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 Aug 1, 2022, we affirmed the rankings (see "Fannie Mae Commercial Mortgage Loan Master And Special Servicer Rankings Affirmed; Outlook Positive For Master Ranking" published Aug 1, 2022). Our ranking outlook for the commercial mortgage loan master and special servicer ranking is positive and stable, respectively.

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
• Uncertain future under the conservatorship of the Federal Housing Finance Agency (FHFA).

Since our prior review (see "Servicer Evaluation: Fannie Mae," published Feb. 5, 2021), certain changes and/or developments have occurred:

• In November 2021, the FHFA issued its annual Conservatorship Scorecard, which provides for a $78 billion cap on the multifamily purchase volume for Fannie Mae in calendar year 2022. Within this cap, certain loans in affordable and underserved market segments are considered "mission-driven." The 2022 Scorecard requires that a minimum of 50% of Fannie Mae's multifamily loan purchases be mission-driven. FHFA is also requiring that at least 25% of the multifamily business be affordable to residents at 60% of area median income or below.
• In April 2022, the chief executive officer (CEO) of Fannie Mae announced his retirement and was replaced on an interim basis in May 2022 by the president of the company, who is handling both duties until a permanent candidate is identified.
• In April 2022, the chief operating officer (COO) resigned from the company, with her responsibilities redistributed to other executives within the company. Per management, there are no immediate plans to refill the role.
• In Dec. 2021, a third-party vendor who assisted Fannie Mae with various overflow work terminated the relationship as part of a long-term business decision. The company has replaced that vendor.
• 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 the end of 2022.
• Fannie Mae's technology group built and deployed the new sponsor risk management system (SRMS) to house all sponsor risk-related functions to streamline access to information.
• The DUS 360 asset management platform was developed to incorporate real estate owned, special asset management, and watchlist management processes. Fannie Mae is also working on building out functionality for the maturing loan management and special credits to be added to the application to streamline the processes.
• Fannie Mae's original document storage facility has been moved to a confidential new document storage location from the Herndon, Va., office. This facility has full time employees on site to check documents into and out of the vault, keyed access, security cameras, and fire suppression, among other security features.
• In 2021, as part of the enterprise cloud mitigation initiative, multifamily technology started migrating to a cloud-based platform. The migration is approximately 80% complete as of August 2022, and is expected to be finished mid-2024.
• Fannie Mae employees worked remotely during the pandemic. While the company currently has no expectation for employees to work in the office, it anticipates that some employees will come to the office one to two days per week on average.

The ranking outlook for the master servicing ranking is positive. We believe that the company will continue to serve as a fully capable master servicer for commercial mortgage loans with a multifamily focus. The extensive master serviced loan portfolio is well managed with solid policies and procedures. Fannie Mae performed admirably during the pandemic which, in part, is a catalyst for the improved outlook. Further, the company is transitioning their technology into a cloud environment, which is expected to be completed by mid-2024 and should allow for greater efficiencies. With continued steady performance and as the Fannie Mae senior leadership team stabilizes, an upgrade of the master servicing ranking could be considered upon our next review.

The ranking outlook for the special servicing ranking is stable. We believe that the company will continue to serve as a fully capable special servicer for commercial mortgage loans with a multifamily focus. Fannie Mae has the special servicing management, oversight, technology and staff experience to handle any default environment. They have managed a substantial sized loan portfolio through multiple economic cycles, including throughout the pandemic, as they work in tandem with their Delegated Underwriting and Servicing (DUS) lenders and experienced third-party vendors.

In addition to conducting a remote site visit meeting with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology data through Dec. 31, 2021, as well as other supporting documentation provided by the company.

The term "servicers" throughout this report refers to Fannie Mae 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 across all markets and its lender network has provided more than $750 billion in liquidity to the mortgage market to finance more than 11.5 million units of multifamily housing (e.g., apartment buildings with five or more units, housing for senior citizens, student housing, cooperatives, affordable housing, and manufactured housing).

Fannie Mae's multifamily underwriting guidelines and servicer oversight benefit from a unique risk-sharing model, with more than 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 and 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 includes these multifamily loans in its own mortgage-backed securities (MBS) and guarantees the payment of timely interest and principal to purchasers of their MBS. Presently, there are 23 DUS lenders, as well as seven other non-DUS or specialty lenders that sell loans to Fannie Mae.

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 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 have been various well-publicized discussions and proposals toward ending FHFA conservatorship, there is no specificity to that end.

In November 2021, the FHFA issued its annual conservatorship scorecard which provides for a $78 billion cap on the multifamily purchase volume of each government sponsored enterprise (GSE), for a total of $156 billion and applicable for calendar year 2022. Within this cap, certain loans in affordable and underserved market segments are considered "mission-driven." The 2022 scorecard requires that a minimum of 50 percent of GSE multifamily loan purchases be mission driven. FHFA is also requiring that at least 25% of the multifamily business be affordable to residents at 60% of area median income or below. Loan purchases that meet the 25% requirement also count as loan purchases toward the 50% requirement.

Fannie Mae had approximately 7,400 employees as of Dec. 31, 2021, and reported 155 staff in the multifamily servicing platform (see table 1) as of Dec. 31, 2021. Its headquarters is in Washington, D.C., and it also maintains significant operations in Plano, Texas. Satellite offices include Boston, Chicago, Frederick Md., New York, Philadelphia, Reston, Va., and San Francisco.

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. As of Dec. 31, 2021, 132 employees were associated with master servicing and 23 were associated with special servicing. Turnover in 2021 was 11% and 14% for master and special servicing which both compare favorably to its peers.

Table 3

Organizationally, an executive vice president is the head of multifamily and oversees the multifamily chief credit officer (CCO). The VP and head of multifamily operations reports to the SVP and head of enterprise operations, who reports to the EVP of single family, who reports to the president and acting CEO. These business lines comprise the following distinct units each managed by a VP who reports to the CCO:

• 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 units which are staffed by 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.

Similar to other ranked servicers, staffing and retaining talent has recently challenged Fannie Mae. Initiatives to address these staffing challenges include: cross training in portfolio risk management, compensation benchmarking, return to office incentives, and recruiting outside of the traditional D.C. office footprint by offering remote work. Per management, operating remotely opened recruitment to a larger national talent pool, investment in technologies makes virtual work more productive while positively impacting travel budgeting, and has improved work/life balance. 

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. The multifamily group derives corporate support with human resource, legal and technology. Additionally, 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 is controlled through a centralized process managed by corporate human resources. Management and staff are provided with a diversified array of ongoing formal internal and external training programs, 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. However, it requires certain specific courses, such as code of ethics and cybersecurity. Other training features include the following:

• Fannie Mae employees averaged 37 hours of training through year-end 2021, which is largely comparable to its ranked peers.
• Fannie Mae University (FMU), introduced in 2018, was streamlined and updated in 2020, with a current course catalog pared to about 500 classes from over 3,100 based on demand and relevancy. Courses cover topics such 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.
• Employee training hours are formally tracked through the Fannie Mae University application.
• An automated system provides employees with weekly emails of newly available and required training.

Systems and technology

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. However, following a significant effort to separate these systems, as of the fall of 2021 they have now all been separated, with investor reporting the final system completed. 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.
• Servicers use eServicing, a proprietary web-based application, to interface with Fannie Mae to report monthly loan activity. The eServicing system's investor reporting module allows Fannie Mae and servicers to reconcile monthly loan and MBS activity levels, and 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.
• DUS 360® is a consolidated life of loan technology platform pulling data in from internal data warehouses to manage risk across all relationships, products, and markets. This application includes an external user's module for ease of use.
• The Delinquency Early Warning System (DEWS) helps Fannie Mae' servicers 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.
• Servicers use the web-based, Cash Remittance System to set up drafting information and to transmit Fannie Mae remittances.
• The internal Cash Receipts/Disbursements Tracking System tracks and reports cash receipts and payments, made either via wire transfer or check. They are automatically logged and assigned to the business units' general ledger accounts.
• The proprietary server facing Multifamily Asset Management Portal (MAMP) is used for asset management-related data submissions and borrower requests performed by its servicers.
• The proprietary Risk Rating Analytic Platform (RRAP) was 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 supporting loan document deliveries, underwriting information, and third-party reports. The system was enhanced with centralized underwriting and loan documents, reducing process time by 50% by cutting down on manual inputs.
• A secured central repository, Risk Works, holds the company's policies and procedures.
• Special Servicing Asset Management uses DUS 360, 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 in the Northeastern US, while there is a redundant data center in the Southeastern US.
• Fannie Mae moved the original document vault to a confidential new document storage facility from the Herndon, Va. office. This facility has full time employees on site to check documents in and out, keyed security access, security cameras and various other security features.
• Management stated that annual fail-over testing demonstrates if a single site goes down, all applications can be brought up quickly 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.
• The last full disaster recovery test was conducted on July 16, 2022, and management reported no significant issues.

Cybersecurity 

The cybersecurity group provides employees with ongoing training covering relevant cybersecurity issues. Cyber risks are managed using the following processes:

• Fannie Mae sends monthly phishing emails to internal employees to test awareness. Employees may be required to attend additional trainings per individual results of these 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 Dec. 2021.
• 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

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 enterprise policy, standard, and procedure center of excellence.
• The most recent changes include the date they were made, and the approving party is highlighted within every P&P; and
• Current versions are accessed via the Risk Works repository.

Compliance and quality control 

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. One employee focuses on the multifamily division as part of the team.

As is the case with many servicers 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 determines audit frequency.

Internal and external audits  The multifamily division's internal control and compliance framework is rigorous and supports the maintenance of a sound mortgage servicing environment.

Fannie Mae multifamily risk operations is audited every three years covering the risk management of both the master and special servicing operations. The March 30, 2022, multifamily operational risk audit covered 2021 and was completed by the internal audit department. The audit contained no material exceptions. There was a low-level finding seeking improvement on key indicators needing to be bolstered in multifamily to add additional check points. Management stated this has been addressed.

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 multifamily servicing group's most recent report was issued June 29, 2020, covering April 1, 2019 thru March 31, 2020. Results were the highest possible grade and the report contained one low risk finding related to payoff reconciliations, based on the summary we reviewed, with the issue remediated and additional controls added. The next review is planned for late spring 2023.

The latest internal audit report for multifamily debt asset management covers the 2021 calendar year. Per management, results were received verbally pending the written report. No issues were noted with key controls within portfolio risk management, however, there were two areas identified in the inspection review group processes around the need for methodology showing how properties are chosen for desktop reviews and re-inspections. Documentation to remediate this is in process.

The special servicing group is reviewed every three years with the most recent audit covering April 1, 2020 through March 31, 2021. The report was issued on June 29, 2021. There were no issues noted based on the report we reviewed. The multifamily servicing group's most recent report was issued June 29, 2020, covering April 1, 2019 thru March 31, 2020. Results were the highest possible grade and the report contained one low risk finding related to payoff reconciliations, based on the summary we reviewed, with the issue remediated and additional controls added. The next review is planned for late spring 2023.

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.

Insurance and legal proceedings

Fannie Mae has represented that its directors and officers' 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.

Despite a relatively modest 4.5% increase in loan count since our last review (Jun. 30, 2020), the unpaid principal balance (UPB) has grown 16% and the average loan size has increased to an average of $14.3 million from $12.9 million as smaller loans continue to pay off (see table 2).

The current portfolio has limited property type diversification, as 91% of collateral properties (by UPB) serviced by Fannie Mae are classified as multifamily, consistent with Fannie Mae's company mandate. The other 9%, while not technically categorized as multifamily, 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 $72.4 billion (17.5% of UPB and 20.1% of total properties) of the portfolio is in California. Other top states include Texas (10.8% by UPB), New York (8.5%), and Florida (7.3%).

Table 4

Table 5

Delinquencies

After increasing to a multi-year high of 1.27% at the end of 2020, Fannie Mae's Dec 31, 2021 delinquency rate declined to 0.45%, generally in line with other similarly ranked U.S. master servicers. The decrease in the delinquency rate from last year is primarily due to the workout of loans under Fannie Mae's COVID forbearance structure (see table 6).

Table 6

Advancing

Fannie Mae does not act as a CMBS master servicer, and therefore is not obligated to provide the types of advancing typically found in a securitization pooling and servicing agreement. However, various Fannie Mae loan products 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 regularly calls 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, reflecting the reporting and remittance dates.
• Servicers must report the MBS pool data and the loan-level data in the eServicing system. Fannie Mae collects the remittance from the servicer automatically.
• The company has separate staff handling reporting and remitting duties.
• Fannie Mae completes a reconciliation of the servicer's reported data compared to its collection expectations and all discrepancies are resolved before the data is finalized with analysts reviewing all discrepancies.

Servicer and data management

The 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 who collectively oversee seller/servicer performance and provide feedback to its 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  The multifamily mortgage business has a proactive approach to surveillance, and it has effective processes for identifying and managing high-risk loans.

Fannie Mae's loan surveillance department ensures loans acquired by the company meet requirements and prudent underwriting standards. It evaluates the underwriting quality of the 23 DUS lenders, six special affordable/small loan lenders, and one cooperative non-loss sharing lender 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 Selling and Servicing Guide (the Guide) requirements.

Additional functions of the surveillance process include:

• Monitoring compliance with relevant laws and regulations.
• Quality control reviews on property financial statements, which includes checking 61-line items that identify risk factors early.
• Random selection of property operating statements pulled for re-analysis and comparison against lender-submitted data.
• An overall quality control review of 2% 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, ensuring servicers are following 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. Functions and features of the group are as follows:

• 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 deemed 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 or risks that are identified.
• Asset management testing is done annually, regardless of risk level. All lenders may be subject to annual assessments, but are primarily evaluated on risks identified by subject-matter experts.
• As part of the process, the LAO team performs a quality control and compliance review of borrowers' financial statements and property inspection submissions.

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 available for its servicers. The Guide is also published on the Fannie Mae website "DUS Navigate®" and amendments are communicated to lenders via email.

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. The lenders are required to annually certify that they comply with Fannie Mae guidelines, and provide copies of audited financial statements, a summary of their internal control structure, evidence of insurance, the external auditor's opinion, and net worth statements.

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. In 2021, Fannie Mae performed desktop reviews of custodial accounts for 13 servicers. Ten of these servicers had USAP or REG A/B certifications with no material findings noted. Additionally, Fannie Mae performed a custodial account review for three servicers without an USAP or REG A/B certification with no material findings noted. Year-to date through March 31, 2022, Fannie Mae has performed desktop reviews of custodial accounts for two servicers. Both servicers had USAP or REG A/B certifications with no material findings noted.

Asset and portfolio administration

Fannie Mae oversees the credit performance of its subserviced portfolio by utilizing its RRAP to differentiate levels of credit risk. This application allows Fannie Mae to risk-rate its entire debt portfolio monthly 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 certain legacy loans that have unique loss sharing arrangements. It proactively manages loans within 24 months of stated maturity and specifically manages loans that may not meet current underwriting criteria. MMG's role is further described below:

• 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 loans; and
• Fannie Mae also strategizes with its lenders regularly 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).
• All borrower requests are tracked in the MAMP portal.
• 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, which 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.
• Over 1,000 transactions were processed during 2021, including 95 repair extensions, 45 partial collateral releases, 39 forbearances, 29 substitutions of collateral, and 28 loan assumptions. Over 800 other borrower consents addressed include maturity extensions, leasing consents, and management changes.
• During 2021, Fannie Mae has continued including training topics during their monthly CAM calls where new processes are discussed as well as various asset management and servicing topics. These calls are recorded with a video library created for servicer training.
• Additional online training is also available to Fannie Mae lenders through the Fannie Mae multifamily website.

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. The WMG evaluates portfolio performance, reviews and confirms RRAP risk ratings, establishes loan impairment recommendations, and transfers specific loans to special servicing quarterly.
• 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 troubled multifamily assets throughout the country. Special servicing is managed from Plano, Texas. It reported 23 full-time employees as of Dec. 31, 2021, led by the VP of portfolio risk management. Special servicing asset managers, of which there are six dedicated to loan workouts and one to REO asset management, manage their assignments utilizing the new DUS 360 application, which also incorporates the watchlist management processes.

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 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 for oversight to Fannie Mae when there is an imminent default. Nonetheless, the DUS lender continues servicing the loan and works in conjunction with Fannie Mae special servicing staff until the lender/servicer's loss-sharing obligation is exhausted.

Fannie Mae has 274 active assets (243 loans and 31 REO) with a combined UPB of $4.1 billion as of Dec. 31, 2021 (see table 7) in its special servicing portfolio. This is a 21% decrease since our prior review (June 30, 2020) and a by-product of the easing of the problems caused by the COVID-19 pandemic. Special servicing loan asset managers handle an average of 41 loans each, which is the highest ratio among all special servicers that we rank. However, we note that this is mitigated by the oversight role played by Fannie Mae as it works in tandem with DUS lenders' special servicing asset managers.

The one REO asset manager workload of 31 assets is also the highest ratio among all special servicers we rank. However, REO assets are managed by third-party vendors (who are also special servicers ranked by S&P Global Ratings) to perform specific duties under the purview of Fannie Mae, mitigating the high asset to asset manager ratio.

Table 7

To manage any significant increase in loan defaults, multifamily senior leadership utilizes three additional third-party vendors to support the special servicing team. Trimont, an existing REO vendor, added loan defaults to its scope of work in 2019. Two new vendors were added in 2020 to specifically manage loan defaults, SitusAMC and CWCapital Asset Management. MonticelloAM ("Monticello"), a specialized senior housing asset management company, was also added in 2020 to consult on higher risk senior housing loans, and subsequently became an approved third-party vendor managing loan defaults and REO of that form of collateral.

During the height of the COVID pandemic, Fannie Mae temporarily reorganized the SAM team, transferring special credit asset managers to it in order to manage potential loan workouts. The existing SAM asset managers and the special credit asset managers in SAM provided oversight and guidance to the DUS servicers and vendors managing defaults. This change allowed for more focus on loan workouts in the senior and student loan portfolios commensurate with the increased risk in those portfolios. In conjunction with the reduction in volume because conditions affected by COVID-19 eased, all employees temporarily transferred to SAM have since been moved back to their original teams.

Fannie Mae announced several delegated forbearance programs for borrowers facing financial hardship due to the pandemic. Program details were updated over time to address needs. Loans needing additional relief beyond a delegated forbearance are handled by the SAM team on an individual basis.

According to management, at COVID's peak, in spring of 2020, there were 343 loans under forbearance agreements, with an outstanding UPB of $4.9 billion. As of May 2022, the volume was reduced to 10 loans in active forbearance, totaling 11 properties representing $0.2 billion in outstanding UPB.

The special servicing department 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 monthly with watchlist loans identified.
• Loans rated "substandard" are given additional scrutiny.
• 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.

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 and safety risks, large-scale casualty losses, and other issues 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 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.

The REO operations and disposition group oversees REO assets, including 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 DUS 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 or acceleration letters.
• Through outside counsel, the asset manager will commence foreclosure proceedings and seeks 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 which are based on asset size.
• Each month, the SAM director or the VP of portfolio risk management 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.

Fannie Mae and its servicers use DEWS monthly to identify 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.

Loan resolution activity for 2021 and 2020 were each significantly greater than the 2017 through 2019 average of 66 resolutions (see table 8). In 2020, Fannie Mae provided borrowers with forbearance options to assist with the potential economic impact of COVID and limited foreclosure activity. Particularly during 2020, 66% of the 125 loans reported in its resolution activity were returned to master, while 25% were full payoffs. Foreclosures (6%) and DPO/note sales (3%) made up the balance. In 2021, loans returned to master (51%) continued as the primary resolution strategy as servicers worked through loans on forbearances. At the same time, full payoffs (37%) increased in prevalence during 2021 as low interest rates facilitated refinancing activity while property values experienced significant increases across the country. Nonetheless, foreclosure activity also increased, comprising 11% of the resolution activity.

Average hold time for loans resolved by SAM have historically been favorable and although they reached a multi-year high of 14.3 months in 2021, were efficient and largely in line with peers.

Table 8

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 multifamily third-party vendors, who are also special servicers ranked by S&P Global Ratings, to perform specific duties. The third-party senior housing vendor is not ranked by S&P Global Ratings. 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.

Fannie Mae demonstrates adequate oversight of the management and disposition process. 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. Notable aspects include the following:

• Albeit on limited volume, average REO disposition times have been relatively comparable over the past two years when compared with similarly ranked 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 in 2021.

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's accounting and reporting for REO loans is handled by its multifamily REO accounting group, which resides within the accounting operation function and is outside of special servicing operations.
• Property management companies maintain a single 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, which electronically submit both monthly and annual operating reports, along with property budgets.
• Reports of property-level operations 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, of which four audits were completed in 2021.

Subcontracting management

Fannie Mae handles the management and oversight of subcontractors 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 reviewing vendor performance are routinely held with loan asset managers.
• Vendor engagements are tracked through a central system.

Legal department

Fannie Mae's in-house legal team provides legal assistance to special servicing through attorney-client relationships. The team's experiences span mortgage loan purchases, servicing, special servicing, litigation, bankruptcy, securities, tax, and other specialties. 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 manage 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 handled by outside legal firms.
• The department reviews and approves all legal invoices for accuracy in consultation with the appropriate asset manager and compliance with the contract before payment is made.

Financial Position

The financial position is SUFFICIENT.

Related Research

• Fannie Mae Commercial Mortgage Loan Master And Special Servicer Rankings Affirmed; Outlook Positive For Master Ranking , Aug. 1, 2022
• Select Servicer List, July 26, 2022
• Research Update: U.S. 'AA+/A-1+' Sovereign Ratings Affirmed; Outlook Remains Stable, March 8, 2022
• Servicer Category Descriptions Expanded and Revised, Feb. 28, 2022
• Servicer Evaluation: Fannie Mae, Feb. 5, 2021
• Servicer Evaluation Spotlight Report™: Environmental, Social, And Governance Factors Have Consistently Powered Our Servicer Evaluation Rankings, Nov. 16, 2020
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019