The small loan market is starting to heat up again, as banks regain their appetite for balance sheet loans and wrest some business from the GSEs.
Chase Commercial Term Lending—the new incarnation of Washington Mutual’s small loan program that once dominated the market—has grown much more active in recent months, mostly on the West Coast. And other national, regional, and community banks, such as Sovereign Bank, are beginning to step off the sidelines again.
Banks overwhelmingly prefer shorter-term loans, and are particularly competitive on higher-leverage five-year deals. Borrowers looking for 10-year deals will still find the best rates and terms with Fannie Mae’s small loan program.
“If a very active bank wants to compete on proceeds and rates in the five-year space, they’re probably going to win that deal,” says Rick Wolf, who previously led Fannie Mae’s small loan program and is now a senior vice president at New York-based Greystone. “But on some of the lower-leverage business we can be very aggressive on five-year money.”
The banking sector is only just beginning to ramp up again, and not every borrower in every market will find success with banks. The competition to win deals for the strongest borrowers is becoming fierce in major metros, but middle-market borrowers in secondary and tertiary markets weren’t seeing a lot of competition in the fourth quarter.
Climbing Rates Cut into Proceeds
The increased competition from banks in the fourth quarter came just as all-in rates on small loans began rising dramatically.
The yield on the benchmark 10-year Treasury was at 2.6 percent November 8, and borrowers were still locking rates in the mid-4 percent range. But a month later, the benchmark reached 3.26 percent, and during that time, investor spreads climbed about 25 basis points (bps). That’s a rise of 91 bps in just one month.
Meanwhile, 10-year small loans from Fannie Mae were quoting at 5.6 percent, with seven-year deals around 5.05 percent and five-year money at 4.40 percent in mid-December. That 5.6 percent rate is an important milestone. Fannie Mae uses an underwriting floor of 5.5 percent in sizing 10-year loans, and for much of the second-half of 2010 it wasn’t an issue given the low rates.
The higher rates are throwing a blanket on transaction velocity, which seemed to gain steam each passing month in 2010. And this obviously impacts the refinancing market, which constituted the majority of business for Fannie Mae lenders in 2010. “I’m working on several acquisitions for January, and that is having an impact, cutting into proceeds, and potentially renegotiating the purchase and sale,” says John Edwards, a vice president at Uniondale, N.Y.-based Arbor Commercial Mortgage.
Fannie small loan lenders don’t expect to see any big changes in underwriting next year, however. In the spring, Fannie Mae started loosening up a little bit, and that trend is likely to continue, but no wholesale changes to the underwriting guide are expected.
“We’ve seen some incremental flexibility around things that six months ago were off-limits,” says Wolf, including waivers granted on underwriting floors in strong markets. “As the industry relaxes a little bit from some of the credit tightening, I expect they’re going to. Where you’ve got a good story, ‘come talk to us’ has been their more welcoming approach since the spring.”