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Fannie Mae and Freddie Mac Loans and Borrower's Counsel Opinion Letters

Borrowers who obtain Fannie Mae (FNMA, the Federal National Mortgage Association) or Freddie Mac (the Federal Home Loan Mortgage Corporation) loans for apartment buildings frequently receive lower-interest loans - but must comply with all of the Fannie Mae or Freddie Mac requirements. One of these is that they hire an attorney to prepare an opinion letter to the initial lender and Fannie Mae/Freddie Mac (which buys the loans after they have closed). The lender is required to hire an attorney for an opinion letter, but the borrower still must have its own attorney as well. This article is designed to provide a few tips and cautions about the process for these loans.

The borrower should get the borrower's attorney involved as early as possible in the process, since a number of items that need to be completed for the opinion letter - such as obtaining certificates of good standing for the borrower from the State -- take time. The loans are only good for a specified period; after that, the interest-rate lock is lost - and the borrower's counsel's opinion letter and the investigations on which it is based must be completed prior to closing.

Among other things, the borrower's attorney is required to review the articles and the bylaws, operating agreement or limited partnership agreement of the borrower, plus any amendments to those documents. If the borrower is a limited liability company or limited partnership, then the borrower's attorney also must review the organization documents for the manager(s) of the limited liability company or the general partner of the limited partnership (and also obtain certificates of good standing for them). As a result, it's a good idea for the borrower to round up these documents early in the process.

In addition, the borrower must be a single-asset entity, meaning that it owns only that one property and engages in business solely with respect to that property. The lender, which must follow the Fannie Mae requirements, often requires that amendments be made to the borrower's organizational documents to create or strengthen the single-asset entity restrictions.

There are a number of new requirements for the Fannie Mae loans, many of which are novel. For example, Fannie Mae now has a requirement that the borrower certify, after "due inquiry and investigation" that "there is no evidence of any illegal activities relating to controlled substances on the Property". Since this is a new provision, there is no guidance as to what constitutes compliance with this requirement. That may require the borrower to investigate whether any police reports have been filed regarding illegal drug activity concerning the apartment - which again can take time. Because of these new and untested loan provisions, it is in the best interest of the Borrower to engage counsel to help them interpret and understand how these requirements may impact their particular loan package.

On a Freddie Mac loan, if the single-asset entity is a Delaware limited liability company (LLC) with a single member, there must be at least one independent manager (sometimes two), there must be a "springing" member who becomes the member if the original member no longer exists, and there must be an additional opinion regarding compliance with these provisions. The operating agreement can be amended if need be to satisfy these requirements.

Fannie Mae and Freddie Mac each have their own forms - note, deed of trust, borrower's counsel's opinion letter, and many more - and it is very rare that any of those provisions can be changed. Essentially, the price of getting the lower-interest rate on a Fannie Mae or Freddie Mac loan is that everything is done the way they want. Still, it can be well worth it. Borrowers just need to remember that they should get their attorneys involved and begin gathering the documents to be reviewed very early in the process.

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