One reason many borrowers choose to borrower from non-bank lenders is the ability to get non-recourse financing. On a multifamily (or commercial) investment you don’t want to put your full financial condition on the line if things don’t work out. However, over the years the line on what it means to have a non-recourse loan has been moving. While old documents (From the late 1980′s/early 1990′s) were fully non recourse, most modern loan documents have been non-recourse with exculpation for certain items. This change came after S&L crisis when many lenders discovered non-recourse provided strange incentives to a borrower or borrowing principal. The most notable items are fraud, misrepresentation, waste and certain environmental items.
Yesterday Freddie announced a slight expanding of the line in non recourse financing by adding creditor’s rights to the equation. Creditors rights has been a required title endorsement to protect the lender in the case of fraudulent conveyance of a property including misappropriation of funds from a new loan by one partner from another. Getting this coverage was no big deal a few years ago, but more recently title companies have asked for significant documentation relating to this coverage, have substantially increased the rates for this coverage and in some cases have refused to provide the coverage at all.
In order to assist borrowers who are having trouble with this title insurance Freddie is allowing borrowers to choose between obtaining the coverage or adding a new clause to the “bad boy” carve outs . This would ass recourse “for loss or damage incurred by the lender as a result of the voidance of the mortgage due to fraudulent conveyance or bankruptcy” . In itself this is not a big deal and will help some borrowers. Most borrowers I know would rather assume this minor liability than pay the cost of this insurance. This change will help Freddie borrowers, but we will have to see if other lenders will follow their lead.
The last round of non recourse tightening came in response to the last commercial real estate melt down. It makes me wonder if this is just a single action to address one item or the beginning of a bigger trend.