Rationale

S&P Global Ratings' rankings on the Federal National Mortgage Association (Fannie Mae) are ABOVE AVERAGE as a commercial mortgage loan master and special servicer. On Jan. 20, 2021, we affirmed the rankings (see "Fannie Mae ABOVE AVERAGE Commercial Mortgage Loan Master And Special Servicer Rankings Affirmed; Outlook Stable," published Jan. 20, 2021). The outlook on each ranking is stable.

Our rankings reflect Fannie Mae's:

• Solid depth and breadth of management and staff, with significant industry experience and meaningful company tenure;
• Continued dedicated focus on the technology platform and applications, along with extensive data loss protection and oversight;
• Comprehensive quality control and audit environment;
• Solid multifamily underwriting guidelines and servicer oversight, which benefit from a unique risk-sharing model;
• Lengthy track record of special servicing loan resolution activity, though it is predominately limited to the traditional multifamily product;
• Historical low level of multifamily delinquencies;
• Continued financial support and implicit guarantee from the U.S. government; and
• Continued position under the conservatorship of the Federal Housing Finance Agency (FHFA), and the conservatorship has an uncertain future.

Since our prior review (see "Servicer Evaluation: Fannie Mae," published July 23, 2019), the following changes and developments have occurred:

• In 2020, multifamily lending activity set a record at $76 billion (versus year-end 2019 lending of $70 billion, and year-end 2018 lending of $65 billion), including over $13 billion of green mortgage-backed securities.
• In November 2020, the FHFA issued its annual Conservatorship Scorecard, which provides for a multifamily lending cap at $70 billion for Fannie Mae for 2021; at least 50.0% of that cap must include mission driven affordable multifamily acquisitions. In January 2021, the FHFA and Treasury Department amended the preferred stock purchase agreement to include an $80 billion cap to be calculated in any 52-week period.
• In March 2020, the vice president (VP) of debt and equity asset management retired from the company. These duties were assumed by the VP of portfolio risk management who now heads both groups.
• Following the 2019 departure of the director of portfolio and partner surveillance, his duties were reassigned to three directors in the asset management group.
• In Spring 2020, due to the pandemic, Fannie Mae added two new third-party vendors to support special servicing, as well as one specialized seniors housing asset management company to consult on higher risk senior housing deals.
• Fannie Mae created a new relationship management team to maintain consistent messaging during the pandemic, which allows every Fannie Mae lender to have a dedicated point of contact to help with issues and questions.
• In 2020, the company closed its Atlanta and Los Angeles locations. The respective employees assigned to these locations became remote off-site teleworkers.
• A new Robotics Process Automation (RPA) tool was implemented to automate data retrieval needed for payoff quotes.
• A multi-year effort is underway to replace the current document imaging process and repository for all core loan documents. The new content management system, MF DocWay, is projected to be complete for core transaction documents by 2022.

Furthermore, Fannie Mae maintains a disaster recovery and business continuity plan, including response procedures to address operational disruption as a result of a pandemic event. In March 2020, the company implemented its continuity plan due to the COVID-19 pandemic. Management reported that there were no disruptions to the company's operations or data facilities.

The outlook on each ranking is stable. We believe that the company will continue to serve as a fully capable master and special servicer for commercial mortgage loans with a multifamily focus. Although the future existence and role of Fannie Mae has been under discussion internally and externally within various levels of the U.S. government recently, we assume it will conduct business as usual for the foreseeable future.

In addition to conducting a remote site visit meeting with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology data through June 30, 2020, as well as other supporting documentation provided by the company.

The term "servicers" throughout this report refers to Fannie Mae Delegated Underwriting and Servicing (DUS) lenders.

Profile

The charter for Fannie Mae, established by Congress in 1938, was expanded in 1984 when it formed its multifamily commercial lending business. Since 1987, Fannie Mae has been an active purchaser of multifamily mortgage loans. These loans finance the acquisition or refinancing of commercial multifamily properties (e.g., apartment buildings with five or more units, housing for senior citizens, student housing, cooperatives, affordable housing, and manufactured housing).

Fannie Mae serves primary, secondary, and tertiary markets. Its multifamily underwriting guidelines and servicer oversight benefit from a unique risk-sharing model, with over 99% of its loans having risk-sharing with lenders. Fannie Mae does not make loans directly; instead, it delegates the responsibility of originating, processing, approving, closing, and servicing loans to third-party sellers/servicers, subject to Fannie Mae guidelines. These loans are sold to Fannie Mae after origination, and the lenders share loan losses per loss-sharing agreements, where applicable. Fannie Mae, which began including these multifamily loans in its own mortgage-backed securities (MBS) beginning in 1994, guarantees the payment of timely interest and principal to purchasers of their MBS. Presently, there are 23 Delegated Underwriting and Servicing (DUS) lenders, as well as seven other non-DUS/specialty lenders that sell loans to Fannie Mae.

Since 1988, Fannie Mae and its lender network have provided more than $700 billion in liquidity to the mortgage market to finance more than 11 million units of multifamily housing, the majority of which is workforce housing.

On Sept. 6, 2008, the FHFA placed both Fannie Mae and Freddie Mac into conservatorship, and the conservator assumed all powers of the boards, management, and shareholders. The FHFA noted that during conservatorship, Fannie Mae would continue to conduct business as usual. The goals of conservatorship were to restore confidence in these government-sponsored entities (GSEs), enhance their capacity to fulfill their missions, and mitigate the systemic risk that has contributed to market instability. The conservatorship will end when policymakers determine that the plan to restore both GSEs to a safe and solvent condition is complete. While there continues to be some well-publicized discussions and proposals toward ending FHFA conservatorship, there is no specificity to that end at this time. Further, with a change in U.S. presidential leadership, the outlook for the end of conservatorship has become murkier.

In November 2020, the FHFA issued its annual Conservatorship Scorecard, which provides for a multifamily lending cap at $70 billion for Fannie Mae for 2021; at least 50.0% of that cap must include mission-driven affordable multifamily acquisitions. In January 2021, the FHFA and Treasury Department amended the preferred stock purchase agreement to include an $80 billion cap to be calculated in any 52-week period.

Fannie Mae had approximately 7,500 employees as of Dec. 31, 2020, and reported 145 staff in the multifamily servicing platform (see table 1) as of June 30, 2020. Its headquarters is in Washington, D.C., and it maintains a large office in Plano, Texas. Other satellite offices include Boston, Chicago, Herndon, Va., New York, and Philadelphia.

Table 1

Table 2

Management And Organization

The management and organization subranking is ABOVE AVERAGE for both commercial mortgage loan master and special servicing.

Organizational structure, staff, and turnover

Fannie Mae's management team and staff exhibit above average levels of industry experience and tenure when compared to peers. There were 123 employees associated with master servicing and 22 associated with special servicing as of June 30, 2020. Turnover in the first half of 2020 was 4% for master and special servicing, which compares favorably to peers.

Table 3

Organizationally, the executive vice president, who is the head of multifamily, oversees the chief credit officer. The VP for portfolio risk management, VP for multifamily policy/lender risk management, and VP for credit multifamily and chief underwriter all report to the chief credit officer. The executive vice president, who is the chief operating officer, oversees the VP for master servicing loan operations. Both the head of multifamily and chief operating officer report directly to the president. These business lines comprise the following distinct units:

• Loan operations, headed by the VP of loan operations, handles the servicing of credit facilities and bulk deliveries, master servicing duties, reporting and reconciliations, account set-ups, adjustable-rate mortgage rate changes, delinquency reporting, governance, and other specialized initiatives.
• Portfolio risk management, headed by the VP of portfolio risk management, is responsible for both master and special servicing functions. Master servicing responsibilities include watchlist management, credit asset management, asset management, and maturity management. The unit also handles special credits, special asset management, and real estate-owned (REO) for special servicing.
• Multifamily policy/lender risk management, headed by the VP of multifamily policy/lender risk management, handles policy and risk governance, regulatory activities, guide management, lender assessments, and post purchase. It also includes credit risk sponsor risk management.

Each of these groups has multiple directors and managers who report to the VP of their unit and each of them leads teams of asset managers and analysts. These groups appear to communicate freely among each other and work in a cohesive manner to cover all aspects of master and special servicing.

We believe the multifamily mortgage division's organizational structure provides appropriate oversight and accountability and that it supports the master and special servicing duties and requirements associated with Fannie Mae's multifamily portfolios. We note that accounting functions associated with the multifamily division are performed in a separate area within Fannie Mae and are not considered part of multifamily operations.

Training

Fannie Mae's training follows a centralized process that is managed by human resources. Management and staff are provided with a diversified array of ongoing formal internal and external training programs, which is typical of a large organization. Unlike other large organizations we rank, Fannie Mae does not require its employees to obtain a minimum number of annual training hours; although it does require specific courses such as code of ethics and cybersecurity. Other training features include the following:

• Fannie Mae employees averaged nine hours of training through the first half of 2020 and 12 hours of training in 2019, which is below its ranked peers.
• Fannie Mae University, introduced in 2018, was streamlined and updated in 2020, with the course catalog pared to about 500 classes from over 3,100 based on demand and relevancy. Current courses cover such topics as leadership, decision making, project management, and information technology (IT).
• The dedicated training team is currently designing new courses specific to Fannie Mae's multifamily operations.
• Formal tracking of employee training hours is done through the Fannie Mae University application.
• An automated system provides employees with weekly emails of newly available and/or required training.

Systems and technology

We believe Fannie Mae has effective technology to meet its master and special servicing requirements, along with sound data backup protocols, robust disaster recovery and business resumption plans, and comprehensive cybersecurity protocols.

In addition, the scale of the company's available IT resources is extensive and continues to be a priority and focus for the company, allowing for frequent application enhancements as necessary.

Servicing system applications 

Historically, several systems were used jointly by both the multifamily and single-family divisions at Fannie Mae. In recent years, following a significant effort to separate these systems, only a single joint system remains, and all other systems are unique to either the multifamily or single-family divisions. Management anticipates the project to separate the last joint system will be completed by the end of 2022. The following are descriptions of current systems and applications for the multifamily division:

• Fannie Mae utilizes McCracken Strategy version 19D as the servicing platform for their loan operating system.
• eServicing is a proprietary web-based application that servicers use to interface with Fannie Mae to report monthly loan activity. The eServicing system also has an investor reporting module that allows Fannie Mae and servicers to reconcile monthly loan and MBS activity levels, as well as monitor rates for adjustable-rate mortgages and payment changes. A new loan history screen was added, since our last review, to track all changes in loan activity.
• The company rolled out their new DUS 360® application, in the first quarter of 2020. This system creates a centralized reporting environment pulling data in from internal data warehouses to manage risk across all relationships, products, and markets. This was further expanded by launching a module in the fourth quarter of 2020 for external users.
• The Delinquency Early Warning System (DEWS) is used by Fannie Mae' servicers to report delinquent loans, certify the delinquency status of their portfolios, and view or download reports.
• The Payoff Calculator allows servicers and Fannie Mae to create, edit, view, and attach documentation for payoff requests, which can be approved by authorized individuals within this module.
• An RPA tool was implemented within the Payoff Calculator to collect source data from different documents and data warehouses to compile payoff quotes.
• The Cash Remittance System is a web-based system used by servicers to set up drafting information and to transmit Fannie Mae remittances.
• The Cash Receipts/Disbursements Tracking System is an internal system that tracks and reports cash receipts and payments, which are made either via wire transfer or check. They are automatically logged and assigned to the business units' general ledger accounts.
• The Multifamily Asset Management Portal (MAMP) is a proprietary servicer-facing system for submitting asset management-related data and tracking borrower requests from servicers.
• The Risk Rating Analytic Platform (RRAP) is a proprietary system developed to risk-rate loans using consistent methodologies, processes, and tools to differentiate levels of credit risk in the multifamily mortgage business portfolio.
• The DUS MF DocWay® tool is a proprietary content management system that supports loan document deliveries, underwriting information, and third-party reports.
• Risk Works is a secured central repository that holds the policies and procedures for the company.
• Special Servicing Asset Management uses MF Core, which provides loan, collateral, and sponsor-level data for asset managers, allowing them to record and document post-acquisition events.

Business continuity and disaster recovery 

Fannie Mae has well-designed data backup routines and disaster recovery preparedness. Highlights include the following:

• Each department across the multifamily lending unit maintains its own business continuity plan. These plans are updated at least annually and must comply with corporate policy. Each department also has a documented business impact analysis, comprising a systematic assessment of the potential financial, reputational, and operational impact of critical incidents and disruptions. This analysis is designed to identify recovery time frames and requirements and help allocate resources during a crisis event.
• The division maintains data backup and replication routines via its application service contract through McCracken's Strategy servicing system. Its main data center is located in the Northeast, while there is a redundant data center in the West.
• Management stated that fail-over testing is conducted annually to demonstrate that if a single site goes down, all applications can be quickly brought up from the redundant site.
• Operations are divided into tiers for data recovery. Tier 1, which contains the most essential applications, has a targeted recovery time of four to eight hours after any disaster. Tier 2 applications have a goal of eight to 48 hours for recovery. All other applications, including its hosted websites and website calculators, are targeted for recovery within five days.
• Employees are all required to test their virtual private network remote access connections annually and have access to a second, remote location (i.e., home) where they can work in the event their primary office workstation is unavailable.
• Fannie Mae maintains a disaster recovery and business continuity plan, including response procedures to address operational disruption as a result of a pandemic event. The company implemented its plan in March 2020 due to the COVID-19 pandemic. Management reported that there were no disruptions to the company's operations or data facilities. Most of the staff continues to work from home with a limited number of people occasionally at the office if the need arises.
• The last full disaster recovery test was conducted in May 2020, and management reported no significant issues were cited.

Cybersecurity 

The cybersecurity group provides employees with ongoing training covering relevant cybersecurity issues. It manages cyber risks using the following processes:

• Fannie Mae sends monthly phishing emails to internal employees to test awareness. Employees may be required to attend additional training per individual results of these cybersecurity tests.
• Fannie Mae engages a third-party vendor for quarterly penetration testing to their systems with no significant issues noted during their last test in June 2020.
• Fannie Mae routinely updates their internal systems and firewalls and installs routine system patches as necessary, providing extensive data loss protection.
• Fannie Mae has a stand-alone cybersecurity insurance policy, and the company has specialized in-house attorneys to handle any cybersecurity matters.

Internal controls

We believe that Fannie Mae's risk management efforts, including its policies and procedures and audit processes, demonstrate a comprehensive and sound approach to maintaining a controlled servicing environment.

Policies and procedures 

Fannie Mae maintains thorough and well-organized policies and procedures (P&Ps). Highlights include:

• P&Ps are reviewed by the respective business unit annually;
• Changes require approval from the multifamily policy department;
• Most recent changes made, the date they were made, and the approving party are highlighted in the beginning of every P&P; and
• Current versions are accessed via the Risk Works repository.

Compliance and quality control 

As is the case with many servicers that we rank that are part of large organizations, Fannie Mae uses a risk-based planning approach and completes a comprehensive risk assessment of the inherent risks within each auditable line of business. Risk assessment scores are based on the dimensions of financial, operational, business strategy/reputational, and regulatory/compliance risk. The resulting score is used to determine review frequency.

The enterprise risk management group, separate from internal audit, focuses on risk and issue management, documentation and reporting, and testing internal controls. The group is an independent oversight function established by Fannie Mae's board.

Internal and external audits 

Master servicing operations are audited within different intervals: every three years for multifamily debt asset management, and in offsetting years for a separate internal audit focused on multifamily servicing. The special servicing group is reviewed every two years. The next audit is scheduled for first quarter 2021.

The multifamily servicing group's most recent report was issued June 29, 2020, covering the 2019 calendar year. Results were the highest possible grade and the report contained no material findings, based on the summary we reviewed.

The May 2, 2019 internal audit report for multifamily debt asset management covered the period from Jan. 1, 2018 through Dec. 31, 2018. The results were the highest possible grade and contained no material findings based on the summary we reviewed.

The July 25, 2018 internal audit report for loss mitigation covered the period from April 1, 2017 to March 31, 2018. The results were the highest possible grade and contained no material findings based on the summary we reviewed.

Fannie Mae is exempt under its charter from having to register its securities under the Securities Act; therefore, it is exempt from Regulation AB and the Uniform Single Attestation Program.

We believe that the division's internal control and compliance framework is suitably rigorous and that it is sufficient for maintaining a sound mortgage servicing environment.

Insurance and legal proceedings

Fannie Mae has represented that its directors and officers, as well as its errors and omissions insurance coverage, is in line with the requirements of its portfolio size. As of the date of this report, there were no material servicing related pending litigation items.

Loan Administration--Master Servicing

The loan administration subranking is ABOVE AVERAGE for master servicing.

Fannie Mae's servicing obligations differ slightly from those typically observed at other commercial mortgage-backed securities (CMBS) master servicers we rank; however, the multifamily division performs many similar servicing and asset management activities for the Fannie Mae portfolio. Fannie Mae has established processes and systems designed to complete the following traditional master servicing functions:

• Aggregating loan data and funds from subservicers;
• Portfolio accounting;
• Advance tracking and recovery;
• Investor reporting and remittance;
• Notifications any time a depository institution rating is downgraded;
• Collateral, loan, and portfolio-level surveillance;
• Monitoring subservicer performance and compliance; and
• Oversight of credit-related borrower consent requests.

We believe Fannie Mae has well-defined reporting lines and comprehensive operating procedures for servicing functions.

Despite a modest increase in loan count since our last review, the unpaid principal balance (UPB) has grown 17% and the average loan size has increased to an average of $12.9 million from $11 million as older and smaller loans continue to pay off (see table 2).

The current portfolio has limited property type diversification, as 90% of collateral properties (by UPB) serviced by Fannie Mae are classified as multifamily, consistent with Fannie Mae's company mandate. The other 10%, while not technically categorized as multifamily, still serve as housing functions, such as co-ops, health care centers, and mobile home parks (see table 4).

Geographic diversification across the country continues to be strong, with representation in all 50 states and certain U.S. territories. Approximately $62.8 billion (17.5% of UPB and 21.9% of total properties) of the portfolio is located in California. Other top states include Texas (11.7% by UPB), New York (8.2%), and Florida (7.5%).

Table 4

Table 5

Delinquencies

As of June 30, 2020, Fannie Mae's 1.0% delinquency rate for loans more than 60 days past due was on par with the delinquency rates for other U.S. master servicers oversight roles we rank but is greater than it has been in the last four years. The increase in the delinquency rate is due primarily to the COVID-19 pandemic and is being closely monitored by Fannie Mae, as well as their lenders (see table 6).

Table 6

Advancing

Fannie Mae does not act as a CMBS master servicer, and as such, it is not obligated to provide the types of advancing typically found in a securitization pooling and servicing agreement. However, various Fannie Mae loan products do require some form of advancing and liquidity that the multifamily mortgage group administers:

• Depending on the product, Fannie Mae will advance funds up to certain limits for scheduled principal and interest, liquidity advances, credit enhancement, swap payments, full UPB at payoff, and other operating and property protection advances.
• Fannie Mae has regular calls with the lenders regarding any advancing decisions.
• Advance monitoring and recovery procedures are documented, and all advances are adequately tracked, in our view.

Investor reporting and remittance

The investor reporting and remittance process includes the following:

• Fannie Mae provides an annual calendar to its loan servicers, which reflects the reporting and remittance dates.
• Servicers must report the MBS pool data and the loan-level data in the eServicing system.
• Fannie Mae completes a reconciliation of the servicer's reported data compared to its collections expectations. Analysts review all discrepancies between the servicer's reported data and Fannie Mae expectations.
• The company has separate staff handling reporting and remitting duties.
• All discrepancies are resolved before the data is finalized.

Servicer and data management

The 48-member multifamily asset management team along with the master servicing team is responsible for the relationships with and monitoring of all primary servicing functions of servicers. The team has multiple groups, including credit asset management, asset management, watchlist management, and maturity management that collectively oversee seller/servicer performance and provide feedback to their servicers.

The team uses Fannie Mae's MAMP to collect assessment data, such as property income and expense information, property inspection results, and borrower compliance information from the sellers/servicers.

Surveillance 

We believe that the multifamily mortgage business has a proactive approach to surveillance and that it has effective processes for identifying and managing high-risk loans.

Fannie Mae's loan surveillance department functions with nine people to ensure loans acquired by the company meet requirements and prudent underwriting standards. It evaluates the underwriting quality of the 23 DUS lenders and the seven non-DUS/specialty lenders by performing an annual review of a sample of their work. The master servicing and asset management staff also perform random testing to assess compliance with the Fannie Mae multifamily guide requirements.

Additional functions of the surveillance process include:

• Monitor compliance with relevant laws and regulations.
• Quality control review on property financial statements, which includes a check of 61-line items that identify risk factors early.
• A random selection of the property operating statements pulled for re-analysis and comparison against the lender-submitted data.
• An overall quality control review of 3% of property inspections submitted by lenders.
• Communicating asset management feedback to servicers and internal stakeholders.
• Performing servicer site visits to monitor relationships.
• Conducting monthly calls with asset managers to advise them of updates on any issues and answer questions in an open forum.
• Obtaining feedback from all areas within asset management and identifying strengths, weaknesses, and areas of potential risk.
• Using a third-party service provider to conduct reviews of a sample of financial statements that are submitted by servicers. This includes re-spreading financials to ensure that servicers are following the Fannie Mae Multifamily Selling and Servicing Guide (the Guide) and categorizing property expenses correctly.

Subservicer oversight 

The multifamily lender assessment oversight (LAO) group is a separate group responsible for annual assessments of DUS seller/servicers, non-DUS lenders with selling authority, certain third-party vendors, new lenders, and new subservicers. Highlights include the following:

• LAO, master servicing, and asset management staff members perform random testing in 10 categories to ensure lender compliance with guide requirements.
• LAO uses a tiered approach to define risk levels (high, medium, or low) based on internal assessment scores.
• Lenders that are deemed to be high-risk will be assessed every year (currently there are none of these). All other lenders are assessed every other year.
• Lenders must provide a change memo to LAO on years without an assessment detailing any major changes and any significant issues and/or risks that are identified.
• Asset management testing is done annually regardless of risk level. All lenders may be subject to annual assessments, but they are primarily evaluated based on risks identified by subject-matter experts.
• As part of the lender assessment process, the LAO team reviews borrowers' financial statements and performs an additional review of property inspection submissions for quality control and compliance purposes.

The Guide, which is available to all servicers, provides detailed information about Fannie Mae's P&Ps related to its servicing expectations of multifamily mortgages. It is arranged in multiple sections for clients' ease of use. Fannie Mae lenders are expected to know the Guide and follow all requirements; and the LAO group verifies compliance during its servicer assessment. The Guide also contains pertinent forms that servicers may need in the normal course of managing and reporting on their multifamily portfolio business. Fannie Mae's website contains notices of changes and updates, as well as various training videos that are available for its servicers. The Guide is also published the Fannie Mae site DUS Navigate® and amendments are communicated to lenders email.

The lenders are required to provide annual certifications stating they are in compliance with Fannie Mae guidelines, as well as copies of audited financial statements, a summary of their internal control structure, evidence of insurance, the external auditor's opinion, and net worth statements.

Operational risk assessments performed by the LAO group members include a review of the counterparty's operations, including people, process controls, and technology, for the following predefined assessment categories:

• Corporate governance;
• Legal;
• Financial management;
• Production and origination;
• Credit and underwriting;
• Committing and delivery;
• Servicing;
• Asset management;
• Loss mitigation/special asset management (SAM); and
• Insurance.

All DUS lenders must meet Fannie Mae's servicer eligibility requirement tests, such as capital requirements, minimum net worth, and minimum rating agency rankings, in addition to audit, business continuity, and other process control procedures. All servicers are required to establish and maintain separate custodial accounts for the deposits of funds (principal and interest, tax and insurance, collateral agreements, and escrow) collected for all Fannie Mae loans.

The accounts are subject to review by the LAO (as a joint effort with their servicing group for custodial reviews) to ensure that funds are adequately safeguarded and handled with sound accounting and cash management practices. These reviews are conducted at least every other year. At the time of our review, management confirmed that every servicer's custodial accounts that were required to be reviewed in 2019 were completed either by Fannie Mae or via a review of the servicers USAP and/or Reg AB certification, with no findings.

Asset and portfolio administration

Fannie Mae oversees the credit performance of its subserviced portfolio in a process similar to its primary servicers by utilizing its RRAP to differentiate levels of credit risk in the multifamily mortgage portfolio. This application allows Fannie Mae to risk-rate its entire debt portfolio on a monthly basis using current loan terms and updated monitoring information, which it gathers from property operating statements, inspections, and sponsor ratings. The RRAP rating engine identifies "pass" and "substandard" loans. Loans rated "special mention" or "doubtful" are manually rated by asset managers. The ratings are used to assess individual transaction risk, track portfolio performance, identify trends, and monitor credit risk exposures.

The maturity management group (MMG) works in conjunction with the servicers to mitigate risk and negotiate options for maturing DUS and top-loss loans. It proactively manages loans within 24 months of stated maturity and specifically manages loans that may not meet current underwriting criteria, which includes:

• Loans transferred to MMG are identified through a combination of internal and external sources;
• Loans with considerable risk are targeted for specific strategy review discussions with the servicer;
• MMG's primary goal is to mitigate the likelihood of maturity defaults while maintaining a viable exit strategy for the loan; and
• Fannie Mae also strategizes with its lenders on a regular basis regarding their respective maturing loan portfolios and refinance abilities.

Borrower requests

The credit asset management (CAM) group is responsible for borrower consent requests. We believe that Fannie Mae has good procedures for reviewing, approving, and returning the borrower requests in a timely manner to its lenders.

Highlights include the following:

• The CAM group evaluates each borrower consent request for compliance with governing documents and credit policy, as well as the impact on collateral and associated risk (e.g., credit, interest rate, reputational, and/or operational).
• The group generally delegates authority to DUS servicers, who may approve the borrower consent requests based on loan size, risk rating, and loss sharing.
• Once the servicer sends its credit case to Fannie Mae, it is evaluated for accuracy and may include a review by Fannie Mae's in-house legal counsel.
• A dedicated team inside the CAM group, along with Fannie Mae's in-house legal counsel, reviews and opines on all non-delegated assumptions and transfer requests, including related loan document changes.
• Approximately 833 transactions were processed during 2019, including 150 repair extensions, 38 loan assumptions, and 29 partial collateral releases. Over 600 other borrower consents addressed include maturity extensions, leasing consents, and management changes. Through June 30, 2020, Fannie Mae completed an additional 536 transactions including 264 forbearances and 161 repair extensions. The 100 other borrower consents include: partial collateral releases, loan assumptions, management changes, substitution of collateral, and leasing consents.
• In 2019, the group provided 16 formal training sessions for servicers on various topics (e.g., insurance, borrower requests, assumptions/transfers, senior/structured transactions, and asset management/loss mitigation). In 2020, four remote training classes were held. These formal training classes were cancelled during the first seven months of the COVID-19 pandemic and were replaced with chief asset management calls, where new processes were discussed.
• Additional online training is also available to Fannie Mae lenders through the Fannie Mae multifamily website.
• All borrower requests are tracked in the MAMP portal.

Early stage delinquencies

The progression of a loan to the watchlist management group (WMG) is the final area of administration before the loss mitigation team initiates more robust collection procedures. This process includes the following:

• The WMG confers with servicers to understand what factors might be negatively affecting a loan's performance.
• The WMG focuses on risk management and action plans with servicers. On a quarterly basis, the WMG evaluates portfolio performance, reviews and confirms RRAP risk ratings, establishes loan impairment recommendations, and transfers specific loans to special servicing.
• The WMG identifies watchlist loans by their risk rating, which is driven by loan and collateral performance (similarly to the approach used by the Commercial Real Estate Finance Council).
• The WMG works closely with both the master and special servicing departments.

Loan Administration--Special Servicing

The loan administration subranking is ABOVE AVERAGE for special servicing.

Fannie Mae has a demonstrated track record of successfully managing and disposing of troubled multifamily assets located throughout the country. Special servicing is managed from its headquarters in Washington, D.C., with staff members also located in the Plano regional office. It reported 22 full-time employees as of June 30, 2020, of which there are six dedicated loan workout and one REO asset management personnel, along with multiple analysts. Loan asset managers do not handle REO assets; dedicated REO asset managers oversee foreclosed properties (as applicable).

Loans originated and sold to Fannie Mae by the DUS lenders are typically subject to a loss-sharing agreement. This requires the loan servicer to maintain risk, which generally means the loan servicer bears one-third of the credit loss on each loan. Special servicing of a nonperforming loan subject to DUS loss sharing is transferred to Fannie Mae when there is an imminent default. The lender/servicer remains as the servicer and works in conjunction with Fannie Mae special servicing staff until the lender/servicer's loss-sharing obligation is exhausted.

Fannie Mae has 374 active delinquencies (361 loans and 13 REO) with a combined UPB of $5.2 billion as of June 30, 2020 (see table 7). This is a greater than 900% increase since our prior review and a by-product of the COVID-19 pandemic. Special servicing loan asset managers handle an average of 60 loans each, which is the highest ratio among all special servicers that we rank. However, we note that Fannie Mae works in tandem with DUS lenders' special servicing asset managers and therefore, perform in more of an oversight role. Also, the June 30, 2020 figures represent close to peak volume of the COVID-19 forbearance requests as noted later in this section. Due to Fannie Mae's unique structure and decline in volume from the peak in early summer, we feel that the staffing levels are appropriate.

The REO asset manager workload of 13 assets is generally in line with other special servicers we rank. Further, REO assets are generally transferred to third-party vendors (who are also special servicers ranked by S&P Global Ratings) to perform specific duties under the purview of Fannie Mae.

Table 7

Fannie Mae has reorganized the SAM team in response to the COVID-19 pandemic. Special credit asset managers were transferred to the SAM team to manage potential loan workouts if loan defaults increase. Additionally, the existing SAM asset managers and the special credit asset managers now in SAM will provide oversight and guidance to the vendors managing defaults. This change allows for more focus on loan workouts in the seniors and student loan portfolios commensurate with the increased risk in those portfolios during the COVID-19 pandemic.

In March 2020, Fannie Mae announced a delegated forbearance program authorizing their DUS servicers to provide up to three months of forbearance to borrowers with a financial hardship due to the COVID-19 pandemic. Program details were aligned to the provisions of the Coronavirus Aid, Relief, and Economic Security Act. In June 2020, the program was enhanced to include additional delegation to provide up to three additional months of forbearance on multifamily loans still experiencing a financial hardship. This update included tenant protections that would run during the forbearance and repayment periods for the borrower. In early-August 2020, the program was enhanced yet again to include requirements for borrowers to provide notices to tenants when the tenant protections would be in effect and when the protections would be ending. Loans needing additional relief beyond a delegated forbearance are handled by the SAM team on an individual basis.

At its peak in spring of 2020, there were 343 loans under forbearance, with an outstanding UPB of $4.9 billion. As of Dec. 3, 2020, the volume had been reduced to 89 loans in active forbearance, totaling 126 properties representing $1.7 billion in outstanding UPB. As of this date, 98.6% of Fannie Mae's approximate $378.4 billion multifamily book of business was performing.

Non-pandemic related loans backed by collateral where the property is showing signs of deteriorating condition may be transferred to the special credits team. The team proactively engages both the borrower and servicer to address identified collateral-based issues, including deferred maintenance, life/safety risks, large-scale casualty losses, and other issues that are determined through property inspection reports. The team devises workouts for these nonmonetary defaulted loans through modification negotiations with borrowers and servicers. The group also manages other nonmonetary matters, such as code violations, unauthorized borrower transfers, and other credit-related issues.

The special servicing department at Fannie Mae is divided into three areas of specialization: special credits, SAM, and REO operations and disposition.

Loans transferred to special credits are identified through external and internal analysis and communications, as follows:

• The entire multifamily loan portfolio is risk-rated on a monthly basis with watchlist loans identified.
• Loans rated "substandard" are given additional scrutiny to identify the cause for the lower rating.
• Loans with adverse property condition ratings are automatically transferred to the special credits team for further investigation into the collateral status.
• Servicer and legal communications can also lead to loans identified as requiring increased oversight.
• Servicers are expected to notify the special credits team upon ascertaining that a loan may have collateral issues.

The SAM group handles the management and resolution of monetary defaults. The group initiates foreclosure actions and would pursue any necessary litigation on post-foreclosure matters. This team simultaneously pursues both legal foreclosure and borrower negotiations to maximize recovery and expedite asset resolution. The group works with the REO operations and disposition group to ensure a seamless handoff after foreclosure.

The REO operations and disposition group oversees REO assets, as well as assets managed by third-party vendors after foreclosure. The use of third-party vendors provides scalability for Fannie Mae to meet ever-changing market demands. The REO department works to maximize property operations and asset value for the company by managing the life safety, deferred maintenance, and asset preservation needs of the collateral. This group also works together with SAM and the Fannie Mae lenders to finalize loss-sharing settlements as applicable.

Loan recovery and foreclosure management

Fannie Mae displays comprehensive and proactive loan recovery and foreclosure management protocols to efficiently resolve nonperforming multifamily loans. Highlights include the following:

• After a loan is assigned to SAM, the asset manager reviews original loan documents, including the underwriting narrative package.
• With the assistance of the in-house legal department, SAM asset managers engage outside counsel to draft default/acceleration letters.
• Through outside counsel, the asset manager will commence foreclosure proceedings and will seek a receiver when possible.
• After the sponsor/borrower executes a pre-negotiation letter (which Fannie Mae requires for any modification discussions), SAM asset managers may communicate with the borrower as the foreclosure process continues (i.e., a dual track approach). This approach directs the borrower to focus on options to resolve the default.
• Typically, within 30 days of transfer, an initial course of action is determined and initiated between Fannie Mae and the lender. Approvals for these plans are completed using the internal delegations of authority.
• Each month, the SAM director and/or the portfolio risk management vice president conducts a portfolio review of each loan in SAM utilizing an internal tracking report, which provides updated valuations, default probabilities, and comments regarding the current status of the workout stage for each loan.
• On a regular basis, SAM asset managers discuss the status of pending loan foreclosures with REO operations and disposition to facilitate a seamless handoff after a foreclosure.

DEWS is used by Fannie Mae and its servicers to identify, on a monthly basis, potential loans to transfer to SAM for monetary default. Loans with nonmonetary defaults are discussed with the watchlist group to determine the best course of action to cure the default. SAM business analysts obtain status reports on each delinquent loan and work with the servicer to understand the cause of the default and identify potential remedies. SAM is advised of problem loans through either external or internal communications, similarly to the special credits group.

Loan resolution activity for 2019 was similar when compared to prior years' (see table 8). In particular, there were 66 loan resolutions consisting of 45 full payoffs, 11 note sales, seven loans returned to master, and three foreclosures. Activity has accelerated during the first six months of 2020, as Fannie Mae completed 56 loan resolutions during this period.

Average hold time for loans resolved by SAM have historically been favorable and measured an efficient 12.2 months for 2019 and 12.3 months in the first half of 2020. There were 19 loans resolved in the first half of 2020 averaging under four months, largely COVID-19-related forbearances, that were returned to the master servicer. At the same time, another 18 loans returned to the master servicer during the same time period averaged over 23 months. Further, the 13 loans that resulted in full payoffs averaged 15.6 months, longer than historical hold times for this type of resolution, contributing to the slight increase in overall average hold times.

Table 8

We believe the multifamily mortgage division has well-managed processes for foreclosing and transferring loans to REO status.

REO management and dispositions

The REO team ensures that life-safety, deferred maintenance, and asset preservation needs are addressed for asset collateral protection, tenants' needs, and reputational risk.

REO assets are assigned and transferred to one of three third-party vendors, who are also special servicers ranked by S&P Global Ratings, to perform specific duties. These duties include:

• Day-to-day REO asset management, operations, marketing, and disposition;
• Hiring and overseeing third-party professional property management firms;
• Performing deferred maintenance and capital improvements;
• Conducting periodic property inspections;
• Engaging nationally recognized brokers and auction companies to market assets;
• Marketing target properties to nonprofit organizations; and
• Promoting the continued availability of affordable housing, when possible.

The REO team actively manages its vendors by conducting weekly calls to discuss upcoming sales, marketing efforts, and disposition strategies. The team holds quarterly portfolio assessments to perform detailed reviews of its REO assets. Fannie Mae demonstrates adequate oversight of the management and disposition process. Notable aspects include the following:

• Albeit on limited volume, average REO disposition times have been relatively favorable in recent years compared with CMBS special servicers (see table 9), and proceeds have historically exceeded well above 95% of appraised values.
• In addition to traditional brokerage firms, Fannie Mae uses third-party auction platforms to sell REO properties, as well as defaulted mortgages, including a new vendor it added since our prior review.

Table 9

REO accounting and reporting

Fannie Mae's controls and procedures for property-level accounting and oversight are sound. Highlights include the following:

• Fannie Mae handles accounting and reporting for REO loans in-house. This process falls under its multifamily REO accounting group, which is part of the accounting operation function and is outside of special servicing operations.
• Property management companies maintain a single property-level account for rent collections and property expense payments.
• Separate accounts for tenant security deposits are established per state and local laws.
• Fannie Mae receives copies of monthly bank statements from their property management companies. These third-party property management companies electronically submit both monthly and annual operating reports, along with property budgets.
• Monthly summary reports of property-level operations are also provided by the property management company and are saved on the shared drive that is owned and controlled by the REO group for its review.
• A monthly summary report of property-level operations is also provided by the third-party REO asset management vendors.
• A third-party firm conducts an annual audit of the REO vendors and property management firms.

Subcontracting management

Fannie Mae handles the management and oversight of subcontractors in a controlled and effective manner following certain guidelines:

• Appraisers, engineers, and property management companies are controlled through approved vendor lists.
• Real estate brokers are used based on market experience.
• REO representatives are included in annual vendor assessments performed by the LAO team. Discussions are also held with loan asset managers to discuss vendor performance on a routine basis.
• Vendor engagements are tracked through a central system.

Legal department

Fannie Mae's in-house legal team provides legal assistance to the division through attorney-client relationships. The attorneys and paralegals have experience with mortgage loan purchases, servicing, special servicing, litigation, bankruptcy, securities, tax, and other specialties. Other notable aspects of the legal function include the following:

• The team may retain local outside counsel as necessary to maximize efficiency and expertise.
• In-house legal staff manages the process for engaging outside legal firms, using standard contracts, and their retention.
• If outside counsel is used, internal Fannie Mae attorneys meet quarterly to discuss and review the work being handled by outside legal firms.
• The legal department reviews and approves all legal invoices for accuracy and compliance with the contract before payment is made.

Financial Position

The financial position is SUFFICIENT.

Related Research

• Fannie Mae ABOVE AVERAGE Commercial Mortgage Loan Master And Special Servicer Rankings Affirmed; Outlook Stable, Jan. 20, 2021
• Select Servicer List, Dec. 1, 2020
• Servicer Evaluation Spotlight Report: Environmental, Social, And Governance Factors Have Consistently Powered Our Servicer Evaluation Rankings, Nov. 16, 2020
• Fannie Mae, April 23, 2020
• Servicer Evaluation Spotlight Report™: U.S. Commercial Mortgage Servicers Preparing For Impact From COVID-19, April 3, 2020
• Servicer Evaluation: Fannie Mae, July 23, 2019
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019