Small-Balance Loan Market Starts Seeing Impact from Credit Tightening
Friday, October 26, 2007
Commercial Real Estate Direct Staff Report
The origination of small-balance commercial mortgages started to
decline in the second quarter, reflecting weak market conditions in
both the commercial and residential mortgage sectors.
According to Boxwood Means Inc., a Stamford, Conn., research firm
that tracks the market, $34 billion of loans with balances of $5
million or less were originated during the second quarter, the last
period for which data is available. That's down slightly from the
first quarter. But if you take the total originated during the 12
months ended June 30, and compare it to the same period a year
earlier, volumes have fallen by nearly 5 percent to $139 billion.
And if you compare that 12 month period to the one ended March 31,
the decline has been nearly 10 percent.
"If we take a longer view, we're starting to see erosion" in the
market, said Randy Fuchs, a principal and co-founder of Boxwood.
The company's data is compiled from public tax rolls and deed
transfer records at counties across the country. As a result of the
complexities involved in gathering and scrubbing that information,
the latest data it has available is for the second quarter.
A sure sign that the troubles in the residential market are touching
small commercial properties is the fact that 57 percent of all
small-balance loans were originated for refinancing purposes.
Historically, loans for property purchases and refinancings were
"The seeds of some changes are embedded in these numbers," Fuchs
said, predicting that origination declines and the purchase/refi
split will be even greater when data for the third and fourth
quarters are available. .
Many owners of small-capitalization properties are individuals who
might have tapped some of the equity built up in their homes to fund
their investments. As their ability to tap that equity has been
diminished, because of the tightening of credit, their ability to
fund acquisitions has shrunk. Their difficulty in funding
acquisitions is compounded by the decline in residential property
values, which shrinks the amount of equity they might have in their
homes. That's a dynamic that doesn't figure into the softness in the
larger-cap property market.
Nonetheless, the small-balance market remains a relatively sizable
market. The market for originating such loans remains highly
fragmented. Washington Mutual Bank dominates the sector with a 5
percent market share, according to Boxwood. No other lender has more
than a 2 percent share of the market. Other top lenders include
Wells Fargo Bank, Wachovia Bank, Bank of America and Citigroup.
Fuchs said Lehman Brothers, Sovereign Bank and GE Capital have each
gained market share.
Comments? E-mail Orest Mandzy or call him at (215) 504-2860, Ext.
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