THESE DAYS, THE SMALL-BALANCE loan marketplace seems to be divided into two types of executions: long-term loans from Fannie Mae and short-term loans from banks. And their terms couldn't be more different.
Fannie Mae's small loan program is offering standard 10-year loans at around 5.75 percent, with seven-year pricing in the mid-5 percent range, as of mid-June. But it's on the five-year term where banks are really undercutting Fannie Mae, with rates often being quoted as low as in the mid-4 percent range.
“If a borrower wants five-year money with a step-down prepay, the banks are often going to win that business because that's not really Fannie Mae's sweet spot,” says Rick Wolf, previously the head of Fannie Mae's small loan program and now a senior managing director at New Yorkbased Greystone. “If a borrower wants 10-year money, they're going to go with an agency lender. Banks just don't offer it—or they can't price it effectively.”
Greystone has a good perspective on the competitive landscape. The company's small loan program works on a wholesale model. Rather than market directly to borrowers, the company works with banks and brokers to offer them Fannie Mae small loan capability. And business has been good this year, as more banks look beyond their balance sheets for small loan capacity—generally those loans valued at under $3 million (or $5 million in high-cost areas).
“A lot of our customers are banks that come to us because they're not able to put their existing customers back on their balance sheet,” Wolf says. “We had a record first quarter in small loans.”
In mid-June, Fannie Mae made some underwriting changes to its small loan program, piggybacking on many of the changes recently announced for its conventional business. (For more on Fannie Mae's recent changes, see “Relaxed & Scrutinized.”)
For instance, the company lowered the underwriting floors—a tool used for sizing loans—on its seven- and 10-year small loan executions, allowing borrowers to qualify for more proceeds. Another change allows Fannie Mae lenders to have full delegation on low-leverage deals in most pre-review markets, which speeds up deal cycle time.
Borrowers can still achieve 80 percent maximum leverage, though they're more inclined to get it on an acquisition deal. Most refis max out at 75 percent loan-tovalue (LTV). Nonrecourse money is still being offered in the strongest markets, such as Boston, New York, Los Angeles, Chicago, Washington, D.C., and Seattle.
“We're more than willing to go up to 80 percent LTV, and we'll also go down to 1.25x DSCR [debt service coverage ratio],” says Michele Evans, a vice president of multifamily at Washington, D.C.-based Fannie Mae. “And we're doing nonrecourse in markets that we consider to be strong. Otherwise, it's a recourse loan.”
While credit parameters are generally favorable these days, there are certain areas where Fannie Mae will draw a hard line in the sand, particularly regarding sponsorship. For instance, a borrower's FICO score has always been a key consideration in the small loan program. Last year, the company upped the minimum FICO score to 680 from 650. Before that change, borrowers could get waivers for the requirement if their score was as low as 620.
Those days are long gone, as even one point can now tip the scales. “We had a guy at 679, and we could not get that deal done,” says Jerry Anderson, executive vice president and principal of Alliant Capital's Anaheim, Calif.-based small loan program. “They are not willing to budge.”
Fannie Mae's small loan program has seen higher delinquency rates than its conventional business, and since loan performance is often tied to a borrower's FICO score, the company has taken a more stubborn stance. “There are certain underwriting criteria where we draw a hard line, and FICO scores is one of them,” Evans says. “In the past, we've provided a FICO score waiver, but more recently, we've held to our standards.”
Borrowers are best advised to get their credit scores up above 680 if they want to be considered for a Fannie Mae execution. If you're on the cusp—say at 670—many Fannie Mae lenders will start the underwriting process immediately and advise you to settle up some debts before the loan is submitted to Fannie Mae. But if that FICO score is closer to 600? Well, then, you need not apply.
Greystone recently hired a small loan originator in New York with hopes of winning more market share in its own backyard. In the past, the company hadn't focused on the local market due to the intense competition, mainly coming from Washington Mutual and Sovereign Bank.
Washington Mutual, once the industry's leading national small-balance loan lender, has been much less active since being acquired by JPMorgan Chase. And while Sovereign Bank was once a very active presence in the Northeast, it found itself a victim of the recession and was purchased by Spanish bank Banco Santander early last year.
Centerline Capital also sees an opportunity in New York. The company's Small Loan Solutions group added to its existing offices in Irvine, Calif., and Seattle by opening a new regional office in New York in the second quarter. That office won't be limited to just the tri-state area of New York, New Jersey, and Connecticut, but will also look to do business in Philadelphia, Washington, D.C., and Boston.
“There's just not as many banks out there, and by default, people are looking for that lower rate and longer execution,” says Rick Warren, who leads Centerline's Irvine, Calif.-based small loan group as managing director. “It's a very common practice now for a traditional bank borrower to be a first-time Fannie borrower.”