The small loan marketplace has grown much more competitive this year as banks and even some life insurance companies increasingly challenge Fannie Mae’s dominance.
Last year, the small loan program was pretty much the only part of Fannie Mae’s multifamily business to grow—to $2.4 billion from $2.2 billion the year before. And that increased volume was driven in part by continued problems in the banking sector.
But many national, regional, and community banks have worked through their balance-sheet issues and are again returning to the small loan market. In fact, FDIC-insured commercial banks reported an aggregate $29 billion profit in the first quarter—the highest level since the second quarter of 2007.
And while many life insurance companies favor large loans, there are quite a few—including Symetra, StanCorp, and Protective Life—that have an appetite for deals below $5 million.
“We’ve definitely seen more capital coming into the market in the last four or five months,” says Keith Van Arsdale, president and CEO of Dallas-based small loan specialist BMC Capital. “A lot of people don’t realize that there are a lot of options out there now other than Fannie Mae.”
Fannie has the advantage on longer-term small loans, with all-in rates for a 10-year fully leveraged deal around 5.25 percent. But banks overwhelmingly favor shorter-term loans, and many are now undercutting Fannie on price (and offering more proceeds) in the five-year deal space.
Given the increased competition, it’s probably no coincidence that Fannie Mae made some borrower-friendly changes to its small loan program—allowing more non-recourse loans and interest-only (IO) terms—at the end of April.
“We can use the IO to position ourselves a little bit more aggressively against banks, which generally don’t like to offer it,” says Rick Wolf, former head of Fannie Mae’s small loan program and now a senior managing director at New York-based Greystone. “And in markets where you didn’t have that non-recourse option before on higher leverage loans—like Minneapolis or Denver—it’s a very nice selling tool. ”
In the past, only 14 metropolitan statistical areas (MSAs) across the nation were eligible for non-recourse small loans at any leverage level. And in the rest of Fannie Mae’s delegated nationwide network, borrowers could only achieve non-recourse on lower leverage deals, those 65 percent loan-to-value (LTV) and below.
But Fannie Mae is now offering non-recourse to a broader universe of borrowers. Today, fully leveraged deals (up to 80 percent LTV) are eligible for non-recourse in any of the company’s delegated nationwide markets, with a few caveats. The loan has to be $750,000 or more, and a FICO minimum score requirement of 680 has to be met. A physical needs assessment also has to be preformed, and full funding of replacement reserves is required to achieve non-recourse.
Fannie Mae is also now allowing more IO options in the small loan program. In the past, it was very limited: The company allowed up to two years of IO on lower leverage 10-year loans. Now, in those 14 primary MSAs, loans of 65 percent LTV and below can achieve up to five years of IO on a 10-year deal, and some deals that are 55 percent LTV and below can now get full-term IO for up to 10 years.