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In their proposed regulation setting underwriting standards for qualified commercial real estate (CRE) lending, including multifamily, the U.S. Department of Housing and Urban Development (HUD) and five other federal agencies have taken a very conserevative approach to definining what constitutes a low-risk loan, raising concerns among commercial builders.
As with the single-family qualified residential mortgage, or QRM, meeting this standard would exempt issuers of securities backed by CRE loans from a requirement in the 2010 Dodd-Frank financial reform law that they retain 5% of the loan value as a credit risk.
The requirements include:
- 1.7 debt service coverage (1.5 for existing properties with at least a two-year period of good performance)
- 65% loan-to-value
- Fixed interest rate or derivative equivalent to a fixed rate
NAHB is concerned that few developers will be able to achieve these underwriting standards, which would require the 5% risk retention.
While the cost of the risk retention is unknown, it could be passed along to the lender and/or borrowers, pushing up financing costs and resulting in higher rents.
Under the proposed rule, Fannie Mae and Freddie Mac would not be required to hold the additional 5% risk retention , while they were under conservatorship or receivership.
Also, loans insured or guaranteed by the FHA, Rural Housing Service (RHS), Veterans Affairs (VA) and the Farm Credit Administration would be exempt, as would securities issued by Ginnie Mae and the Federal Agricultural Mortgage Corporation. The proposed rule also exempts loans/securities issued by states or any public instrumentality of a state.
To read the proposed rule in the Federal Register, click here.
For more information or to provide feedback on the proposed rule, email Claudia Kedda at NAHB, or call her at 800-368-5242 x8352.