Consistency. Better Quality. Ease of Review
New year, new guidelines for property condition assessments. The latest change comes from Fannie Mae. Last year, it was Freddie Mac, and now, U.S. HUD is in the process of doing the same. This brief focuses on the impact of the new requirements from Fannie Mae for Physical Needs Assessments (or PNAs).
As a result of the lack of consistency of PNA reports for multifamily properties secured by loans purchased by Fannie Mae Multifamily, in February 2014, Fannie Mae Multifamily issued its first comprehensive PNA guidance in over 20 years. Among other things, the update includes new forms that serve as reference documents and templates that reflect an effort by Fannie Mae to establish minimum property evaluator qualifications, standardize report format and improve assessment quality and consistency. The purpose of this brief is to gauge how the industry is reacting to the new requirements since the release.
Maintaining High Loan Standards
To get a behind-the-scenes look at what prompted the new guidelines, EDR Insight reached out to Tammy Romero, Fannie Mae’s Credit Risk Analyst III, MF Risk Management. “Fannie Mae’s Multifamily Mortgage Business routinely reviews loan delivery requirements and guidance to maintain high loan standards and provide quality affordable housing,” said Romero. “Improved guidance on property conditions and improved minimum requirements provide a more thorough understanding of the physical condition of the properties financed by multifamily mortgage loans purchased by Fannie Mae. The U.S. multifamily housing stock is aging. The Harvard Joint Center for Housing Studies estimates that the average age of the nation’s multifamily housing stock is 38 years,” she continued. “Given the aging U.S. multifamily housing stock, Fannie Mae believes that improved understanding of property conditions is consistent with our mission to provide safe and affordable housing.”
A look at last year’s numbers sheds some light on why Fannie Mae has such an interest in stricter standards. Fannie Mae’s investment in multifamily housing is significant: In 2013 alone, Fannie Mae provided $28.8 billion in multifamily finance involving approximately 507,000 multifamily units.
According to Fannie Mae, the improved guidance provides a more comprehensive approach to property conditions by:
• Providing explicit qualifications for the Property Evaluator as well as the representative from the Property Evaluator performing the on-site inspection;
• Providing clearly defined property components and systems that must be addressed as part of the Physical Needs Assessment to improve the quality of information delivered as well as the identification of potential risks that may impact property operations or resident health and safety;
• Standardizing report format and tables to better identify errors and/or omissions while streamlining review;
• Identifying known problematic materials and providing clear guidance on evaluation; and
• Improving management of property condition issues that must be addressed throughout the loan term.
Reaching a Higher Bar
Key among the changes made by Fannie Mae to its PNA requirements are more stringent professional qualifications for property evaluators, which could narrow the field of providers who meet the higher bar (see text box). Among other things, the PNA report delivered to the lender “must be reviewed and certified by a professional engineer or by a licensed or registered architect, in good standing, or by an individual with appropriate experience and certifications in the construction field. The PNA Report should be signed by an employee of the property evaluation with experience (i) commensurate with the subject property type and scope (i.e., size, complexity, etc.) and (ii) in the property of PNA reports, and who is not a subcontractor of the property evaluator.”
Gregory Bailey, Director, Architectural & Engineering Technical Operations at EMG, believes that some firms may find it challenging to meet these new requirements. “The new property evaluator and reviewer qualifications, as well as the new special hazards requirements, pose the most difficulty because they require very high levels of education, industry experience and continuing education that many firms in the industry currently do not have,” Bailey says.
“This creates a steep learning curve for many providers of Property Condition Assessments. Going forward, firms doing work on Fannie Mae projects will need to ensure that their staff meets the education and experience requirements, find and hire new staff that does, or a combination of the two. We will likely see the pool of qualified professionals decrease as they are being sought after by various firms.”
~Gregory Bailey, Director, Architectural & Engineering Technical Operations, EMG
As Bailey noted, EMG participated in the early piloting of the new standards, and as a result, “we actively prepared in advance of the effective date.” Other firms that already prioritized internal training programs and certifications are expected to have an easier time of transitioning over. Additionally, Bailey notes, “These changes will help those companies that focused on quality in the past by raising the bar across the board.”
On the topic of whether the new requirements would impact the turnaround time of PNA reports, Partner Engineering and Science’s Aaron Kovan, Technical Director of Agency Services, had this to say in an FAQ published by Globe St.com: “There is some concern in the industry that the changes could potentially lengthen the delivery date due to the more restrictive qualification requirements and ensuing difficulty to staff a project. The larger consulting firms will have a greater capacity to deal with these changes with minimal to no increase in schedule as they are better positioned to train employees and have a larger, generally more qualified staff.”
Emphasis on Energy Reporting, Benchmarking
Benchmarking, the process of tracking a building’s energy and water use and comparing it against past performance and against its peers, is now an important component of the Fannie Mae PNA requirements. The Fannie Mae Multifamily Selling and Service Guide guidance and new Form 4099 (i.e., the instructions for the Property Evaluator) have been updated to require properties located in jurisdictions that require reporting of energy consumption (currently required in Boston, Chicago, Washington DC, New York City and Seattle) to report Energy Use Intensity (EUI) for the EPA ENERGY STAR® score (to be released this fall) to Fannie Mae as a way to gauge property performance and operation. The ENERGY STAR® score serves as a proxy for performance risk similar to the debt service coverage ratio, or DSCR (i.e., Does a property with a lower EUI or a higher ENERGY STAR® score have a healthier cash flow and lower risk in a volatile energy market?). Tracking energy consumption over time will allow for an analysis of whether there is a correlation between a property’s ENERGY STAR® score and property cash flow. [For more on the new ENERGY STAR® score, see the note at the end of this brief.]
Feedback From the Field
Fannie Mae has been actively educating and soliciting feedback from its network of lenders, property owners and property evaluators. Since the PNA update was first published in October 2013, over 800 industry professionals have been trained on the new requirements. Says Romero, “Industry feedback received since the original publishing date led to an additional update published in January 2014.
“Input we have received from the property evaluator community has primarily centered around the qualifications for the property evaluator, which Fannie Mae addressed in the most recent PNA guidance update. Feedback from our lender partners has primarily been focused on the impact to replacement reserve schedules; however, initial feedback from multiple property evaluator firms indicates that the increase in replacement reserves is marginal and appropriate,” Romero says.
Climbing the Learning Curve
While the changes are designed to improve the consistency and quality of PNAs, some firms could find it more challenging than others to get their processes in line with the new processes, forms and report structure. Form 4099’s standard report format will allow PNA reports to be reviewed more efficiently. The latest Instructions for the PNA Evaluator (Form 4099) can be found on Fannie Mae’s website.
The new PNA guidance applies to all PNA reports dated on or after February 3, 2014. Fannie Mae will remain accessible to lenders and property evaluators to address feedback and questions resulting from the updated PNA guidance. The next version of the instructions is already underway based on Fannie’s outreach and additional feedback it has received from the lending community, property evaluators and owners, as well as other industry experts.The new requirements are minimum requirements by Fannie Mae. Lenders approved to deliver loans under Fannie’s Delegated Underwriting and Servicer (DUS) guidelines may also have additional requirements.
NOTE TO READERS:
EDR Insight would like to sincerely thank Fannie Mae’s Tammy Romero and EMG’s Greg Bailey for their valuable contributions to this brief, as well as to our colleague, Tom Adams, for peer reviewing this brief prior to publication.
For more on EPA’s ENERGY STAR® Score
Just this week, Fannie Mae issued a press release announcing its collaboration with the U.S. EPA in its development of an ENERGY STAR® score for multifamily properties. In Fall 2014, EPA will finalize a 1-100 ENERGY STAR ® score for multifamily housing properties in the ENERGY STAR Portfolio Manager® tool. The 1-100 ENERGY STAR® score will be based on analyses of nationally representative survey data collected by Fannie Mae under a memorandum of understanding with EPA signed in 2011. As noted in the PR notice by Jeffery Hayward, Senior Vice President and Head of the Multifamily Mortgage Business, Fannie Mae. “The ENERGY STAR score will help the industry identify and implement energy-efficient methodologies that will improve property performance and conditions of multifamily properties.”