Freddie Mac has a new program to provide small loans to apartment properties—the Small Balance Loan program will help apartment owners consistently get the small balance financing they need.
“We believe this offering, specifically designed to meet the long-term debt capital needs of small rental property borrowers nationwide, will increase liquidity in the small balance space and provide stability in this somewhat underserved market,” says Nashwa Moussa, senior director for Freddie Mac Multifamily.
Currently, small loans comprise about 29 percent of the market for multifamily financing. The average size of these small loans is just $1.2 million, according to 2012 data from research firm Trepp. Most of the loans are made by local and regional banks. Because the small loan borrowers rely on banks, the availability of the loans is often subject to volatility during market downturns and dislocations, says Moussa.
For years, Freddie Mac has originated small loans of $1 million to $5 million for apartment properties. However, these loans were mixed in with Freddie Mac’s regular apartment business. The experts who worked on each loan were not necessarily motivated to focus on smaller transactions and might not have understood the different needs of the small loan borrowers.
Freddie Mac’s new program will ensure streamlined and standardized pricing, credit parameters, underwriting, servicing and legal standards. It will bring consistency and transparency to a part of the finance market that has been more improvised in the past. Each application for a small apartment building loan will no longer be dependent on whether the loan officer happens to be experienced and enthusiastic about small loans.
Freddie Mac will sell its small balance loans to Wall Street investors as mortgage-backed securities in transactions similar to its “K-Deals,” which securitize its conventional program loans to multifamily properties. Freddie Mac anticipates strong investor interest that will make it possible to offer competitive long-term interest rates.
“We wouldn’t do this if we didn’t think there were investors who would be interested,” says a Freddie Mac spokesperson.
The small balance loans will cover up to 80 percent of the value of an apartment property. Freddie Mac offers both hybrid adjustable-rate mortgages and fixed-rate permanent loans with a balloon payment at the end of the term. The debt service ratio for loans in the program should be at least 1.25x in most markets, though in top markets Freddie Mac will accept ratios as low as 1.20x. The program will also offer borrowers partial or full-term interest-only loans.
The Small Balance Loan program also offers a streamlined 60-to-120-day interest rate lock process and a simplified underwriting process, including abbreviated third-party reports. So far, Freddie Mac has signed up Arbor Commercial Mortgage, Greystone Servicing Corporation and Hunt Mortgage Group to originate and service its small balance loans. Four other lenders are in various stages of the approval process.