Exclusive Q&A: Leading Lenders Tout Freddie Mac’s Small Balance Loans
In 2015 alone, Bisnow partner Freddie Mac financed more than $47B in multifamily apartment loans, far exceeding the $28B it financed in 2014. As of December 2015, more than $2.5B of this production was Small Balance Loans (typically five to 50 unit properties with an unpaid principal balance of $1M to $5M)—a new offering that Freddie Mac launched in October 2014 .
According to Freddie Mac, this offering is critical to protecting, preserving and expanding the nation’s workforce housing stock by providing much needed financing “to the small loans market, which provides affordable housing for families across the country.”
Freddie Mac’s Small Balance Loans have quickly earned a following among mortgage shoppers. The reason, it seems, is significant benefits for borrowers. But what exactly are these benefits? We sat down with five of the program’s top lenders to get their perspectives on why the program has attracted so much attention.
CBRE Capital Markets Senior Managing Director Jeff Hurley
What’s different about this compared to other small multifamily financing options in the market today?
Jeff: The small loan execution that Freddie Mac has in most markets will be a substantially lower interest rate than other executions, so that puts more cash flow in borrowers’ pockets. Additionally, most bank offerings are going to be shorter term or a five-year term, whereas Freddie can lock in a seven- or 10-year fixed-rate loan or we can even do a 20-year hybrid ARM, so you don’t have to worry about the financing of it for quite some time. Another big difference is the non-recourse aspect of the Freddie debt, and the fact that typically we are not going to require escrow for capital improvements and replacement reserves.
CBRE has been Freddie Mac’s largest multifamily Seller and Servicer for six or seven years. We have a very strong relationship with them across the country. We also have an incredible depth of local market presence in the multifamily business, so we’re able to provide a very quick sizing and turnaround time, as well as a very high level of service after closing.
Sabal Financial Group CEO and Founder Pat Jackson
How does the cost and process of getting a Freddie Mac Small Balance Loan stack up in the marketplace?
Pat: Cost is one of the benefits, actually. It’s the certainty of a defined cost to get your loan done, and at a lower cost compared to your local bank or a conduit. There is a standardized, well-articulated underwriting and funding process, so we can say, “Here’s what it’s going to take to get your loan funded.” That gives the borrower, in actual dollars, an amount of closing costs and efficiency that they can count on. It really yields a consistent, transparent way of getting your loan done.
Freddie Mac has also streamlined the process, but without cutting corners—I think this is a really important distinction. For example, they’ve standardized loan documents where we don’t need the complexity or excess legal work. And, we use a single counsel, which eliminates additional costs for borrowers. Sabal has even created a system called SNAP, an interface that connects to Freddie Mac electronically and allows brokers to enter loan parameters, get real-time pricing and upload documents for quicker underwriting. These are all examples of how we and Freddie are making the process more efficient.
Greystone Senior Managing Director Rick Wolf
What kind of flexibility does a Freddie Mac Small Balance Loan offer?
Rick: You’re going to find features and flexibility that your bank may not be able to offer. Small Balance Loans have to be as standard as possible, but at the same time, you need to have an ear towards something that makes sense, and this program allows for that. There is the ability to listen to a story, and I think that’s important.
It takes dedicated people and resources to do that, which Freddie carved out specifically for its small loans offering. And, when you come to Greystone, you’re talking to people dedicated to small loans. You’re not talking to someone who also does $50M loans and maybe a small loan goes to the bottom of the stack. You are a priority. That’s true on the Freddie side as well. That level of service makes a difference for the borrower.
Hunt Mortgage Group Small Balance Senior Managing Director Rick Warren
How does your local market expertise come into play when you determine whether to do a deal?
Rick: Having boots on the ground in local markets makes a difference. We have multiple offices nationwide, regional underwriters with local knowledge, plus there’s a lot of data in our portfolio that we can draw on. We can tap every corner of the nation from very small markets to the largest markets. Since we started doing small loans with Freddie Mac, we haven’t been timid about going into smaller markets. We take the time to get to know the market, understand what we’re underwriting, and get the deal done correctly.
I’ve been doing small balance lending—commercial and multifamily—for 25 years. This product is extremely competitive and so are the rates. And, if you’re a small apartment owner, having the experience of being a Freddie Mac borrower as the markets continue to cycle is a really good tool to have because banks aren’t always in the market, as we’ve seen in the past. We’re very happy about how this product hit the market and we’re looking forward to seeing it continue to grow.
Arbor Commercial Mortgage COO John Caulfield
How are you and Freddie Mac streamlining the small loan process?
John: Not only did we helped develop Freddie Mac's Small Balance Loan program, but we uniquely understand the Small Balance Loan business because we've been leading it for a long time with incredible success. Freddie's done a tremendous job of constantly staying in tune with what's going on in the small loan market and being proactive, evolving and making improvements to their offering to keep it highly competitive. Simply put, it's an excellent product for borrowers.
At Arbor in particular, we've just unveiled a new online loan origination program called ALEX, or Arbor LoanExpress. As the industry's first all-agency platform, ALEX was developed for direct borrowers, brokers and even correspondent lenders to help make the historically complex multifamily lending process more organized and streamlined. ALEX should help clients easily and efficiently obtain financing from Arbor, an established institution.