Effective as of October 18, 2023, additional underwriting guidance is provided to address the increase in Properties with deferred maintenance and/or critical life safety issues

• not properly identified, and
• impacting the 
  • Mortgage Loan application, 
  • Commitment, and
  • Sponsor's ability to do business with Fannie Mae. 

• condition is accurately assessed when
  • inspecting the site, and
  • reviewing the PCA; and
• expenses are better understood.

Comply with  Part II, Chapter 4: Lease Audits, Inspections, and Reserves, Section 404: Property Condition Assessment (PCA) .

Develop a sustainable employee training plan including:

• on the job instruction;
• inspection shadowing for less-experienced employees;
• in-house training by experienced staff;
• other acceptable training (e.g., MBA's School of Multifamily Property Inspections); and
• PCA review and evaluation.

Effective early screening enables you to

• identify physical condition issues, and
• mitigate concerns during quoting and underwriting. 

Comply with  Part II, Chapter 4: Lease Audits, Inspections, and Reserves, Section 404: Property Condition Assessment (PCA) .

• Understand your Sponsor's:
  • overall and market-specific multifamily experience;
  • proposed business plan for the Property, including
    • acquisition/rehab,
    • repositioning, 
    • improving operations, and
    • optimizing staff across properties; 
  • history of owning or managing assets of similar  
    • size,
    • vintage,
    • location, 
    • class, and 
    • product type; 
  • plan to:
    • manage any out-of-state assets; 
    • conduct regular on-site visits; 
    • appropriately maintain the Property; and
    • hire an appropriate third-party management firm with relevant market experience; and
  • ownership organization, including
    • capital structure, and
    • ability to issue capital calls.
• Virtually walk the neighborhood and Property assessing its
  • current condition, and
  • surrounding uses. 
• Perform online searches for adverse action against the Principals.
• Confirm sufficient estimated expenses for 
  • repairs/maintenance, and
  • payroll.

Effective internal quality controls

• ensure independence, and
• limit external influences.

Per  Part II, Chapter 4: Lease Audits, Inspections, and Reserves, Section 404: Property Condition Assessment (PCA) and  Form 4099 , you must:

• order the PCA, not external deal participants (e.g., Borrower, broker, correspondent); and
• have an annual quality control program to review
  • the quality of the PCAs performed by your PCA Consultant, and
  • your compliance with 
    • the Guide, and
    • Form 4099 .

Establish and maintain processes for ordering PCAs, including: 

• reviewing and vetting the PCA Consultant; 
• ensuring the PCA scope includes confirmation of any recent value-add capital improvements relied on to mitigate risk; and
• ensuring the credentials and quality of the PCAs and individual field engineers/assessors (who may be independent contractors working for multiple PCA Consultants) through 
  • controls, 
  • calibration, and
  • feedback. 

A thorough underwriting inspection: 

• provides a baseline assessment highlighting actual Property conditions; 
• serves as a quality control of the third-party underwriting reports; and
• reflects whether the Property:
  • is proactively maintained; or
  • has
    • Deferred Maintenance, 
    • Life Safety concerns, or
    • components past their useful life. 

Per  Part II, Chapter 4: Lease Audits, Inspections, and Reserves, Section 401: Lease Audit : 

• you must randomly select units for inspection; 
• photos must include any observed
  • Immediate Repairs, 
  • Deferred Maintenance, or
  • Replacement of Capital Items; and
• the inspection must be performed by a qualified individual with experience inspecting similar property types (e.g., Seniors, Students, conventional). 

• Ensure the Overall Property Rating reflects the actual asset condition at the time of the inspection, without considering risk mitigants such as
  • to-be-completed repairs,
  • Net Worth/Liquidity, 
  • previous experience, or
  • insurance proceeds. 
• Use best efforts to inspect the Property before Rate Lock, particularly for a 
  • cash-out refinance, or
  • Supplemental Mortgage Loan.
• Ensure the MBA Standard Inspection Form (MBA Form) is completed, including
  • commentary, and
  • photos, including
    • detailed,
    • close-up, and
    • overall components from a distance.
• Reconcile the Overall Property Rating for consistency with sub-ratings (e.g., Overall Property Rating is 2, but Life Safety is 3, and Deferred Maintenance is 3).
• Obtain the Borrower's action plan to remediate or improve: 
  • anything identified as "Declining" on the Physical Condition & DM tab of the MBA Form; and
  • an overall Property Rating of 3 to a 1 or 2. 

Effective internal quality controls

• ensure independence, and
• limit external influences.

Per   Part II, Chapter 4: Lease Audits, Inspections, and Reserves and the  Form 4099 , you must ensure:

• the Overall Property Rating and assessment reflects the actual asset condition at the time of inspection, without consideration of risk mitigants including
  • to-be-completed repairs,
  • Net Worth/Liquidity, 
  • previous experience, and
  • insurance proceeds; 
• if available, the PCA Report includes a summary of major capital expenditures over the prior 3 years, including
  • improvement name, 
  • brief description, 
  • timing of improvement, and
  • cost; 
• the PCA includes all relevant information about any work
  • under contract, or
  • observed underway during the site visit; and
• you address, via Immediate Repairs, any Deferred Maintenance and Life Safety concerns.

• Ensure alignment among the
  • underwriting inspection, 
  • PCA Report,
  • Loan Documents, and
  • associated
    • photos, 
    • captions/comments, and
    • component ratings.
• Ensure the Replacement Reserve amount and Schedule 6 to the Multifamily Loan Agreement - Required Repairs Schedule are determined by the Property needs and remaining useful life, regardless of the Mortgage Loan size or structure. 
• Confirm that the PCA addresses completion of previously identified Deferred Maintenance and Life Safety concerns for a 
  • refinance, or
  • Supplemental Mortgage Loan. 
• Ensure, if previously identified required work is incomplete at the time of a Supplemental Mortgage Loan underwriting, the original timeframe remains in place.
• After your review:
  • discuss material issues or misalignment in conclusions with the vendor; and
  • elevate unresolved issues to your senior management.