Fannie Mae has shuttered its Micro Loans program, a little more than a year after introducing the execution.
The Micro Loans program, which offered multifamily loans of $750,000 or less for properties of five units or more, was rolled out in the first quarter of 2008. But by the second quarter of this year, it had been put in mothballs.
Micro Loans offered some pretty aggressive underwriting as compared to Fannie’s regular Small Loan Program, which was ultimately one of the reasons for its demise, industry watchers say. “It had a very short life,” laments Ken Fazio, national sales manager for Uniondale, N.Y.-based Arbor Commercial Mortgage. “I think on a lot of levels, it mirrored the residential side, where they got overly aggressive.”
The big issue was a lack of investor demand for the loans: Investors in Mortgage Backed Securities were turned off by the underwriting standards of the program, according to industry watchers. The buzz in the industry is that Micro Loans had a higher default rate than the rest of Fannie’s business.
To be competitive with community banks, the program underwrote to a 1.10x debt service coverage ratio and required much less documentation than the standard Small Loan program. Borrowers didn’t have to supply annual financial statements, and the borrower’s FICO score was a main metric, as opposed to third-party analysis.
Arbor had applied for a license to begin offering the program. But just as they were ramping up the platform to sell to customers, the program was shuttered, Fazio says.
Fannie Mae will still consider doing loans sized at $750,000 or less on a much more select basis, funneling those loans through its Small Loan Program, a company spokesman said.