Small-Balance Lending Gets Bigger
DALLAS–As more lenders focus on small-balance commercial and multifamily loans, servicers need to understand how to handle these loans post-closing, analysts said here at the MBA Commercial/Multifamily Servicing and Technology Conference.
Vartan Derbedrossian, Director of Servicing with Sabal Financial Group, Newport Beach, Calif., defines small-balance loans as less than $10 million. “But our loans in this sector average $1.7 million to $1.8 million,” he said.
Roy Chun, Senior Director of Multifamily Asset Management with Freddie Mac, McLean, Va., noted that 40 percent of Freddie Mac’s small-balance loans go to smaller secondary markets and 10 percent go to markets with fewer than 60,000 renters. “It’s sometimes harder to get information on smaller markets, and under distress scenarios it can be more difficult to work out because there are fewer options,” he said.
Chun said 30 percent of Freddie Mac’s small-balance lending qualifies for very low-income renters, those earning 50 percent or less of area median income.
“In terms of collateral age, the original construction date for small assets averages 1958 compared to 1985 for conventional loans, so there is an almost 30-year difference,” Chun said. “In terms of the last renovation, 40 percent of our portfolio–both conventional and small-balance–had some renovation around 2009. So both were likely renovated in 2009 but the construction age difference is probably due to the markets both types of assets tend to be in.”
Shannon Carmack, Senior Loan Portfolio Analyst with Ameritas Investment Partners, Cincinnati, Ohio, said small-balance borrowers sometimes fail to fully understand exactly what they are undertaking.
“They know they want a particular property and they want to borrow money, but they might not understand the program through which they are borrowing,” Carmack said. “Going to a local bank [for a loan] is very different from going to an FHA or agency lender in a program with additional requirements. So it does require a little more explanation throughout the process. It’s best that they surround themselves with appropriate advisors so their lender is not the one doing all the borrower education.”
Some types of small-balance loans have negotiable terms, but others have non-negotiable program requirements, said Bonnie Hochman Rothell, Partner with Morris, Manning & Martin LLP, Washington, D.C. “So we encourage borrowers to obtain counsel that understands the program type through which they’re borrowing,” she said.
Small-balance borrowers frequently want to do all property work themselves, Hochman Rothell said. “That can be both a blessing and a curse if they’re their own contractors and accountants [as well as property managers],” she said. “It’s a big challenge because often their own passion for the project and knowledge of the project is beneficial, but there needs to be a separation to get an appropriate experience level in there. We’ve seen some small borrowers who have provided financial statements handwritten on paper or on napkins or otherwise lacking the sophistication that they need. Making sure borrowers have the right financial professionals engaged is important.”
In addition, small borrowers sometimes comingle funds between investments, Hochman Rothell said. “It’s so important to ensure that borrowers understand the need to keep property finances separate from other businesses they might be engaged in,” she said. “You see that more often here than with larger, more sophisticated borrowers.”
Capital improvements and deferred maintenance can also present problems for small-balance loan servicers, Hochman Rothell noted: “Small borrowers often don’t have the funds to make the repairs or replace things as the time comes, so one thing that’s even more important in this sector is ensuring that there are appropriate escrows in place.”
But there is a fine line between advising a borrower and becoming their de facto partner, Hochman Rothell said. “Make sure they know that you’re the lender, not the partner in this project,” she said. “It’s nice to have that one-on-one where they feel like you’re there for them, but at same time you can’t act as a borrower; you have to make sure they make decisions for themselves.”
The Mortgage Bankers Association will host a Small Balance Lending Summit June 22 and 23 in Chicago to discuss the sector in detail. For more information, click https://www.mba.org/conferences-and-education/event-mini-sites/small-balance-lending-summit.
