The tables have turned in the small loan space, and it’s a borrower’s market once more.
The competition between Fannie Mae and portfolio lenders is brewing, and many borrowers who might not qualify for some of Fannie’s strict guidelines will find it easier to explore the offerings from a credit union or bank instead.
For the last few years, Fannie Mae seemed like the be-all end-all in the small loan space, since many banks were still getting their houses in order in the wake of the Great Recession. But now, plenty of private-sector lenders are gaining traction, offering more flexible underwriting to entice borrowers away from Fannie Mae.
“The trend now is that borrowers can shop around a bit,” says Marc Schillinger, senior vice president at Los Angeles–based George Smith Partners, which serves as a strict intermediary between lenders.
One of Schillinger’s latest requests from a major borrower included a 60 percent loan-to-value (LTV) deal for an asset in Santa Monica, Calif. The borrower was looking for a nonrecourse loan, with low interest rates.
“They were basically looking for everything,” he says.
But one thing the borrower had going for it was the amount of the loan—at $2.5 million, the loan was in the sweet spot for many local, regional and national banks. Anything below $1 million may be seen as an inefficient way to place capital.
As a loan amount gets higher than $1 million, the borrower gets a lower rate. “Your money gets cheaper as you borrow more,” Schillinger says.
Because there isn’t much of a difference in rates, portfolio lenders are also competing by offering nonrecourse. Additionally, because Fannie’s rates depend on the Treasury index and lender spreads, which fluctuate daily, portfolio lenders may seem like a more appealing choice.
Fannie Steps Up
Even as more portfolio lenders jump off of the sidelines, Fannie Mae’s small loan program still has its appeal. One of the main advantages Fannie Mae offers is duration—most banks are loathe to go long, preferring instead to do five-year deals.
“The [Fannie Mae] program competes with a typically longer-term loan and lower rates than what you see with a portfolio lender,” says Rick Warren, managing director for Irvine, Calif.–based Centerline Capital Group. “So, although you might find a bank lender out there who’s willing to do a 10-year loan, it’s more likely you’re going to see these banks do shorter terms.”
Yet, portfolio lenders in high-cost areas such as New York and Los Angeles, are more apt to offer 10-year loans—in New York, for instance, Fannie Mae has a much more difficult time winning small deals.
But in other, less-prominent markets, a bank may offer a 75 percent LTV, with a 20-year amortization. Fannie, meanwhile, will compete by lending at 80 percent LTV, with a 30-year amortization. Fannie Mae can compete better in noncoastal, secondary and tertiary markets, where portfolio lenders are more conservative.
Depending on how a loan is structured, Fannie’s terms will be spread in five-, seven-, and 10-year increments, with the principal balance of the loan being due after those time frames. Portfolio lenders, though, can do a hybrid loan. Hybrids are fixed for five, seven, or 10 years, after which they convert to an adjustable-rate loan. After the set time frame, the loans must be refinanced.
Strict Standards Remain
For a Fannie deal, the borrower must have a net worth equal to the loan amount, as well as liquidity (at least nine months of principal and interest until the close), with a FICO score of 680 or higher.
“Everybody’s underwriting borrowers more conservatively today than they did five years ago,” Warren says. And while it used to be more about the property than the borrower, now it’s about both, he adds.
“Portfolio lenders have some flexibility in scenarios that we don’t have,” Warren notes, considering that a bank is more willing to budge on a lower credit score if all other facets of a deal look good. Meanwhile, Fannie might reject a borrower with a FICO score of 675.
Additionally, borrowers can’t have bankruptcies or foreclosures in their records. And, ideally, they should be local.
Fannie’s credit standards are certainly reasonable, and effective—overall, its multifamily delinquency rate is a miniscule 0.28 percent. And while that delinquency rate is higher in its small loan division, Fannie’s strict adherence to credit guidelines may need to be rethought given the increased competition from the private sector.