More lenders are targeting the small-balance commercial mortgage niche, which should mean better rates and terms for smallish apartment property owners in 2006.
The driving force: Once-reluctant Wall Street is finally embracing mom-and-pop borrowers as a few innovators are successfully pooling up and securitizing small-balance commercial and multifamily mortgages. The key implication for borrowers will be a narrowing of the traditional gap between rates on small-balance and larger income-property mortgages.
Ever-improving efficiencies continue cutting the per-deal costs of underwriting, closing and securitizing mortgages generally, noted E.J. Burke, executive vice president at KeyBank Real Estate Capital. The trend should make small-balance transaction costs increasingly worthwhile to Wall Street conduit lenders, and hence gradually reduce the spread between larger-deal and small-balance coupon rates, he added.
Major multifamily lenders KeyBank and LaSalle Bank rank among the latest institutions formalizing small-balance origination and securitization plans. Government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have likewise targeted small-balance lending opportunities and devised programs aimed squarely at them.
Indeed, something of a turf war is breaking out as large national lenders are finally focusing on small-balance borrowers, encroaching on territory traditionally reserved for local and regional banking companies, said Dan Dulin, an agent with brokerage Marcus & Millichap in Phoenix. No doubt the greater attention is a welcome change for small-deal borrowers who’ve traditionally had to pay higher rates than their bigger brethren.
While a few giant commercial and investment banks and life insurers have actively courted small borrowers, local banks and thrifts have been the most active small-balance debt providers. But these portfolio-type lenders tend to prefer relatively short terms and often require full (or considerable) recourse. More important, coupon rates on the bank and thrift loans tend to be at least a half-point higher than conduit and GSE mortgages.
New benefits for small borrowers
But the increased lender interest in the small-balance niche should lead to reduced borrowing costs. A general flood of commercial mortgage capital is helping to push lenders into traditionally less competitive market niches such as the small-balance arena. Meanwhile the secondary bond-buyer marketplace is finally welcoming newfangled efforts to securitize pools comprised exclusively (or nearly so) of small loans into commercial mortgage-backed securities (CMBS).
Since niche pioneer Bayview Financial has demonstrated prospects for successfully securitizing small-balance commercial mortgage pools, new players such as start-up CBA Commercial, LLC, and long-established Imperial Capital Bank have geared up programs in recent months.
The early successes suggest a nice opportunity for banks, which want to serve smallish clients seeking permanent financing – but prefer not to hold long-term loans on their books.
KeyBank is targeting $500 million of originations – at $500,000 to $5 million a pop – over its new Key Commercial Mortgage Direct program’s first 18 months. As KeyBank aims to securitize the loans, the program offers 10-year maturities for recourse loans amortized up to 30 years. Apartment deals can have loan-to-value ratios up to 80%, compared to 75% for other property types.
Meanwhile, LaSalle just took to market a $389 million pool comprised almost entirely of small-balance apartment mortgages.
Michelle Paretti, managing director overseeing investment banker Credit Suisse First Boston’s (CSFB) long-established small-balance program, isn’t surprised to see other institutions jumping on the bandwagon. CSFB’s small-balance lending activity has been growing by 20% annually for four years running and was set to end 2005 in double-digit territory, even as property prices have continued upward.