Keeping Multifamily In Check: Fannie Mae’s New PNA Guidance

Scotsman Guide just featured an article authored by EDR Insight’s Principal Analyst, Dianne Crocker as one of four “not to miss” articles in this month’s edition. The article, titled Keeping Multifamily in Check, takes readers through the who, the what, and the why of Fannie Mae’s guidance for “physical needs assessments” or PNAs on multifamily properties. EDR Insight wishes to sincerely thank Fannie Mae’s Tammy Romero and EMG PCA expert, Greg Bailey for their invaluable insights in the preparation of this piece.

For EDR Insight readers, the article appears in its entirety below.

This article below was originally published in the August 2014 edition of the Scotsman Guide:

Keeping Multifamily In Check

The trifecta of multifamily lending—Freddie Mac, Fannie Mae and the U.S. Department of Housing and Urban Development—are all in the process of updating the guidelines used by their network of lenders to assess the physical condition of multifamily properties. Not surprising when you consider this statistic from the Harvard Joint Center for Housing Studies:  the average age of the multifamily housing stock in the U.S. is 38 years, and counting. Thus, the property condition assessment needs now are very different than what Fannie Mae, Freddie Mac and HUD started with back in the 1990s. Add to that element the fact that the commercial real estate market is recovering from the financial crisis, and the resultant pressure to get a full and accurate read on the full risk of an asset is critical.

The latest of these three lending sources to update their requirements is Fannie Mae with new instructions for performing Multifamily Physical Needs Assessments (PNAs) that took effect on February 3, 2014. Multifamily continues to be the favored asset class, but thorough study by qualified property condition assessment firms is still important for avoiding lending on a risky asset. For commercial real estate loan originators or brokers, these new requirements signal an important move toward better quality and more consistency in reports designed to flag any physical problems at multifamily properties. To ensure a seamless loan origination process, it is critical to be aware of what Fannie Mae now requires and to work with property evaluators who meet the new professional qualifications. This article focuses on the “who” (who must follow the guidance?), the “what” (what’s changed?) and the “why” (why did Fannie Mae adopt tighter standards?).

WHO Must Follow the New PNA Guidance?

All reports ordered on or after February 3, 2014 require Fannie Mae’s Delegated Underwriting and Servicing (DUS®) lenders and their vendors to follow the Multifamily Selling and Servicing Guide when conducting PNAs on multifamily loans. The PNA is an underwriting tool that provides information necessary for the lender and Fannie Mae to assess the overall physical condition and risk of a multifamily property securing a mortgage loan to be financed by the lender and purchased by Fannie Mae.  The PNA provides:
•    an assessment of the property’s current physical condition;
•    for each of the property’s systems and components, an estimate of (i) the effective age, and (ii) the remaining useful life;
•    an evaluation of past and current operating and maintenance practices at the property, and suggestions for future operating and maintenance practices; and
•    an identification of current and future physical needs, including all significant (i) capital replacement costs, and (ii) maintenance costs required at the property during the mortgage loan term.

The new instructions from Fannie Mae provide directions for the firm conducting the PNA (the “property evaluator”), and are minimum requirements by Fannie Mae. Lenders approved to deliver loans under Fannie’s DUS guidelines may also have additional requirements. Since the PNA update was first published in October 2013, over 500 lenders and property evaluators have been trained on the new requirements.

WHAT Has Changed?

A principal element of the PNA is having the property evaluator visit the property. The site visit is a visual inspection needed to make a reasonable determination of the property’s overall functionality and sustainability.  During the walkthrough, the evaluator will observe the property’s systems and components to identify deferred maintenance items, physical needs and any unusual or unique features. The PNA Report will include a description and condition of the property systems and components, including recommendations for repairs, replacement, maintenance, estimated remaining useful life and scope of work for repair or replacement, if recommended.

Among other things, the most recent changes include several new forms and reflect an effort by Fannie Mae to establish minimum evaluator qualifications, standardize report format and improve assessment quality and consistency. In particular, the bar has been  raised for property evaluators and report reviewers as Fannie Mae seeks to reduce past problems with too many poor-quality reports.  PNA reports must now 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. It is worth noting that the educational requirements in Fannie Mae’s guide are now in line with those in Freddie Mac’s policy. Firms that provide PNAs on Fannie Mae projects, also known by the more generic term, Property Condition Assessments, now have a higher bar to reach, and DUS lenders are more proactively informing their borrowers of what to expect of their PNA professionals.

Another change is that PNA reports have 6-month shelf lives versus the previous guidance of 12 months. Fannie Mae is now aligned with HUD, ASTM, and the general industry in terms of an effective 6-month lifespan for existing PNA reports. After 6 months, a new site visit is required. (At the lender’s discretion, however, the life of the PNA report may be extended to 12 months, provided that the lender visits the property to confirm that there have been no adverse changes.)
One interesting, and very timely, element of the new instructions relates to a property’s energy efficiency. PNA reports must provide an energy benchmark for any properties in a state or municipality where legislation requires that a property is benchmarked. As of December 2013, this included New York City, Seattle, Boston, Washington DC, and Chicago. The energy benchmark will be a numeric metric measuring the combined energy consumption by the property’s systems and equipment for the same 12 month period as used by the property of reporting its annual financial information, and will be calculated using ENERGY STAR® Portfolio Manager ( This benchmark score will be the Property’s ENERGY STAR® rating on a 1 to 100 scale. If the energy benchmark score is below 50, the PNA Report should attempt to identify causes for the low performance and remediation opportunities for improvement.
Fannie Mae also tightened its underwriting standards and will be paying more attention to lifecycle costs and sustainability at multifamily propertiesProperties older than 15 years will be expected to carry reserves required for component replacement throughout industry-recognized lifecycles. This is another area of revision that aligns Fannie Mae with industry standards, including HUD and USDA underwriting approaches. This change is likely to result in higher annual deposits to reserve accounts for older properties. The biggest impact thus far has been on an increase in reserves for loans over 10 years.

WHY Did Fannie Mae Update Its Guidance? 

To understand the need for change and the scope of Fannie Mae’s reach, consider this:
•    Fannie Mae provided $28.8 billion in multifamily finance in 2013.
•    These loans covered more than half a million multifamily units in the U.S.
•    Some of the biggest names in multifamily lending participate in Fannie Mae’s program (e.g., Wells Fargo, CBRE, Beech Street and Berkadia Commercial Mortgage, just to name a few).

The new instructions are the result of the ongoing review of loan delivery requirements and guidance by Fannie Mae to ensure that it is maintaining high loan standards. Improved guidance on property conditions and more stringent  minimum requirements provide a more thorough understanding of the physical condition of the properties financed by multifamily mortgage loans purchased by Fannie Mae. Given the aging U.S. multifamily housing stock, Fannie Mae believes that improved understanding of property conditions is consistent with its mission to provide safe and affordable housing. Fannie Mae has been actively educating and soliciting feedback from its network of lenders, property evaluators and owners, and will make appropriate updates as necessary.

NOTE TO READERS: Tammy Romero, Fannie Mae’s Credit Risk Analyst III and Greg Bailey Director, Architectural & Engineering Technical Operations at EMG contributed to this article.


Any PCA experts, mortgage brokers, or originators interested in more information can find Fannie Mae’s Multifamily Instructions for the PNA Property Evaluator (Form 4099) on Fannie Mae’s website.

For another EDR Insight article on the new guidance, see our March 2014 piece titled Fannie Mae Releases First PNA Guidance in Over 20 Years, including lists of the top lenders in Fannie Mae’s DUS lender network.