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Freddie Expands Roster for Small Loan Program
January, 06, 2015
Source: International Finance Review (IFR)

NEW YORK, Jan 6 (IFR) - Freddie Mac took another step closer Tuesday to its first-ever securitization backed by small multi-family loans, after adding Sabal Financial Group to its short list of approved lenders.

Freddie has doubled the number of originators to six on its three-month-old Small Balance Loan program, aimed at boosting affordable rental housing in the US and providing more liquidity to smaller rental property owners.

While it's unclear how many loans the agency has bought so far, a spokesman said Freddie may be in a position to launch an inaugural bond deal from the series, of about US$100m in size, in the second quarter.

Arbor Commercial Mortgage, Greystone Servicing Corporation and Hunt Mortgage Group were the initial trio of lenders approved back in October.

Not-for-profit Community Preservation Corporation, which traces its roots to tackling housing blight in New York City in the early 1970s, and ReadyCap Commercial, a lender backed by hedge fund Waterfall Asset Management, joined shortly after.

"We made it a point of being very active in early discussions with Freddie as it developed the Small Balance Loan program," said Greystone's Rick Wolf, a senior managing director working on the initiative.

Greystone closed its first two transactions under the Freddie program in December. At just over US$4.6m, the loans refinanced smaller rental properties in Los Angeles, and the lender is looking to originate more loans including in other key US markets where it already has a footprint, such as Boston, New York and Washington.

"You can chase the market as dumb money would, but Freddie is not out there doing that," Wolf said. "It is not exceeding the market just to get deals done."


Freddie is buying loans of between US$1m-US$5m on properties that have as few as five rental units. Terms include up to 80% loan-to-value with underwriting constraints that are highly competitive with those of banks.

"Lenders are lining up like store-shoppers for holiday sales to get approved by Freddie Mac," said Randy Fuchs, co-founder of Boxwood Means, a research and consulting firm focused on the small-balance sector.

Among its draws are an agency backstop for its Triple A rated securities, lower financing rates for borrowers and a clearly-defined credit box that brings more certainty to the loan closure process, market players said.

And more accessible financing could potentially propel the value of smaller apartment buildings that have lagged widespread appreciation in the past couple of years.

Apartment prices across the US have jumped 16% year-over-year through December, and by 33% over the last two years according to the Moody's/RCA Commercial Property Price Index.

Boxwood's Small Multifamily Price Index, however, showed a much smaller 9% year-over-year increase and a 19% rise over the last two years.

Freddie hopes to complete US$500m-US$1bn in securitizations from the series in 2015, depending on how many loans it can buy.

That may be capped by the number of Mom and Pop real-estate owners who qualify for the Freddie program, particularly since Section 8 and other rent-subsidized properties routinely breach housing regulations. That can damper a building's financing options.

"A common violation in New York City actually is front doorbells," a lender in the sector said, referring to older properties.

"If you can't get new wiring up to each apartment because the building was built ages ago, you won't be able to clear the violation."


A new securitization on the back of the small loan program would be similar to Freddie's existing multifamily CMBS K-deal series, which sells the first-loss slice of risk to private capital investors, called B-piece buyers.

The main difference will be the lower-quality assets that the small balance loan securitization program is targeting.

The B-piece in the K-series is offloaded to private investors at the time the Triple A notes are syndicated, whereas the small balance platform requires the loan seller to keep that risky slice of securities, at least initially.

At first the small balance program is expected to include only one lender that contributes loans to a single transaction, but a mix of mortgages from multiple lenders is a possibility further down the road.

Wolf said he expects Greystone to ink enough loans to lead its first deal in the series before the second quarter ends.

(Reporting by Joy Wiltermuth; Editing by Natalie Harrison and Marc Carnegie)