The small loan marketplace is generally divided into two executions right now: long-term loans from Fannie Mae and short-term loans from banks.
Fannie’s small loan program is offering standard 10-year small loans at around 5.75 percent, while seven-year pricing is in the mid-5 percent range, as of mid-June.
But it’s on the five-year term that banks are really undercutting Fannie Mae, with rates often being quoted as low as in the high-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, a senior managing director at New York-based Greystone. “If a borrower wants 10-year money, they’re going to go with an agency lender. Banks don’t just offer it, or they can’t price it effectively.”
Fannie Mae made some underwriting changes to its small loan program in mid-June, piggybacking on many of the changes recently announced for its conventional business.
For instance, the company lowered the underwriting floors—a tool for sizing loans—on its seven- and 10-year small loan executions. This change means that borrowers will be able 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 are still able to achieve 80 percent maximum leverage, though they’re more inclined to get it on an acquisition deal. Most refinancings get held up at a 75 percent loan-to-value (LTV) maximum. Nonrecourse is routinely 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 1.25 DSC,” 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, there are certain areas where Fannie Mae will draw a hard line, particularly regarding the minimum FICO score of 680. In the past, borrowers could get waivers if they didn’t meet the requirement, but that’s not the case anymore. “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.”
So, if you want a Fannie Mae small loan, check your credit reports. If you’re right on the cusp, say at 670, many Fannie Mae lenders will advise you to work on settling up some debts, and will begin the underwriting process immediately. But if you’re closer to 600, most Fannie Mae shops say you need not apply.
Greystone just hired a small loan originator in New York with hopes of winning more market share in its own backyard. In the past, the company saw intense competition there mainly from Washington Mutual and Sovereign Bank, both of which are much less active since being acquired by JPMorgan Chase and Banco Santander, respectively.
Centerline Capital also sees an opportunity in New York. The company’s Small Loan Solutions group opened a new regional office in New York in the second quarter, adding to its offices in Irvine, Calif., and Seattle.
“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.”