The State Of Small Balance Loans In 2016
A few months ago, we wrote about Freddie Mac’s small balance loan offering, featuring Hunt Mortgage Group senior managing director Rick Warren. With Freddie and Fannie stepping up their SBL game, we decided to pick Rick and director Owen Breheny’s brains about everything happening in the SBL field.
Who Gets An SBL?
Small balance loans are available to any real estate asset up to $5M in loan proceeds. In addition to multifamily properties, Fannie and Freddie also offer SBLs to mixed-use properties on a national basis through the Small Loan Program.
But that doesn’t mean they’re willing to give them out to just anyone. Different lenders, Owen notes, are more flexible than others when it comes to the amount of commercial income they will allow at a mixed-use, also weighing how common mixed-use is to the borrower’s market. For mobile and manufactured homes, Fannie likes to see MHC’s with double-wide homes (i.e. two units connected side-by-side), but will allow for single-wide houses as long as it’s common or has strong demand.
But even then, Rick says, lenders will be looking for an experienced sponsor that understands the market and the properties they’re operating.
“Lenders want to see solid properties that have historically operated well,” Rick tells Bisnow. “I’m sure everyone’s looking for the same things. You’d love for them to be as pretty as possible, but small loan properties are really Class-C properties with Class-A sponsors.”
How’s The SBL Market Holding Up?
Despite market volatility both here and abroad, Owen hasn’t seen any reluctance from lenders or borrowers. While Fannie and Freddie are operating as usual, they’re definitely placing more of an emphasis on affordable/workforce housing and other properties that won’t be counted towards their cap limits, such as MHCs and other properties with large percentages of very low or low income tenants.
What Are The Hot Offerings?
While Freddie Mac SBLs have been the most active portion of Small Loan Programs, given its rather impressive terms (competitive pricing, streamlined loan documents, and fixed-rate structures and interest-only options), Owen says Fannie Mae’s still in the game for Small Loans and has some impressive terms of its own, including 12-, 15- and 30-year fixed products, which Freddie doesn’t have the ability to offer.
“The 30-year fixed is particularly attractive at this time due to the 30-year treasury being near all-time lows,” Owen tells Bisnow. “Right now, a 30-year fixed Fannie Mae small loan is priced in the mid-5% range, depending on leverage on the overall transaction.”
Fannie also has the ability to offer supplemental financing to its existing clients, essentially offering a second mortgage that enables borrowers to tap the equity they’ve built up without having to refinance the first loan. These supplemental loans and the first mortage, however, are still non-recourse and on the same 30-year payment schedule.
How Is Tech Helping SBL’s Evolve?
Owen (left) says technology has helped improve the execution of SBL deals, helping borrowers communicate with, and submit the required due diligence to, lenders while helping them track their loans. While this kind of tech hasn’t yet become the preferred method, lenders have definitely taken to the new tech.
In addition, as borrower’s service expectations increase, Rick (right) says lenders have to make the process as simple, quick and efficient as possible, and tech is one way to do so.
“I think everyone’s moving in this direction together and I think there’s still focus on continuing to streamline the reports,” he tells Bisnow.
Where Are SBL’s Going To Be Hot?
Over the last two years, Rick says, South Florida, Texas and especially Denver have come on strong with increasing rents and stability. But, Rick says Hunt looks to do business in markets nationwide, no matter the size. With boots on the ground all over the country, tons of portfolio data to draw on and a strong regional underwriting system, Rick says he’s confident the Hunt team will understand the deal they’re underwriting and can take the time to make sure the deal’s done correctly.
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