DUS Lending fee cut?
There has been some chatter in online investor forums about a Fannie Mae memo proposing cuts to DUS origination/servicing fees. Has anyone seen or heard of this?
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Can you share a link to that post? I'm mostly just curious to know what other platform would be discussing this change.
I'll discuss the proposed change momentarily, but some additional context is required upfront.
Fannie multifamily spreads are comprised of three components - Servicing Fee (S Fee), Guarantee Fee (G Fee), and the MBS Investor Spread.
Spread = S + G + MBS
The servicing fee pays the lender to service the loan, the guarantee fee pays Fannie for their implied guarantee to the bold holder, and the MBS investor spread is the premium over the applicable index rate (typically a US Treasury) that gets paid to the bond buyer.
Fannie publicizes "grid" pricing to their DUS lenders for G & S fees, which is a high watermark starting point for each of their leverage points (Tier II (80% / 1.25x), Tier III (65% / 1.35x), & Tier IV (55% / / 1.55x).
For simplicity purposes, let's assume that grid pricing for a 80% / 1.25x loan comes out to 200 over, and is made up of 50 basis points in MBS & 75 basis points in both G & S fees. When it comes time for a deal to get quoted, both Fannie & the loan servicer (who most borrowers think of as their lender - CBRE, Berkadia, JLL, W&D, etc.) will waive portions of their applicable fees (G & S) to arrive at a competitive price point.
The MBS Investor Spread is a market driven component of the rate that can't be controlled (exception being rate buy downs, but we're avoiding that topic right now). Therefore; spreads inside of grid must assume reductions to base S & G fees.
Assuming we want to get to a spread of 160 basis points, we would need to achieve a combined 40 basis point reduction in guarantee and servicing fees. Fannie currently has multiple different delegated and preapproved pricing waivers that servicers can apply to base rates to achieve lower pricing (typically driven by naturally occurring rent affordability). If a lender (servicers) wants to achieve discounts below those pre approved waivers, they would need to reach out to Fannie Mae's internal team for approval. This adds considerable time to the quote process as Fannie is relatively under staffed and slow to get around to each and every request. Additional pricing waivers also aren't guaranteed, so you're taking on time risk for an uncertain outcome.
The proposed change would be to grant servicers expanded delegated authority to offer additional discounts, but 100% of that would come out of their S Fee (which is ultimately a huge driver of lender profitability). The main rationale being that this will save both Fannie & lenders considerable time and allow them to better compete against other capital sources. The concern amongst lenders is that this change will allow lenders to offer loans at a potential loss, which starts a race to the bottom that erodes the overall health of the ecosystem.
The agencies already have minimum origination fee schedules for all their loans to avoid a very similar conflict. They want to limit how much we as lenders can compete on price, because they (a) want us to have an aligned incentive and (b) want to create an even playing field where we can compete on service w/out sacrificing quality via a race to the bottom.
It's an in interesting & nuanced topic, and I hope they rethink this idea.
Of course.
To be honest, I'm not that familiar with the internal economics of a buydown. What I can tell you is that a 1% fee gets you roughly 12 basis points off the MBS on a 10-yr deal & 24 basis points off the MBS on a 5-yr deal. A/k/a 100 basis points upfront for 120 basis points of lifetime savings over 10 years or 96 basis points of lifetime savings over 5 years.
Indeed nuanced and interesting. It would be a race to the bottom.
Every large borrower would expect their DUS lender to quote the bottom servicing fee and take the full risk.
Every large brokerage firm would sell to their clients their ability to get their DUS lender to the bottom which is why they would sell to every borrower why they should earn the business instead of going "direct"
Every smaller/independent broker would also fight for their client on every shitty deal and shop to the DUS lender willing to give up profit for volume. We all know there are a few who look the other way ... see a certain short seller report.
The reason why Fannie and Freddie instituted MINIMUM origination fees to keep a somewhat level playing field. They learned there is always someone willing to give their product away for less or for "free" to build their portfolio. It is impossible to compete against stupid. We shall see if Fannie revises this in the near future.
Thanks. It was a comment on Value Investor Club discussing Arbor but it isn't available to non-members yet.
What’s your take on the GSE’s place in the CRE debt space going forward? It has had a great run in the last 15 years in terms of profitability but what about the next 15? There is a whole industry today based on the GSE’s and the two dozen shops with a Fannie and Freddie license employing underwriters, production, asset management folks, etc and most of them are paid $200K+ (not just producers who are paid based on commission for the most part but it’s also possible for non sales folks to get a base of $175-200K+) for working 30-40 hours a week and doing nothing too complex. Will the gravy train keep going?
I don't think that this proposal is an indication that we're on a path away from lender profitability, yet.
In many cases, the bid that Fannie is trying to compete against is Freddie. Freddie has a different org structure and is far more efficient, IMO.
Who do you propose would encroach on their ~ $120B in annual volume? Their implied guarantee almost makes it a certainty that they will price better than private label CMBS, tend to lead the pack in offering interest only, don't discriminate on vintage like most balance sheets that can sometimes compete on price, & nonrecourse. There's a reason they have such a large market share outside of being a profit generator for their DUS / Seller Servicer network.
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