Explain DSCR Floor for GSE Financing Please
If 1.25x is the lowest minimum DSCR used for sizing purposes what purpose does DSCR floor rate serve? I see 5% used for 10 year loans, 5.50% for 7 year loans and 6.75% for 5 year loans and the DSCR is then lower than 1.25x at the floor rate. Can a GSE financing expert explain what does the floor rate here refer to? Thank you!
This is for floating rate debt - the loan needs to have coverage at both the actual pay rate and at the floor rate. You are required to buy a rate cap at whatever floor rate you size to so these were more relevant as a loan sizing constraint when rates were super low and floor rates were above pay rates.
If you we're constrained by this test and wanted more proceeds you could size to a lower floor rate but would need to buy a rate cap with a lower strike price (more expensive). Now that pay rates are well above the floor it's not really a loan constraint, but you are starting to see borrowers having to renew their expiring hedges which are very expensive because they are way in the money compared to when the loan was originated and SOFR was ~0%.
Starting to see pref deployed in the renewed rate cap space
I think OP is referring to FNMA's Tier II floor rate tests which applies to fixed rate loans as well.
OP, FNMA has a third sizing test for their Tier II loans (max leverage / 1.25x DSCR), which utilizes these floor rates you referenced. I believe they were intended to be an as-is test (1.25x on the actual rate & 1.25x on the floor rate) when the world was more LTV constrained in general, but ultimately we're able to get waivers down to lower min DSCR's on these floor rates based on certain "exit rates", which model out a future cap rate in which the loan can expect to be paid off. Today, on 5-yr deals we are more-or-less goal seeking the min DSCR 1.25x on the floor rate that gets us to an equivalent loan sizing on the standard 1.25x DSCR at the actual rate. There are scenarios where additional years IO can make that exit test output restrictive, but it's somewhat rare in today's interest rate environment.
Below is the actual table from FNMA's underwriting standard guide book.
Bro is breaking out the 4660
You appear to be a GSE financing expert, can you please help me understand what strike rates and stress rates refer to in a floating rate loan? I see 3% used for stress rates and 4% for strike rate as a default when you initially size a loan and then it can later get adjusted by the GSE's. So what is this 3% and 4%? I have also noticed Min DCR is usually 1.0x when you size a floater? But what is the purpose of sizing to a 1.0x when the minimum DCR you need is usually 1.25x or whatever the fixed rate equivalent is, so what purpose does this 1.0x Min DSCR serve? Really appreciate your help!, thank you!
For a fixed rate deal too, I see sometimes a Min 1.00x floor rate at 6.75% for a 5 year fixed rate loan. Do you know what the 1.00x and 6.75% here refers to in terms of a fixed rate deal? Like what is the purpose when the Min DSCR for sizing purposes is usually 1.25x for a tier 2 deal here and not 1.00.
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