Section 702

ARM Loan and SARM Loan Conversions

702.01

Governing Documents

Requirements

For interest rate conversions, you must comply with the following documents and order of priority:

  • Interest Rate Conversion Agreement Interest Rate Conversion AgreementDocument describing the terms and conditions when a Mortgage Loan interest rate may convert from an adjustable rate to a fixed rate. ;
  • Loan Documents Loan DocumentsAll Fannie Mae-approved documents evidencing, securing, or guaranteeing the Mortgage Loan. ; and
  • this Chapter.
702.02

Minimum Conversion Debt Service Ratio

Requirements

To convert... You must...
A Mortgage Loan to a fixed rate Confirm the Minimum Conversion Debt Service Ratio (per the Interest Rate Conversion Agreement Interest Rate Conversion AgreementDocument describing the terms and conditions when a Mortgage Loan interest rate may convert from an adjustable rate to a fixed rate. ) is met.
A Supplemental Mortgage Loan to a fixed rate

Confirm the Minimum Conversion Debt Service Ratio is met using the sum of

 

  • the current annual combined debt service of all Pre-Existing Mortgage Loans Pre-Existing Mortgage LoansMultifamily residential real estate loan secured by Liens against the Property having higher priority than the Lien securing the Subordinate Loan purchased by Fannie Mae. (using the maximum interest rate for any variable rate Pre-Existing Mortgage Loan Pre-Existing Mortgage LoanMultifamily residential real estate loan secured by Liens against the Property having higher priority than the Lien securing the Subordinate Loan purchased by Fannie Mae. ), plus
  • the annual debt service of the converted fixed rate Supplemental Mortgage Loan Supplemental Mortgage LoanMortgage Loan purchased by Fannie Mae that is subordinated to, and has a Mortgage Loan Origination Date after, the Senior Mortgage Loan that is also owned by Fannie Mae. .
702.03

Conversion Criteria

Requirements

You must comply with the following table.

Criteria You must...
DUS Gateway Enter delegated and non-delegated conversions in DUS Gateway DUS GatewayMultifamily pre-acquisition system, or any successor systems, recording deal registration, Pre-Review and/or waiver tracking, Mortgage Loan Commitments, and decision records. .
Effective Date Ensure the conversion is effective on a payment date (i.e., the 1st day of the month).
Conversion Timeline
  • For an ARM Loan ARM LoanMortgage Loan with an interest rate that periodically adjusts based on an Index per the Note or Loan Documents. , exercise the conversion
    • after the 1st Loan Year Loan YearPeriod beginning on the date of the Note and ending on the last day of the month that is 12 full months after the date of the Note, and each successive 12-month period thereafter. , and
    • up to, and including, the last day of the 5th Loan Year Loan YearPeriod beginning on the date of the Note and ending on the last day of the month that is 12 full months after the date of the Note, and each successive 12-month period thereafter. .
  • For a SARM Loan, exercise the conversion
    • after the 1st Loan Year Loan YearPeriod beginning on the date of the Note and ending on the last day of the month that is 12 full months after the date of the Note, and each successive 12-month period thereafter. , and
    • up to, and including, the 1st day of the 3rd month before the Maturity Date Maturity DateDate all Mortgage Loan amounts become fully due and payable per the Loan Documents. .
Loan Term

Convert to a fixed rate Mortgage Loan Mortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. Test Notes-SV Test Again Sub-bullet test1 Sub-bullet test2 with a loan term

 

  • greater than or equal to 7 years, and
  • less than or equal to 10 years.
Underwriting

Underwrite the conversion as follows:

 

  • Base actual DSCR DSCROn an annual basis or any specified period, the ratio of Net Cash Flow to the total of:  principal, interest, and required Mezzanine Financing or Hard Pay Preferred Equity payments. on the trailing 12-month period from the most recent supportable actual operations per the Borrower’s Borrower’sPerson who is the obligor per the Note. Property PropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). financial statements.
  • Ensure actual DSCR DSCROn an annual basis or any specified period, the ratio of Net Cash Flow to the total of:  principal, interest, and required Mezzanine Financing or Hard Pay Preferred Equity payments. meets the minimum required DSCR DSCROn an annual basis or any specified period, the ratio of Net Cash Flow to the total of:  principal, interest, and required Mezzanine Financing or Hard Pay Preferred Equity payments. for a fixed rate Mortgage Loan Mortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. Test Notes-SV Test Again Sub-bullet test1 Sub-bullet test2 at the same Pricing and Underwriting Tier Pricing and Underwriting TierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). as the original ARM Loan ARM LoanMortgage Loan with an interest rate that periodically adjusts based on an Index per the Note or Loan Documents. or SARM Loan.
  • Comply with the Loan Documentation Requirements Loan Documentation RequirementsLoan Documents listed in Form 6000 applicable to the particular Mortgage Loan execution and/or product and features. ( Form 6000 ).
702.04

Guaranty Fee and Servicing Fee

Requirements

You must calculate the Gross Note Rate Gross Note RateInterest rate stated in the Loan Documents. using the current Guaranty Fee Guaranty FeeFee retained by Fannie Mae for credit enhancing a Mortgage Loan or assuming credit risk on a Mortgage Loan, and which may be expressed as a percentage. and Servicing Fee Servicing FeeFee a Servicer receives for collecting payments, managing operational procedures, and assuming your portion of credit risk for a Mortgage Loan, and which may be expressed as a percentage. for a fixed rate Mortgage Loan Mortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. Test Notes-SV Test Again Sub-bullet test1 Sub-bullet test2 in effect at Rate Lock Rate LockAgreement between you and the Investor containing the terms of the Lender-Arranged Sale or Multifamily Trading Desk trade of the Mortgage Loan and the MBS terms and conditions relating to the underlying MBS, if applicable, which may be documented via a recorded telephone conversation. .

702.05

Interest-Only

Requirements

If an interest-only ARM Loan ARM LoanMortgage Loan with an interest rate that periodically adjusts based on an Index per the Note or Loan Documents. or SARM Loan converts during the interest-only period and the new loan term is less than the original term, you must ensure

  • the interest-only period does not carry over, and
  • fixed rate amortization begins immediately.

Guidance

If an interest-only ARM Loan ARM LoanMortgage Loan with an interest rate that periodically adjusts based on an Index per the Note or Loan Documents. or SARM Loan converts during the interest-only period and the new loan term is greater than or equal to the original term, you may allow the remaining interest-only period to carry over to the fixed rate Mortgage Loan Mortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. Test Notes-SV Test Again Sub-bullet test1 Sub-bullet test2 .

702.06

Fixed Rate Amortization

Requirements

You must comply with the following table.

For ARM Loans and SARM Loans with... The fixed rate amortization term will be...
Full-term interest-only 360 months.
  • Partial interest-only or amortization,
  • a fixed rate term greater than or equal to the original ARM Loan or SARM Loan term, and
  • a most recent Property Condition Rating of 1 or 2
 360 months.
Other characteristics

equal to

 

  • the original ARM Loan ARM LoanMortgage Loan with an interest rate that periodically adjusts based on an Index per the Note or Loan Documents. or SARM Loan amortization term (in months), minus
  • the number of monthly payments (P&I P&IPrincipal and interest or interest-only) since the Mortgage Loan Origination Date Mortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. .
702.07

Fixed Rate Debt Service Payments

Operating Procedures

To calculate the fixed rate monthly P&I P&IPrincipal and interest payments, you must:

  1. Determine the amount required to repay the Mortgage Loan Mortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. Test Notes-SV Test Again Sub-bullet test1 Sub-bullet test2 UPB UPBUnpaid Principal Balance .
  2. Divide the amount into equal monthly installments.
  3. Include interest accrued at the fixed rate over the amortization term per Part IV, Chapter 7: Variable Rate Conversions and Renewals, Section 702.06: Fixed Rate Amortization .
  4. Use a 30/360 interest accrual method, regardless of whether the Mortgage Loan Mortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. Test Notes-SV Test Again Sub-bullet test1 Sub-bullet test2 uses a 30/360 or an actual/360 interest accrual method.
702.08

Fixed Rate MBS Trade Premium

Requirements

For premiums on fixed rate MBS MBSMortgage-Backed Security trades, you must comply with the Pricing Memo Pricing MemoApplicable DUS Pricing Memo or non-DUS Pricing Memo communicating pricing for various products and features. .

702.09

New Property Condition Assessment (PCA)

Requirements

For any non-MAH Property MAH PropertyProperty that: complies with Part III, Chapter 7: Multifamily Affordable Housing Properties, Section 702: MAH Property Eligibility; and is underwritten per Part III, Chapter 7: Multifamily Affordable Housing Properties. , you must obtain a new full PCA PCAAssessment of the Property's physical condition and historical operation. per  Form 4099  if the conversion extends the term of the fixed rate Mortgage Loan Mortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. Test Notes-SV Test Again Sub-bullet test1 Sub-bullet test2 beyond the original term of the ARM Loan ARM LoanMortgage Loan with an interest rate that periodically adjusts based on an Index per the Note or Loan Documents. or SARM Loan.

You must obtain a full PCA PCAAssessment of the Property's physical condition and historical operation. every 5 years for an MAH Property MAH PropertyProperty that: complies with Part III, Chapter 7: Multifamily Affordable Housing Properties, Section 702: MAH Property Eligibility; and is underwritten per Part III, Chapter 7: Multifamily Affordable Housing Properties. per  Part V, Chapter 4: Asset Management: Loan Document Administration, Section 408.04E: New Property Condition Assessments .

You must obtain the PCA PCAAssessment of the Property's physical condition and historical operation. by the earlier of

  • the final Loan Year Loan YearPeriod beginning on the date of the Note and ending on the last day of the month that is 12 full months after the date of the Note, and each successive 12-month period thereafter. of the ARM Loan ARM LoanMortgage Loan with an interest rate that periodically adjusts based on an Index per the Note or Loan Documents. or SARM Loan if it had not been converted, or
  • Loan Year Loan YearPeriod beginning on the date of the Note and ending on the last day of the month that is 12 full months after the date of the Note, and each successive 12-month period thereafter. 10.