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2016 Outlook for Small Balance Lending

Freddie Mac and Fannie Mae loan programs factor greatly in the 2016 outlook for small balance commercial real estate loans.  Commercial real estate investors seeking loans up to $5 million for acquisition or refinance continue to find the terms and interest rates offered by government-sponsored enterprises (GSEs) to be attractive, particularly for multifamily housing consisting of five to fifty units.

The Freddie Mac Small Balance Loan program is designed to provide stability and liquidity to the affordable rental housing market, offering streamlined processes and loan documents.  Competitive pricing, fixed-rate structures, and interest-only options benefit borrowers.  Properties that are eligible for this program include cooperatives in New York City and Long Island, conventional multifamily housing with five more units, and conventional housing with tax abatements and Section 8 vouchers.

Through its Small Loan program, Fannie Mae also offers attractive terms, which include fixed products for 12, 15, or 30 years. Existing clients also may qualify for supplemental financing, tapping into equity without refinancing their first loan.  The supplemental loans are non-recourse and follow the same 30-year payment schedule as the original commercial real estate mortgage.  Multifamily properties with a minimum of five units are eligible for this program, which can meet the needs of conventional housing, cooperative properties, and manufactured housing communities.

With an emphasis on preserving and expanding affordable, workforce housing, Freddie Mac and Fannie Mae are active in the small loan market.   Concerns over cap limits have led to emphasis on properties that house low-income tenants, such as manufactured housing communities.  The wide availability of small balance real estate loans doesn’t mean anyone will qualify, however.  For example, mixed-use properties are eligible for the Small Loan Program, but lenders differ in their expectations.  This is particularly true with respect to the amount of commercial income allowed for mixed-use.  Factors include how common it is to the borrower’s market.  If single-wide houses are common in the market or there is strong demand, Fannie Mae will allow for this.  Generally, however, it prefers to see double-wide homes, which are two units joined seamlessly.

Market volatility has not led to reluctance on the part of borrowers or lenders.  Small balance loans have been increasing in markets including South Florida, Texas, and Denver, but experienced lenders are working with borrowers nationwide.  Lenders who have offices throughout the United States have the advantage of a strong regional underwriting system as well as extensive portfolio data from which to draw.   Regardless of property location, lenders want to see a demonstration of strong operations and market knowledge.  While an attractive property is desirable, the qualifications of sponsors factor heavily into making a good deal.

For the execution of small balance lending deals, new technology is providing significant improvements.  It is easier for borrowers to track their loans and to work with lenders, as communication and submission of documents is facilitated by this technology.  While it hasn’t been adopted across the board as a preferred method, it is gaining traction, particularly as the expectations of borrowers continue to rise with respect to lender services.  Beyond the role of technology during the initial lending process, there is movement toward streamlining reports.

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