After years of domination by national and regional banks, the small balance loan space is being usurped by Fannie Mae. The government-sponsored enterprise is dominating the arena these days, though it has toughened up its credit standards for small loans.
Historically, small loans from Fannie Mae have featured slightly better underwriting standards than larger loans, but in the past month, Fannie Mae has changed the way it approaches loans under $5 million.
Small loans are now being underwritten at a minimum 1.25x debt service coverage ratio (DSCR), and offer a maximum 75 percent loan-to-value (LTV) ratio—just like large loans. As recently as March, small loans could be underwritten at a 1.20x DSCR and 80 percent leverage at Fannie Mae.
Agency lenders are also looking very hard at various trends right now—especially the trailing 12 months of a property’s net operating income—in sizing loans. “The agencies are taking a closer look at the asset’s location, at the sponsors, and at the age of the asset a lot more today than in the past,” says John Brownlee, a Dallas-based senior managing director at Holliday Fenoglio Fowler.
Still, rates for Fannie Mae’s small loans are reasonable. A standard 10-year small loan is pricing between 5.4 percent and 5.7 percent as of April 30. Most banks can’t compete with that rate, market watchers say. What’s more, Fannie Mae’s small loans are non-recourse for deals in major markets—a competitive advantage these days.
Most banks now require recourse, though a handful of regional and local banks are still offering non-recourse loans, albeit with a catch. “In a lot of cases, they’re seeking some sort of depository relationship with a client, and that makes it somewhat problematic to do deals,” Brownlee says.
PNC Bank, which participates in Fannie Mae’s small loan program, recently upped the minimum deal size to $2 million from $1 million last year, since the company has been inundated with larger loan requests.
While Freddie Mac doesn’t currently have a formal small loan program, they do have some appetite for small loans. Still, borrowers often have to bring several small loan requests together before Freddie Mac will consider the deal.
“Freddie will entertain small loans if they come as a package,” says John Barbie, a Los Angeles-based vice president at PNC ARCS focused on small loans. “Sometimes their rates are well inside of Fannie’s, but it changes deal by deal.”
Washington Mutual, which once dominated the small balance loan space for the multifamily industry, is now a shrinking presence, according to many in the lending industry.
Many small loan borrowers are now increasingly turning to the Federal Housing Administration’s 223(f) program, which has great terms, including up to an 85 percent LTV and 1.18x DSCR. But borrowers often have to wait four or five months before closing the deal.
“If proceeds are the key, and you’re taking out a fairly high-leveraged loan, the FHA may be the most attractive option,” Brownlee says. “You just have to plan ahead a little bit more.”