FM Commentary

FM Commentary

The Role of Risk Retention in Multifamily Finance

Caroline BlakelyWe're hearing much debate about the role of risk-sharing in housing finance. We believe Fannie Mae’s Delegated Underwriting and Servicing (DUS) program is successful because it applies a scalable approach to strong risk-sharing, underwriting, and contractual guarantees to a substantial volume of our multifamily business.

Under the DUS model, 25 lenders are pre-approved and delegated the authority to underwrite, close, and service loans on behalf of Fannie Mae. In contrast, the standard industry practice is for a multifamily loan purchaser or guarantor to underwrite or re-underwrite each loan prior to deciding whether to purchase or guaranty the loan. In exchange for Fannie Mae’s delegated authority, DUS lenders are required to share with Fannie Mae the risk of financial loss throughout the life of the loan.

In addition to the lenders’ retaining risk, we set rigorous standards for DUS lenders. They must possess solid credit analysis and underwriting skills, strong infrastructure and technology platforms, and expertise in asset management and servicing. They must use proven underwriting standards while monitoring their properties regularly and reporting back to Fannie Mae on how the properties are operating. The combination of risk retention and our aligned interests strengthens our multifamily book of business. 

The DUS model is working. Fannie Mae’s multifamily loans have generally performed better than commercial mortgage-backed securities. Fannie Mae is a leading provider of liquidity for the rental housing market in the United States. Fannie Mae’s experience in the multifamily industry offers valuable insight into the benefits of risk retention by lenders and servicers.

I encourage you to read our new research paper, titled Delegated Underwriting and Servicing (DUS®) – The Role of Risk Retention in Multifamily Finance, which outlines much more about our proven model and the benefits it provides Fannie Mae and our lender partners. The paper and this commentary do not purport to express any view or comment on the proposed rule to implement the risk retention requirements of the Dodd-Frank Act.

Caroline Blakely
Vice President for Multifamily Risk

October 27, 2011

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