still hasn't been enough. It has cleared standard credit reporting, but inevitably ends up receiving a no due to "pre-review state, first time borrower, and past credit event".
The deal metrics are rock solid. Cash flows well exceeds tier 3 DSCR requirements, valuation is 63%, below the Tier 3 65% threshold. We've been in business over 20 years, and currently have over 200 self-owned and developed under management.
We are first time agency borrowers, but the rest of our profiles are completely fine. We easily clear the standard liquidity and net worth benchmarks for the loan size. Still, direct DUS lenders get excited about the property metrics only to say respectully say no months into underwriting once credit formally reviews it.
For the credit analysts here, what is actually spooking committees right now? Is it just a choppy market environment where lenders are looking for any reason to pass, or is a 12 year old bankruptcy a permanent corporate veto regardless of the marginal ownership stake and strong asset cash flow?
Aside from bringing on a full co-guarantor, what does it actually take to get credit teams to look at the real estate instead of a legacy character mark?
Appreciate the raw insight from the credit desk. I am not looking for broker pitches, just pure policy reality.
You need to divorce your wife, Joey. And freeze her out of the capital stack.
Don’t be a dick about it or anything. Make sure she knows it isn’t because you don’t love her anymore. Gotta do what you gotta do for the deal, though. Multiples over marriage.
Lol, I would but my wife is my father in this case. Not as many perks as a wife other than multiples, and the breath of life.
Roll tide, brother. The user name makes sense now.
No sir, LSU. Lane's home now eating tiger bait
You'd need to give the bankruptcy details before expecting any real answer. At that point, it's not about the property or cash flows, it's the sponsorship and character risk.
Chapter 7 on personal credit card debt totaling $70K. Had a 2007 property sale in which the title attorney transfered the properties in the buyer's name before funds were delivered. He spent the next 7 years suing the buyer and title attorney only to get 1/10th of what was owed, which ended up outweighed by legal fees.
All that's to say, it wasn't caused by overt irresponsibility. Kept doing deals and managing different properties during that time. But like I said, credit score is already back over 800, me and him have both amassed a good sized portfolio, and agencies even state they "only look 10 years back".
Makes sense. I don't work in DUS lending anymore but I'd guess the bankruptcy was being used as an easy decline reason or credit committee was like "what happens if this defaults and we ignored a prior bankruptcy" - something like that.
Are they telling you that this case is the primary reason for the deal being passed on?
You already included this in another comment, but I would just echo that, on your borrower principal forms, you are only required to disclose BK events within the last 10 years. Is this coming up because you include this in your resume? It's a weird catch 22 where you want to be transparent, but the transparency is biting you in the ass.
Have you considered exploring a loan with Freddie Mac? What's the loan size?
It's a $7.5mm UPB on $12.2mm appraisal, 128 units. The issue with Freddie is that they'll only loan to 55% LTV, & it's located in Louisiana, and from talking to most shops, Freddie doesn't lend much higher LTVs in Louisiana / Mississippi markets.
Not for nothing but ... was this a Fannie Mae rejection or a lender rejection? Important distinction. I believe Fannie requires a lender to give proper notice if they turn it down since Lender's used to hide behind Fannie due to their own internal risk tolerance.
New borrowers are tough. Which is asinine. And, back to a previous comment, it's only a 10-year look back.
It was lender rejection after the formal credit review. I dealt with some of the top DUS lenders and they spent a good bit of time preparing the package before formal credit review. From what I understand, there's alot of back and forth between the loan production side and the credit team during the 90 days or so leading up to formal credit review, so not sure as to why credit doesn't just kill it sooner if they have all the info so long before hand
If Fannie provided a quote, then there is a lender out there who will do your business. If the lender didn’t want to let you submit you need to keep shopping it
Who was the lender? Would try one of the brokers with DUS licenses rather than a bank. Happy to take a look.
Don’t do business with a scumbag who doesn’t pay his debts.
It’s really that simple.
I bet the lenders are taking it to Fannie and getting told no, it's not their internal decision, and once Fannie's asked once on a deal the next lender will get the same answer.
Just do HUD. Their BK policy is after 7 years if you have no credit issues they will let you be in the deal or even a KP. Pricing is same or better than equivalent agency, upfront costs and reserves will be slightly higher and you have less structuring options (35 year fully amortizing w declining % prepay for 10 years) and takes a little longer to execute, but you'll get your perm loan... DM me if you want to size it up, happy to help, direct lender (without an agency desk), you can get clean break from the guys who can't get your deal done.
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