Courtesy Freddie Mac

There was a time not so long ago when owners and operators of small apartment buildings faced uncertain financing options.

The loan application process was often inconsistent and opaque from lender to lender, making it difficult to plan property maintenance and upgrades with confidence. Necessary improvements might be delayed or allowed to slide indefinitely, limiting the availability of clean, safe apartments for an already challenged housing market.

Liquidity and Transparency
Today, owners of Class B and C multifamily properties have more options.

Few have a better perspective on this encouraging turn of events than Catherine Evans and Meg McElgunn. Evans is vice president of small balance loan (SBL) underwriting at Freddie Mac and McElgunn serves the government-sponsored enterprise (GSE) as senior director of SBL production. Both are part of a surge that has seen SBL volume grow from $4.6 million in 2014 to over $7.4 billion in 2018, deals that cover more than 66,000 low- and very low-income apartment units nationwide.

Catherine Evans, VP SBL underwriting, Freddie Mac Multifamily
Michael C. Campbell Catherine Evans, VP SBL underwriting, Freddie Mac Multifamily
Meg McElgunn, senior director of multifamily production & sales, Freddie Mac Multifamily
Meg McElgunn, senior director of multifamily production & sales, Freddie Mac Multifamily

Affordable Housing Commitment
“On average, 94% of SBL business supports affordable housing—households that make at least the area’s median income,” explains McElgunn. Last year alone, the SBL team closed more than 2,700 loans, or about 10 loans of all sizes every business day. To say SBLs help maintain liquidity for this vital affordable housing segment may be an understatement.

Small Apartment Owner Priority
“Our borrowers are integrated in the neighborhoods they serve. They’re fixtures in the community. They know their tenants by name,” Evans says. “They support community stability and diversity.” Adds McElgunn, “SBL liquidity makes it easier for landlords to keep their properties up. If that liquidity wasn’t there, those improvements may go by the wayside.”

Why are thousands of small operators taking advantage of the financing? Evans and McElgunn believe there may be least five reasons:

  1. Loans from $1 million to $7.5 million available nationwide;
  2. Six hybrid ARM and fixed-rate options, up to 80% LTV available in certain markets, nonrecourse, 30-year amortization, and available interest-only plans;
  3. Declining prepayment options;
  4. Rate-lock at application feature; and
  5. Certain execution with in-house loan servicing for the life of loan.

To illustrate, McElgunn cites the experience of two first-generation immigrant brothers in the Boston area. Over the years, they’ve slowly assembled a portfolio of small Class B- and C+ properties—classic workforce housing. “They were very skeptical of working with a ‘big, scary’ GSE for their financing,” McElgunn recalls. “They finally took a chance with us. They’ve come back to us several times since. On property inspections, you can see how close they are with their tenants. They know each one by name. They understand how important their housing is to these families.”

2020 and Beyond
Overall, expectations are high for 2020. “The important thing to remember: We’re always there for owners through our lending partners. I think borrowers appreciate that consistency,” Evans says.

More information about Freddie Mac’s SBL program is available in a recent podcast or by visiting Freddie Mac Multifamily.