Small Balance Loans A Stable Option For Borrowers As Market Gains Popularity
Fannie Mae and Freddie Mac have expanded the lending market with small balance loans, creating another avenue for borrowers to seek long-term financing. As one of three firms originally selected to launch Freddie Mac’s small balance loan program in 2014, Hunt Mortgage Group had early involvement with this segment of the market.
As agency lenders continue to improve the product with hybrid adjustable rate mortgage options and streamlined due diligence, borrowers have turned more toward the product for properties under $5M, Hunt Mortgage Group Small Loan CRE Lending Senior Managing Director Rick Warren said.
Freddie Mac’s small balance product provides multifamily loans from $1M to $6M in all markets, and between $6M and $7.5M for properties with 75 units or fewer in specific markets. One option is a fixed-rate loan, where debt has a five-, seven- or 10-year term and 30-year amortization. Freddie Mac also offers a hybrid, 20-year adjustable rate mortgage. Borrowers benefit from low interest rates for an initial fixed-rate period followed by periodic adjustment based on shifts in the market.
Fannie Mae’s small loan program provides loans up to $3M nationwide and $5M in specific markets. It has a longer loan term, from five years to 30 years at a fixed rate, but also offers 80% loan-to-value and benefits like declining prepayment penalties over time.
"As far as the terms and structures, both are very attractive products with non-recourse and interest-only options," Warren said. "It looks similar to a bank product with step-down prepayment penalty and other terms, but with no geographic limitations and very competitive rates. So it’s the best of both worlds."
Combined, Fannie Mae and Freddie Mac had a record-breaking $85B in transactions in 2015. Both government-sponsored enterprises announced they expect to fund from $55B to $60B each in multifamily loans in 2017. Mortgage transaction volumes from GSEs are regulated. While conventional apartment loans fall under caps issued by the federal government, small apartment loans, financing for energy-efficiency improvements and affordable housing developments fall under uncapped business and do not count toward the volume limit.
Both agencies prefer stabilized properties that fall under uncapped categories, Warren said. The bulk of Hunt’s small loans are for multifamily projects. Experienced borrowers that operate well-managed properties are also favored for small balance loans.
With GSE transaction volume on the rise and interest rates remaining low, the lending landscape remains favorable for borrowers. Small balance will continue to steadily grow in popularity among developers as a permanent takeout loan, Warren said.
Central to the success of small balance loans that Hunt originates is the firm’s dedication to customer service, setting it apart from other lenders.
“That isn’t easily measurable in the market because we have such a commoditized product. However, that is where we are trying to differentiate,” Warren said. “We are seeing real results there. The bright spot for us is creating the best customer/borrower experience in the industry.”
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