Freddie Mac Interview - Some Questions About Underwriting And Other Things
I had a phone interview with Freddie Mac last week and am now scheduled to do an in person interview at the end of this week. The position is for multifamily underwriting and my background is in multifamily brokerage. I am just trying to prepare myself as best I can for the interview. I have a few questions about how their underwriting might differ from the underwriting than I have done for brokerage....
1) Other than being less rosy than broker underwriting, what other differences are there in underwriting for Freddie Mac as compared to underwriting from a broker perspective? I'm assuming they are basically reviewing the leases to rebuild the rent roll, annualizing the income, adding a vacancy factor, and subtracting the operating expenses to reach NOI. Am I correct in this assumption?
2) Besides DSCR, LTV, cap rates, and NOI, are there any other ratios/terminology that they are concerned with and that I should familiarize myself with for Freddie Mac underwriting?
3) What due diligence materials do they typically review? The job posting mentions analyzing/reviewing appraisals, engineering, environmental and zoning reports. Going through this list one-by-one, what are they reviewing?
Appraisals -- just checking that the amount of the appraisal pencils out adequately to validate the loan amount?
Engineering -- just checking there are no red flags from an engineering report?
Environmental -- again, just checking there are no red flags from an environmental report?
Zoning reports -- just checking that multifamily is a permitted use and the property is conforming?
Are there any other reports they typically review? Title report? Surveys?
3) Are they going to be underwriting the borrower's credit as well? Are they "spreading" financial statements of the borrowers, or is that left to the lenders? If so, what should I know about this process so that I can give an intelligent response even though I have never done this in practice?
4) I understand that loans have to match certain requirements/criteria/fit in a certain "box" in order for them to loan on the property? Where can I find these requirements and/or what should I know about these requirements? Again, just trying to be able to give an intelligent response if this comes up during the interview.
5) Any other things I should study/understand?
I have never worked directly for Freddie Mac, but I have worked in GSE underwriting, so here's my $0.02.
Underwriting from the brokerage side, you are primarily trying to make assumptions to maximize value and make a sale. You try to tell a story through some type of angle (value-add, location, growth, etc). A lot of emphasis is placed on the financial modeling aspect to predict cash flows and get a good valuation.
Underwriting from the Fannie side I have some experience with this, but I assume it's fairly similar to Freddie Mac. There will be a lot less emphasis on financial modeling, and a lot more on the due diligence/risk analysis. You are mainly trying to assess risk for the loan, so the 3rd party reports (Phase I, PCA, Zoning Report, Physical Property Inspection, market reports) become a lot more important. You'll have to do a write-up assessing all the risk factors compared to what the limits are for Freddie Mac so you can present it to a loan committee for approval. All the agency lending guidelines are published on a site called AllRegs, but I doubt they will get into any of that in the interview. I'm pretty sure it's a paid subscription, but if you want to see what some of them are PM me and I'll send you some samples.
Borrower's credit is a big thing, so you will be looking at their personal finances and going through the particulars of the entity structure identifying who the key principals are and requesting info from them. A lot of it is administrative work, but you need to be a good communicator and wary of deadlines. Everybody wants something yesterday, but that's true in whatever sector of real estate.
That's off the top of my head, but if I think of anything else I'll add to it.
old thread about has anyone applied or been a part of Freddie Mac's multifamily analyst rotational program? How many years was it, how competitive was it to get in, any positives/negatives?
Secondly, the above comment mentioned how you will also be underwriting the borrowers credit and be looking at their personal finances and going through the particulars of the entity structure identifying who the key principals are and requesting info from them. But isn't Freddie Mac's goal here is to purchase the loans that were already funded and closed by the DUS lenders? Freddie Mac does not fund loans right? I am just a little confused as the above comment makes underwriting at Freddie Mac sound exactly like underwriting at a DUS lender, appreciate the help!
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I don't know anything about their rotational program...
Underwriting for DUS lender and underwriting for FM are very similar.
FM doesn't "fund" the loans per say. The bank funds the loans, predicated on agreement between FM and the DUS that FM will purchase the loans, but they have to follow a certain criteria (specific occupancy at orignination and throughout the term, certain equity/managers, must remain in the deal, certain repairs must take place, etc. etc.). FM then bundles loans together allocating certain loans to different pools so that risk is reasonably distributed (making sure there's no large concentrations of certain cities/regions, product types, etc.). Once they are bundled together, they are sold on the market as mortgage-backed securities known as k-deals or sb-deals...
Since the loan must meet FM's conditions for FM to purchase the loan, the DUS underwriter underwrites the deal to see that it meets the scope of FM's requirements. In order to do, so the DUS underwriter must evaluate it in essentially the same way they expect FM to evaluate it, looking at the org structure, financials of the borrower and property, etc. to ensure that the deal meets FM's credit requirements to be purchased. So yes, the DUS underwriter and FM underwriter are doing the same thing in many regards.
In a lot of ways, the bulk of the DUS underwriter's work is complete once the deal is handed off to the FM underwriter, at which point the DUS underwriter becomes more of an aid to the FM underwriter by collecting information the FM underwriter is requesting on the property/borrower and dealing with the appraisers, environmental consultants, etc. since FM cannot have direct contact with the borrower.
This entire process takes at least a couple of weeks in general (b/w the DUS and FM). It's not like the DUS just lends the money and assumes FM will purchase the loan. The DUS first goes through the deal, evaluates it and gives it their recommendation to FM that this is a safe loan and that meets FM criteria, and then FM goes through it themselves and confirms that it does in fact meet criteria, and they agree to buy the loan. The DUS then goes back to borrower, tells them the good news, and funds the loan. Then FM purchases the loan at a later date from the DUS based on aforementioned agreement.
You have to recognize that FM is on the lending side and not the equity side of the business. A broker, operator, private equity, etc. may place prime importance on a purchasing below market, value creation potential, meeting a certain risk appetite for the right return, etc. and therefore places much emphasis on valuation and financial modeling. FM is most concerned with the borrower's ability to payback the loan and that the loan will not be rejected by buyers once they go to bundle it and sell it on the market (due to perceived excessive risk).
FM does not try to understand perfect valuation of the properties; rather, they try to assess the likelihood that the loan will be paid back, and rely heavily on either the purchase price and/or the appraiser's valuation as the indicator value. Of course if FM strongly disagrees, they will push back, but generally the appraisers are recognized as the experts on providing unbiased value (debatable).
Think of it this way. An investor goes out and buys property for $100MM (backed by an appraisal purporting $100MM value), but in reality the property is only worth $90MM market value, and even FM believes the property is only worth $90MM. When he buys the property, he puts down 60% down payment and finances 40% (this would hardly ever happen, it's just for example purposes). The property is in good condition, cash flows well, and is able to cover it's debt service more than adequately (since such a large down payment, therefore small debt service payments).
In the case of the investor, this is likely a disaster. The investor lost $10MM on the transaction by overpaying at purchase, which means they will likely be looking at taking a loss whenever they exit the property, or will need market values to increase 10+% before he can even sell the property for what he paid.
However, in the case of FM, this could quite likely be considered a safe loan. Who cares if the property is only worth $90MM and borrower is paying $100MM? The property has no major issues, the property can easily cover it's debt payments, and most importantly the borrower has $60MM invested in the property, so it is highly unlikely that the borrower is going to walk on the loan.
Hi. Thank you so much for the detailed response!!! So appreciate it. Very helpful!. One thing I did not know was that Freddie Mac is involved in live deals too, so before they are closed and funded, the FM underwriter is working with the DUS underwriter,I did not know that. I assumed that the DUS lender closes the loan and makes sure it fits the FM parameters and then the loan gets purchased after closing, did not know that FM has to sign off on it before they even close.
Curious- Is this the case for even residential loans or any non portfolio loans in general?
Bump. Has anyone applied or been a part of Freddie Mac's multifamily analyst rotational program? How many years was it, how competitive was it to get in, any positives/negatives?
Freddie Mac: Capital Markets/Compliance Phone Interview: Pointers? (Originally Posted: 10/02/2017)
Hey guys!
I just got notification for a 20 minute phone interview with Freddie Mac to be an intern in their Capital Markets Compliance team.
Any pointers or things to expect? How should I prepare for this? I'm a current Sophomore. Do you think there will be technicals? I expect all behaviorals..
Thanks!
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If it's a compliance role, I wouldn't expect any technicals. Maybe a brief overview of what's going on in the market and potential regulations.
Thanks for the comment, It's a rotation between the actual capital markets team and the compliance team overseeing it.
Interview went well! All behavioral and technicals were only based on what I put on my resume.
Help! Interview at Freddie Mac (Originally Posted: 01/30/2012)
I am currently a junior attending semi-target school majoring in Economics, and looking for an internship for this upcoming summer.
I got an interview at Freddie Mac corporate finance intern position, however it is my very first interview. so I would like to ask you guys for an advice. (what to expect/study for culture of intervie, tips etc.)
Also, I am very confused about the corporate finance job at Freedie Mac, is this considered and comparable to "front office" in banking industry or does this align with more operations middle/back office jobs.
Thank you for your help!
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