MULTIFAMILY BORROWERS looking for small loans have to look a little harder these days.
This is especially true for loans of less than $1 million. Washington Mutual once dominated the arena through a balancesheet execution, but the company has been much less active since it's acquisition by JPMorgan Chase in September 2008. Additionally, regional and local banks are less active in the sub-$1 million space than in the past, and many Fannie Mae shops are less inclined to go below $1 million, especially since the GSE closed its Micro Loan program in early 2009.
A dozen Fannie Mae small-loan lenders still are technically able to go down to $500,000, but few have the inclination due to the diminishing returns of processing a sub-$1 million loan. After all, if it takes the same amount of documentation, reporting, and due diligence to process a $10 million loan, many shops figure it's not worth the time and effort to go low.
“If you look at the DUS guidelines, there's never been a floor on how small a loan could be,” says Jerry Anderson, an executive vice president and principal of Seattle-based Alliant Capital's small-loan program, based in Anaheim, Calif. “They leave it up to the lenders to consider the economics of getting there and the amount of due diligence required.”
Alliant is among the subset of DUS lenders that court smaller deals, a list that also includes Uniondale, N.Y.-based Arbor Commercial Mortgage and New Yorkbased Centerline Capital. Alliant opened its small-loan division in late summer 2009, originating loans as low as $500,000. “I look at loans that small as almost like doing a public service,” Anderson says. “There aren't a lot of places borrowers can go for a loan that small. So, if it doesn't impact our ability to be of service to all our clients, why shouldn't we do it?”
Arbor, one of the most active small-loan lenders in the industry, will also go down to $500,000. While the company says it won't turn away small borrowers based on loan amount, there are caveats for those looking for $500,000 loans. “When we do it, there's usually a compelling story, and it's often for an experienced borrower with a good background with whom we have a relationship,” says Ken Fazio, national sales manager at Arbor. “It's not something we would do lightly.”
Banks vs. Fannie
If you can swing a small loan from a bank, the advantages over going the Fannie route include a quicker approval process and a bigger appetite for sub-$1 million loans. But there are several disadvantages to calling your local banker for a small loan. Banks often require some level of recourse, and their rates are higher than what Fannie lenders can offer. Fannie is offering 10-year small loans at around 6 percent, as of early January, while most banks are well over the 6 percent mark. What's more, banks prefer shorter-term loans and generally won't do a straight-up, 10-year deal.
“To the extent you wanted to secure long-term financing, regional and community banks are likely not the best source for you,” says Dan McIntyre, a director in the Washington, D.C., office of mortgage banking firm Holliday Fenoglio Fowler. “And if I'm a borrower today, whether I'm a long- or short-term holder, I'm trying to get as long-term financing as I can.”
Another key consideration is that banks, unlike Fannie Mae, typically don't do assumable loans. Banks are much more relationship driven, so they're making a loan to a borrower, not an asset. “If you can offer non-recourse debt that has significant term on it to a buyer three years from now at today's rates, that should aid a future sales process and preserve or potentially enhance value down the road,” McIntyre says. “Create a financial asset to go along with a real estate asset.”
Since small-loan borrowers are more cost-conscious than larger borrowers, the application fee is a main factor as to where to secure the loan. Washington Mutual set the bar high—or rather low. One of the bank's competitive advantages is a low fee that is refunded after the deal closes. Anderson, who previously ran WaMu's Fannie Mae platform, brought that strategy to Alliant, which touts a refundable application fee of $4,500 and doesn't charge legal or appraisal fees. Centerline Capital offers a similar fee structure. Shortly after Alliant and Centerline opened their small-loan shops, Arbor announced that it too would reduce its application fee to $4,500, down from $7,500.
Many Fannie Mae shops offer a $4,500 application fee, as well, which covers all third-party reports, such as the appraisal, engineering and environmental reports, and lender legal fees. In highpriced markets, that figure is well below what most other lenders could offer.
“In Washington, D.C., it could cost $4,500 just to get the appraisal,” McIntyre says. “It really is a pretty big competitive advantage to Fannie Mae's small-loan program.”