When might someone assume my Fannie Mae Small Balance Loan?

5 Replies

Hi all,

I refinanced a multifamily in September of 2019 with a Fannie Mae Small Balance Loan.  All along, it looked like the rate would be about 3.75%, but I was told I couldn't lock. Then right at closing, I was told, rates went down too far, so they changed a grid or something, and my rate was 4.8%.  I bought it down to 4.6%, but at that point, it was too late (or so I thought) to back out, since I had so many non-refundable costs, and I need the equity out for another purchase.

Looking at it now, because of the Yield Maintenance, I can't sell or refinance until my 12 year term is over.  My current YM penalty is about $400,000 !   I learned many lessons from this, but what's done is done.  It's a fine property, and cash flow is improving year after year, but I would love to sell in a year or two and getting better use of the equity (since I won't be able to refinance).

I'm trying to understand at what conditions someone would assume my loan..

Would I need the treasury to go up another point or so, for Multifamily rates, in a 2nd tier marker to be above 4.6%?

With appreciation, at the price I would want to sell, the loan would only be 55-60 LTV, so the buyer would need another loan anyway.

Just trying to see if people actually do assume Fannie Mae loans in these types of situations so I could see if there is some point, I'd be able to my equity out of the property.



Would they be able to get a supplemental loan on top of the existing one and find ways to force value add? It looks like they should have space based on the LTV you stated. That seems to be the most common way to deal with this situation.

Unfortunately a lot of folks are getting whacked and locked into deals due to Yield Maintenance. That drop in rates is a killer. Personally I believe the low rate train is here to stay, but I can't predict the future! The Fed has been clear they will not be normalizing any time soon.

Originally posted by @Ron K. :

Thanks @Taylor L. People need to understand how severe Yield Maintenance can be.  I hadn't considered that scenario...

You're not alone in that. I think a lot of folks who even had considered it just figured that there was no way rates could fall even more. Just know that folks are looking at buying deals with assumable debt. See if you can find a way to make it attractive to a potential buyer. What would they have to do to produce a return? Then work from there.

At least you're cash flowing! Nobody ever went broke making a profit. I know of some other folks in a similar scenario who are negative cash flow. 

@Ron K. , the devil is in the details.  But with the limited supply of multifamily and huge demand, you may still be okay.  Yield maintenance can be a very costly component of real estate, and locking in above market rate loan is never fun.  And, as you learned, the further rates go down, the larger your YM cost.  

Can you still sell the property?  Yes. A buyer will either discount the price because of the assumable debt, or you hold out for a good valuation that more than offsets the yield maintenance (which may or may not be realistic). You are in luck, that at least in the current market, people are paying crazy prices to get into deals, so there very well could be a buyer out there that still sees the value in the property.