FEATURE ARTICLE, SEPTEMBER 2012

PRE-REVIEW STATUS
Borrowers making most of Fannie Mae's pre-review status for Houston.
Brandon Brown

Houston ranks first nationally in job growth, first in both household and corporate relocations, and second in household growth. Recently named the hippest city in America by Forbes, seemingly everyone is on the Bayou City’s bandwagon except Fannie Mae. Why is such a booming city on Fannie Mae’s pre-review list and what does pre-review status mean for borrowers?

Fannie placed Houston on pre-review in 2008 in response to troubles with legacy loans and concern for assets in their portfolio with perceived exposure on maturity. Many loans made during the last cycle ended up at lower debt coverage ratios than anticipated and Houston suffered a higher level of defaults than many other markets that Houston is now outperforming. While these problem loans were largely concentrated in a few challenged submarkets, Houston is nonetheless treated as a struggling market overall.

The pre-review status is essentially Fannie’s way of deleveraging the market as a whole. When Fannie Mae makes new loans, they are comfortable capping leverage in most cases at 65 percent, which is not to be impacted by market conditions that are affecting some of their legacy loans.

Lower leverage boosted cap rates needed for borrowers to hit their return targets, which created opportunity to get in to projects at a lower basis. Today’s low interest rates along with the strong local multifamily fundamentals have similarly benefited borrowers. Strong borrowers are often able to get waivers from Fannie Mae to obtain leverage upwards of 75 percent and even 80 percent in certain circumstances. Owners who bought at a lower basis are able to get supplemental loans from Fannie Mae to take advantage of rising values and increase their effective leverage on existing deals.

Ironically, the low leverage offered by Fannie Mae during the past several years has indirectly benefitted borrowers in another way. We have financed numerous deals in the Galleria submarket during the past few years. This is a strong infill area that boasts among the tightest occupancies in the city. We financed several deals to acquire and do some capital upgrades through life insurance companies. These were deals that might traditionally have gone to Fannie Mae, but we used the life insurance companies because we could obtain greater leverage from them versus Fannie. After the improvements were completed and revenue jumped, we were able to go to Fannie for the refinance and cash out a good portion of the borrower’s equity. Given where rates have fallen, these borrowers refinanced at higher loan proceeds. Due to today’s favorable rate environment, loan payments are the same or even lower than if borrowers had been able to get non pre-review leverage originally from Fannie.

Houston’s multifamily market continues to strengthen. While there remain challenging submarkets, we at LMI are fortunate to be able to draw on the dozens of nearby loans we have closed to help smooth the lending process and make sure our borrowers’ loans get closed.

— Brandon Brown is managing director at LMI Capital, a boutique mortgage banker that has arranged more than $3 billion in capital since 2000 for its valued clients.

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